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  • David Gamage

  • Mark Gergen

Viewpoints: A better direction for California’s climate change policy

Published: Saturday, Mar. 22, 2014 - 12:00 am

California’s historic climate change legislation is at a crossroads. Signed into law by Gov. Arnold Schwarzenegger in 2006, AB 32 has been coming online in stages, with the law’s centerpiece cap-and-trade program launching in late 2012. The program’s second phase is set to take effect in 2015, when the cap and trade program will be extended to gasoline and other fuels.

If the cap-and-trade program is to meet its environmental goals, the price of fuels will rise. Californians will pay more at the pump. This is inevitable, as the structure of the cap and trade program is designed around market-price mechanisms.

Unfortunately, as currently structured, the cap-and-trade program is almost certain to either fail at its environmental goals or else to unduly harm working-class Californians. Fortunately, there is a better way forward.

Senate President Pro Tem Darrell Steinberg has proposed that California adopt a carbon tax on fuel suppliers beginning in 2015. Fuel suppliers would pay a tax rather than be covered by the cap-and-trade program. Two-thirds of the tax would be refunded to taxpayers through a tax credit for low-income workers and other forms of tax relief. The remaining revenue would be earmarked for transit investments.

We support Steinberg’s proposal. It is good for the environment, good for the California economy, and good for California taxpayers. It is almost certain to achieve greater near-term reduction in global greenhouse gas emissions. The Steinberg proposal would also be more transparent and would provide tax relief to California taxpayers. It is a win-win-win policy.

The Steinberg proposal is good for the environment for the simple reason that it sets a significantly higher price on greenhouse gas emissions from the fuel sector than the likely price under the cap-and-trade program. A higher price means lower emissions. At the most recent auction in February, allowances for 2014 emissions sold for $11.48, barely above the reserve price of $11.34. The reserve price is the minimum price set for an allowance. Allowances for 2017 sold for $11.38. The Steinberg proposal would charge a significantly higher price for global greenhouse gas emissions, starting at $15 per ton in 2015 and increasing gradually over time. The Steinberg proposal would thus be better for the environment.

The California Air Resources Board could raise the price of allowances to $15 per ton and achieve the same level of greenhouse gas emissions as the proposed tax in 2015. The ARB can set the price of an allowance either by reducing the cap or by increasing the reserve price for an allowance.

But the proposed carbon tax is a much better mechanism for making those who burn fossil fuels pay for the privilege of doing so. The carbon tax is more transparent, specifying the sums that must be paid for the privilege of emitting greenhouse gases. And unlike cap and trade’s auction proceeds, revenue from a carbon tax can be returned to Californians through direct tax relief.

The advantages of the carbon tax are clear if we think about what the world will look like next year, without Steinberg’s proposed reforms. Fuel suppliers will be required to purchase allowances from ARB at an auction or on the secondary market. Since the program began, ARB has given away about 90 percent of the available allowances for free.

But ARB will not be able to give free allowances to fuel suppliers to cover the carbon content of fuels they sell. Instead, fuel suppliers are supposed to pass the price they pay for these allowances through to consumers – the people who burn the fuels – to encourage consumers to burn less fuel.

Under cap and trade, the price paid by consumers to burn fossil fuels will end up in one of two pockets. It may end up in ARB’s pocket, to be spent on the more limited programs allowed under AB 32. Or it may end up in the pocket of a firm that sells an allowance in the secondary market. This might be a firm that sells an unused allowance given it by ARB. Or it might be a speculator who purchased an allowance. For example, if ARB priced allowances at $15 per ton to get the same environmental benefits as the proposed tax, investors who purchased 2016 allowances for $11.38 per ton would get a windfall.

The carbon tax is more transparent because we know where the money will go. It will go to the state of California, which can give the money back to California taxpayers through tax relief. Just as Steinberg has proposed.


Mark Gergen is a tax law and policy professor at the University of California, Berkeley, School of Law. David Gamage is an assistant professor at UC Berkeley School of Law.



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