Dan Walters

Legal, political clashes will settle future of California’s cap-and-trade system

Chevron’s refinery in Richmond is one of the many industrial installations that must offset emissions of carbon dioxide by acquiring “emission allowances” via California’s cap-and-trade program.
Chevron’s refinery in Richmond is one of the many industrial installations that must offset emissions of carbon dioxide by acquiring “emission allowances” via California’s cap-and-trade program. Associated Press file

California’s highly controversial cap-and-trade approach to reducing carbon emissions has many moving parts – bureaucratic, legal and political – and the next few months will determine whether they coalesce into an enduring system or the entire structure collapses.

The state Air Resources Board sets steadily declining limits on carbon emissions, and companies must cover them with “allowances” they buy during quarterly auctions or in the secondary market.

The current system, enacted under 2006 legislation, expires in 2020. Gov. Jerry Brown, who calls climate change an existential threat to humankind and made it his top legacy issue, wants it reauthorized to 2030 and beyond.

However, legislative approval is uncertain. To make it legally bulletproof, Brown wants a two-thirds legislative vote, due to a 2010 ballot measure that tightens the legal definition of a tax.

A pending lawsuit, brought by the California Chamber of Commerce and supported by other business groups, doesn’t oppose cap-and-trade itself but contends that the current auction system, which has raised several billion dollars, is an illegal tax.

“The challenged action by an unelected, politically appointed state board to engraft into a regulatory program a massive revenue raising device is unlawful because it … imposes what is an invalid tax,” the chamber says in its appellate brief.

Although a trial judge narrowly rejected that contention, an appeals court gave some indirect indications that it might uphold it and will hear oral arguments on the issue this week.

Whatever it decides, the case will certainly be bumped up to the state Supreme Court. And regardless of the outcome, the 2010 ballot measure on taxes would govern any extension adopted by the Legislature.

All of it – the legal cloud, the equally clouded political picture, the 2020 expiration date, a complex factor known as “resource shuffling,” and a glut of allowances in the secondary market – have combined to cripple the quarterly auctions.

The auctions had been expected to raise about $2.4 billion a year for projects supposedly enhancing carbon reduction. The state has spent $3.4 billion from previous auctions, including a $500 million transfer into the state’s general fund, and Brown’s 2017-18 budget proposes $2.2 billion more, including a big chunk to underwrite his pet bullet train project that is very short on financing.

Last year’s auctions, however, generated anemic interest, although the November auction picked up a bit – mostly, market analysts said, because the mandatory floor price would rise in 2017. But unless legal and political clouds are cleared, they see little or no action in the February auctions and those to follow later this year.

The official line from Brown and others is that cap-and-trade is not about money but about California’s setting a global example in reducing carbon emissions, particularly with the newly installed Trump administration indicating that it may back away from the issue.

However, the state could do that without selling allowances. It could, as it does with utilities and as business groups propose for themselves, provide free allowances that could be traded on the market.

Cap-and-trade has financed a wide array of projects and programs, many of which have, at best, tenuous connection to reducing greenhouse gases. That pork barrel approach, especially the general fund diversion, undercuts the high-minded bromides of politicians and makes it resemble just another tax on business and, ultimately, on consumers.

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