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April 01, 2008

Cap-and-trade revenues: What to do with all the money?

In my previous item, I noted the Sacramento Bee's support for a California cap-and-trade system in which allowances to release greenhouse gases are auctioned to the highest bidder, instead of being handed out for free to industry.

In response, a reader named "UrnklMax" made the following comment:

"Whatever industry pays to buy allowances they will ultimately pass on to us consumers. So, this is essentially a hidden tax on carbon. If we are going to pay this carbon tax to help solve the global warming problem why don't we get a twofer and use the 10 billion revenues to solve California's chronic budget deficit problem?

It's an intriguing question, UrnklMax. Here's my reply:

If you used revenues from a carbon tax (or auctioning of allowances) to pay for general services, you might help solve our state's fiscal problem, but at the expense of reducing greenhouse gases.

In a recent op-ed in The New York Times, a Northwestern University researcher named Monica Prasad examined carbon taxes that Denmark, Norway, Sweden and Finland have had in place since the 1990s. Norway, Sweden and Finland use the revenues for general purposes. Sweden uses the money to invest in cleaner technologies.

According to Prasad, per capital GHG emissions in Denmark have dropped 15 percent since 1990, whereas they have increased in the three other countries.

Prasad's advice on revenues from a carbon tax:

"....Prevent policy makers from turning the tax into a cash cow. Carbon tax discussions always seem to devolve into gleeful suggestions for ways to spend the revenue...Denmark avoids the temptation to maximize the tax revenue by giving the proceeds back to industry, earmarking much of it to subsidize environmental innovation. Danish firms are pushed away from carbon and pulled into environmental innovation, and the country’s economy isn’t put at a competitive disadvantage."

One other point I should add: If California were to dedicate all revenue from auctioning allowances to its general fund, that money would be subject to the requirements of Proposition 98, the ballot measure that earmarks funding for schools. Arguably, the schools need this money (in part to teach kids about the science of climate change) but it might undercut the state's ability to achieve a 25 percent reduction in greenhouse gases by 2020, as required by state law.

WHAT IS THE HOT HOUSE?

California has passed the nation's first statewide laws to control carbon dioxide and other emissions linked to global warming. Now comes the tough part: Translating statutes into action. Corporate CEOs, European ministers and others are all watching what happens here in Sacramento. This blog will track the implementation of California’s laws and the power players that are trying to influence the outcome.

WHAT ARE THE LAWS?

AB 32
Signed into law by Gov. Arnold Schwarzenegger in 2006. Requires the state to reduce its global warming emissions to 1990 levels (a 25 percent reduction) by 2020, with a further 80 percent reduction by 2050.

SB 1368
Also enacted in 2006. Requires utilities to purchase long-term power contracts from sources that are as "clean" – in terms of carbon emissions – as the most efficient natural gas-fired power plants. Effectively bans new contracts with out-of-state coal power plants.

AB 1493
Signed into law by Gov. Gray Davis in 2002. Requires motor vehicles sold in California by 2009 to achieve the maximum feasible reduction of greenhouse gases. The major automobile manufacturers are now challenging it in court.

STUART LEAVENWORTH

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