California Forum

Paying to pollute through cap-and-trade is not a tax

The Yurok tribe’s carbon offset project encompasses 7,660 acres of Douglas fir and mixed hardwood forest near the Klamath River in Northern California.
The Yurok tribe’s carbon offset project encompasses 7,660 acres of Douglas fir and mixed hardwood forest near the Klamath River in Northern California. Los Angeles Times file

Consider this scenario: An industrial facility purchases a permit at a state-run auction so it can legally emit 1 ton of pollution in California. Although the company is regulated under a statewide program to cap and steadily reduce emissions from large sources, it’s not required to buy the permit. It could reduce that ton of pollution by installing emissions controls at its facility, for instance, but that would cost far more than the permit.

Is buying the permit akin to paying a tax – or a prudent business decision?

A lawsuit spearheaded by the California Chamber of Commerce and recent missives in the court of public opinion from its sympathizers contend it’s a tax (“Without change, cap and trade is an illegal tax”; Viewpoints, April 27).

But it doesn’t take an expert in tax law to see what’s really at stake. The chamber admits that California’s bedrock climate law, AB 32, authorizes the issuance of a shrinking number of pollution permits to enforce a declining limit on the harmful emissions driving climate change. They challenge only the state’s authority to sell a portion of those permits.

Because those permits are the equivalent of cash (they can be used, banked or sold), the chamber essentially contends that their members have a right to pollute for free. But California law grants them no such right.

Buying a pollution permit also bears none of the hallmarks of taxation.

For one thing, taxes don’t attract volunteers. Yet financial firms purchase permits in the cap-and-trade auctions with the expectation of earning a profit on resale. Ever made a profit on a tax payment before? And regulated industries only purchase permits when they are cheaper than the cost of reducing their own emissions.

Taxes also typically fund the general functions of government. AB 32 auction proceeds, however, are restricted to financing projects that reduce emissions like weatherizing low-income homes, expanding access to zero-emission vehicles or building affordable housing near transit.

To date, those projects have leveraged $3 in private capital for every $1 collected from the auctions, with over half of all investments benefiting California’s most disadvantaged communities.

So don’t be misled. Once scarcity is introduced in a market, value is created. The question is simply who receives it. The Air Resources Board auctions permits to ensure their value supports the emission reductions goals of AB 32 on behalf of all Californians – not polluters.

Alex Jackson is legal director of the California Climate Project at the Natural Resources Defense Council. Contact Jackson at Ajackson@nrdc.org.

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