Cap-and-trade is not a budget solution

“Good news! We found billions of dollars to help the state budget and fund more government programs.” If this sounds too good to be true, you’re right. The Governor’s plan to spend billions extracted from California employers under AB 32’s cap-and-trade program is actually bad news that will hurt the environment and kill jobs.   

The purpose of cap-and-trade is to reduce greenhouse gas emissions, not raise billions in new revenue for state coffers. But the California Air Resources Board (ARB) plans to sell emission rights that the Legislative Analyst estimates will raise “upwards of $3 billion” in 2012-13 alone.  This will be paid by California employers suffering the worst recession since the Great Depression.  Workers, consumers and taxpayers will ultimately pay the price in lost jobs, higher utility bills and price increases at the pump. 

ARB could prevent this statewide economic destruction by fairly allocating, rather than selling, a limited number of emission rights (credits) to regulated parties. Manufacturers, electric generators, universities, and public agencies could then buy and sell credits among themselves and search for cost-effective ways to reduce emissions. Instead, ARB’s plan to sell these credits acts just like a tax to create a multi-billion dollar pot of money. 

The size of the pot will exponentially increase in the next eight years. In 2013 and 2014 companies will buy 10% of the credits they need to operate in the state. In later years some companies will buy 25% or even 50% of what they need. What adds up to $3 billion this year could be $10 billion between now and 2020.  There is no way to avoid these costs with emission control technology.  Companies can choose to pay this “carbon tax” and raise prices or shift production out of state.

The costs to be incurred by individual companies are alarming. In the first year alone, a California cement company could pay $830,000, a glass maker could pay $182,000, UCLA could pay $421,000, and a refinery could pay $5.3 million. All regulated entities combined will pay the $1 billion tax on top of California’s already high costs of doing business. Consumers and taxpayers will ultimately pick up the tab in higher costs for electricity, consumer products, government services or even college tuition.

There is a good chance that ARB’s attempt to impose this massive new tax exceeds their authority under AB 32 and that the Governor’s proposal for spending would also not satisfy legal requirements.  Unless lawmakers act to reverse CARB’s course of action, litigation may push the matter into the hands of a court for final resolution. Legal uncertainty is not a healthy environment to encourage business investment and hiring.

Ironically, we will also hurt the environment by imposing this multi-billion dollar tax. By making in-state production more expensive, we will let companies outside California steal market share and grow production where emissions are not strictly controlled.  This so-called “leakage” of emissions hurts jobs and doesn’t reduce overall global emissions. Leakage will be less if other states join cap-and-trade, but politicians in those states will steer clear of an expensive and unpopular program.  

Despite years of urging by industry groups, ARB has not developed the tools to even monitor, much less solve, the problem of leakage and job loss that will arise from a new multi-billion tax on the state’s fragile economy. But it isn’t just industry that has concerns. A recent report from the Legislative Analyst’s Office offered numerous recommendations to help preserve the integrity of California climate change policy.  The LAO advises that decisions about the cap-and-trade auction revenues should not be made quickly or lightly.  Stakeholders and consumers deserve a full and transparent discussion in order to be assured the AB 32 program will not inflict unintended negative consequences on California’s economy.

It might sound good to use cap-and-trade revenues to help fix a broken state budget, but the downside risk for AB 32 and state’s economy is more than we can afford. 
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Ed’s Note: Shelly Sullivan is the executive director of the AB 32 Implementation Group, a coalition of businesses and taxpayer groups seeking to protect jobs and the economy.