Dan Walters

California’s cap-and-trade carbon emission system may be failing

California’s much-vaunted cap-and-trade system of reducing greenhouse gas emissions may be collapsing.

This month’s quarterly auction of carbon dioxide emission allowances, which was supposed to generate more than a half-billion dollars for politicians to spend, brought in a paltry $10 million as the Air Resources Board sold a tiny fraction of the allowances it was offering.

It could be a one-time adjustment, of course, but those who study the complex market believe that the underlying conditions are more systemic than situational, the most prominent being an increasing concern that the program will expire in 2020.

When the Legislature passed the enabling legislation a decade ago, it was aimed at reducing carbon emissions to 1990 levels by 2020, not only through selling a declining number of allowances at rising prices, but through more specific targets, particularly increasing the level of renewable electric power generation.

There’s a fierce, albeit mostly private, debate over whether the cap-and-trade system can legally exist after 2020, or would have to be reauthorized by the Legislature. Meanwhile, there’s a pending lawsuit, filed by business groups, that seeks to have the system branded a tax, which would require a two-thirds legislative vote.

Gov. Jerry Brown’s administration contends, most recently this week in testimony to a legislative committee, that cap and trade can continue without reauthorization, but it’s by no means a settled issue. And it may be moot if the market is, as it appears, imploding.

Moreover, were reauthorization sought, it could run afoul of a 2010 ballot measure that tightened up the legal definitions of taxes and fees and therefore could be, politically, a nonstarter.

If the system is, indeed, falling apart, the emission reduction goals themselves are not affected. In fact, the sharp decline in emission allowance sales indirectly tightens up the cap. The impact is mostly financial – slowing or even blocking plans by Brown and legislators to spend what they thought would be billions of dollars that they wouldn’t have to raise though direct taxes.

Brown has a $3.1 billion spending plan in his 2016-17 budget, based on an assumption that auctions would generate more than $2 billion during the fiscal year. A big chunk of that money was to go to Brown’s pet bullet train – keeping alive a project that otherwise is woefully short of the money its construction would require.

High-speed rail officials have been planning to “securitize” the cap-and-trade money to finance the next major segment, linking San Jose with the San Joaquin Valley, that would be the first to carry fare-paying passengers.

The legal cloud on cap-and-trade revenue has made securitization a dicey game at best; the sharp downturn in the market makes it an even less likely strategy.

It would be foolhardy for Brown and legislators to dip into a barrel of pork that may be, in fact, virtually empty, just as it was foolhardy for politicians to ignore private warnings from cap-and-trade market analysts about the likelihood of the collapse now occurring.