Without change, cap and trade is an illegal tax

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

A state Senate budget subcommittee has begun hearings on how to spend money collected by the California Air Resources Board from its cap-and-trade auctions.

But it is ignoring a fundamental issue: As currently implemented, the law that led to the auctions is likely unconstitutional.

Assembly Bill 32 directs the Air Resources Board to implement policies to reduce the state’s greenhouse gas emissions to 1990 levels by 2020. The board chose cap and trade – capping the allowed amount of emissions and selling permits to emit greenhouse gases, which businesses can trade.

But Propositions 13 and 26 require a two-thirds majority for the Legislature to approve new or higher taxes and fees. Whether or not AB 32, which barely passed in 2006, is unconstitutional depends on whether the cap-and-trade revenues constitute either a tax or a fee.

These auction revenues fit the definition of both a tax and fee. They are imposed by a government entity, spent on government activities and are collected in exchange for a transaction – in this case a permit to emit greenhouse gases.

Naturally, the Air Resources Board disagrees, claiming that the revenues are merely a byproduct of its regulatory activities. But AB 32 doesn’t mandate it to use cap and trade, let alone an auction to distribute permits. In fact, half of the permits have been distributed for free and the board may increase the free share to 60 percent.

Between 2012 and 2017, the state will collect $7 billion from cap and trade. This could increase to as much as $45 billion by 2020. And the governor and Legislature have been all too happy to spend that money, with 60 percent going to high-speed rail, affordable housing, intercity rail projects and transit operations and the remaining 40 percent appropriated by the Legislature for whatever it chooses.

Moreover, the Legislative Analyst’s Office has determined that “there is significant uncertainty regarding how much emissions would be reduced” with the proposed auction revenue appropriations.

Sacramento seems unconcerned. The governor continues to make spending proposals, legislators continue to hold appropriation hearings, and the board continues to schedule auctions.

Yet two-thirds of Californians think Sacramento does what is right only some of the time, largely because of runarounds like this. But maybe more important to Sacramento power brokers, ignoring the state constitution could complicate California’s ability to reduce emissions beyond 2020.

The legislative counsel is quite certain that AB 32 is quite explicit that the board only has authority to operate a cap-and-trade scheme through 2020. After that, there is significant legal uncertainty about the further use of AB 32 revenues.

Thus, lawmakers should pass AB 32 with a two-thirds majority to give them and the board flexibility in collecting and spending the revenue. Otherwise, the board should spend the revenues only on administration to run the cap-and-trade system.

Anything else is illegally taxing the people of California.

Carson Bruno is a fellow at the Hoover Institution at Stanford University who studies California policy and politics. He can be contacted at