California will make less money from greenhouse gas emission auctions

Two decades ago, when California got serious about reducing or even eliminating carbon dioxide and other greenhouse gases, its political leaders weighed two potential tactics about industrial emissions.

The state could impose direct facility-by-facility limits, generally favored by climate change advocates. Or it could set overall emission reduction goals that would gradually decrease and auction off emission allowances, assuming their costs would encourage reductions.

The latter, known as cap-and-trade, was favored by corporate interests as being less onerous and was adopted, finally taking effect in 2012.

Since then, the California Air Resources Board has conducted quarterly auctions of emission allowances, collecting a total of $35 billion dollars so far, which, in theory, is being spent on projects that would reduce emissions.

The revenues have varied from year to year, but they have generally increased as the emission caps have declined. Since reaching a peak of $8.1 billion in the 2023-24 fiscal year, however, auction proceeds have been declining.

Roughly half of the money has been given to utilities to minimize cap-and-trade’s impact on consumer costs. However, the program has been widely criticized as a de facto tax on gasoline and other fuels, which were already among the most expensive of any state.

The remaining revenues have been deposited into a Greenhouse Gas Reduction Fund that governors and legislators have tapped for various purposes, not all of them connected to emission reductions. In a sense, it’s been a slush fund.

Last year Gov. Gavin Newsom and the Legislature overhauled the program in two bills, Senate Bill 840 and Assembly Bill 1207. The program was extended, it was renamed as cap-and-invest and new priorities for spending auction proceeds were set.

Notably, the state’s cash-strapped and long-stalled bullet train project would get a flat $1 billion a year, rather than the 25% share it had been getting. Project managers hope that lenders will advance enough money to complete its first leg in the San Joaquin Valley; the plan is to repay the loans from the $1 billion annual cap-and-invest allocation.

Early this year, the Air Resources Board released new regulations to implement the legislative changes but faced criticism that they would increase consumer costs. That led to a revision in April that softens the rules’ impact — most obviously on refiners who have been threatening to leave California — but environmental groups are very critical.

The April version would also sharply reduce net revenues from emission auctions, according to the Legislative Analyst’s Office, providing barely enough for the $1 billion allocation to the bullet train and another $1 billion for the governor and Legislature to spend. Other programs that have been receiving cap-and-invest support, such as wildfire protection and housing, would probably get nothing.

The program has been tapped in recent years to backfill programs that a deficit-ridden state budget could not cover, so the projected revenue drop would exacerbate efforts by Newsom and legislators to close the state budget’s yawning gap.

“The (Greenhouse Gas Reduction Fund) is a relatively small portion of the overall state budget, but it has been a noteworthy source of funding for environmental and other programs in recent years,” the state Assembly’s budget advisor, Jason Sisney, says in an email. “Collapse of its revenues would change the state budget process noticeably. The state’s cost-pressured general fund seemingly would be unable to make up much, if any, of a significant (Greenhouse Gas Reduction Fund) revenue decline at this time.”

When Newsom presents his revised budget this week, he may reveal how he intends to cover the cap-and-invest program’s shortfall, particularly whether he will maintain the $1 billion bullet train commitment that project leaders say is vital to continuing construction of its Merced-to-Bakersfield segment.

It could boil down to bullet train vs. wildfire protection.