When California extended its “cap-and-trade” program of curbing carbon emissions to automotive fuels, starting this year, it was projected to generate hundreds of billions in new revenue dollars.
Prior to extension, the state’s quarterly auction of emission allowances was generating well under $1 billion a year, but applying them to fuels would, it was believed, more than double that revenue stream to over $2 billion.
California motorists burn about 15 billion gallons of fuel each year – and consumption is rising again after years of slow decline. Requiring refiners to buy emission credits, either in the Air Resources Board’s auctions or in the secondary market, would, it was believed, add about a dime to each of those gallons, most of which would show up in auction proceeds.
Accordingly, politicians from Gov. Jerry Brown down have floated ambitious plans to spend the new bounty.
Over the last three years, $2.6 billion in cap-and-trade funds have been spent, supposedly on programs to reduce emissions. Brown’s proposed 2016-17 budget, however, would ramp up spending to $3.1 billion in just one year with a $500 million chunk going to his pet bullet train project, whose financial prospects are otherwise dim.
Some of that money is carried over from past years, but overall, with the minimum price of each allowance (now $12.73 per metric ton) required to rise by 5 percent a year, the state expects that cap-and-trade will generate more than $2 billion a year indefinitely.
Or will it?
For more than three years, the state sold pretty much all the allowances offered, even when the number available more than tripled in February 2015. But last February’s auction left allowances valued at $41.6 million unsold, and there are indications that this week’s auction may fall shorter.
One analysis circulating in financial circles raises the possibility that none of the state-owned allowances will be sold because of a huge increase in between-auction sales on the secondary market below the official price.
It appears that speculators who bought up allowances in earlier auctions, hoping to profit when prices rose, have become disenchanted and are dumping their holdings. An estimated 71 million tons in allowances changed hands after the February auction, the equivalent of an entire quarterly auction.
Privately, analysts inside and outside state government say that a major factor in the glut of available emission allowances is uncertainty over the program’s legality and future.
Legislative authorization for cap-and-trade expires in 2020, and a pending lawsuit filed by the California Chamber of Commerce contends that the program is an illegal tax that would require a two-thirds legislative vote to be imposed.
Given the huge secondary market activity since the last auction, and the legal requirement that the state’s allowances be sold after those from electric utilities, it’s possible that the May auction could generate very little money for the $3.1 billion spending plan, and that the low-revenue situation could continue indefinitely.
We’ll know for certain when this week’s closely watched results are known.