California is preparing itself for an influx of billions of dollars in new government revenue. The money is slated to come from auctioning tradable emissions allowances generated under the state’s cap-and-trade program, which is set to launch next year. Those interested in California’s cap-and-trade program are paying particular interest to this anticipated revenue. The auction is expected to generate $0.6 to $1.8 billion* in the first year alone, increasing substantially in 2015 when transportation fuels enter the program. But, state officials have yet to decide how that money will be spent.
One of us (Burtraw) has a new paper with Sarah Jo Szambelan, (released by the California non-profit organization Next 10) which discusses exactly where this money will come from and how California may decide to spend it. In California the revenue will go to three general purposes. One is to protect industry from out-of-state competitors that are not regulated for their carbon emissions. Second is to offset the allowance cost imposed on the electricity sector, in large part to recognize the early action done in the sector through measures such as the renewable portfolio standard. The third is associated with allowance use for transportation and natural gas. The paper also discusses why California residents should care about how this money is spent. For example, if residents use electricity, they can expect their utility bills to increase. If they drive a car, they can expect higher prices at the pump. And prices on everyday items, including food, may rise as well to reflect the cost of carbon embedded in most products and services. But, California residents may not feel the full effect of these price increases if the allowance revenue is used to offset the impacts.
State law constrains the discretion of the legislature in how the revenue can be used. As noted in the Next 10 publication by Farber and Lambe, the least risky strategy from a legal perspective may be to direct the revenue to expenditures related to the source of the fee, e.g. carbon mitigation. This strategy could accommodate investments in the state’s infrastructure, including high speed rail, as has been advocated by the governor. However California officials could elect to direct revenue to other purposes. To do so would raise the risk of legal challenge, or require a two-thirds vote by the legislature, a risky effort as well. Options include directing revenue to reduce other taxes or sending revenue directly back to households as per capital dividends.
A number of people have begun to discuss how carbon functions like currency under programs such as California’s. Now, state officials have to decide how to spend this new money. On May 24, the California Air Resources Board will meet to discuss its options. The ultimate decision, which could include a mix of the spending plans described above, will have real consequences for California residents and businesses.
*This is only a fraction of the total market value of allowances in the program, estimated at $2.6 to $7.8 billion in 2013. This larger number includes allowances given away for free.
