Budgeting for cap-and-trade expenditures

By CMTA Staff

Capitol Update, March 21, 2014 Share this on FacebookTweet thisEmail this to a friend

Budget subcommittees are holding hearings to discuss a plan for cap-and-trade revenue expenditures. Much of the revenue in the expenditure plan is coming from the sale, rather than free distribution, of allowances to the large manufacturers covered by the cap and trade program.  Unless ARB changes the regulation, these costs will rise significantly in future compliance periods. Even the most efficient companies in the state may have to buy allowances to keep operating in the state. Yet under the current proposed plan, very little of the revenue will be used for the benefit of manufacturing. 

CMTA has the following concerns about the expenditure plan:

First, we believe AB 32 does not authorize the withholding and sale of allowances. Cap-and-trade will get California to the 2020 emission reduction goal without the sale of allowances. If it is finally determined in a court of law that ARB is in fact authorized by AB 32, the state's use of the money could nevertheless be severely constrained to stay within limits defined by legal bounds of that authorization. 

The outcome of this legal dispute is not yet final. The most prudent course would be to hold the funds pending resolution of the legal questions. If the legislature nevertheless proceeds with expenditures, CMTA recommends programs and purposes that are most likely to survive a court challenge, thus minimizing a risk that the state general fund would be responsible to pay a refund claim.  The current test to ensure that the auction revenues are legal “fees” rather than illegal “taxes” is that a clear nexus exists between the payer of the funds and the purpose to be served by the expenditure. Using the funds for purposes unrelated to the payer’s regulatory responsibility would turn the fee into a tax.

If the purpose of cap and trade is to minimize the costs of compliance to reach AB 32 goals, the legislature should recycle all auction proceeds back to the companies to reduce onsite emissions, such as through combined heat and power, energy efficiency, or waste management.  This would help offset the increased costs of purchasing allowances in the cap and trade program. 

The bottom line is that the ultimate success of AB 32 depends on keeping the cost of compliance affordable and growing the economy while we reduce emissions. Imposing an expensive auction on manufacturers and then spending the funds on projects unrelated to the needs of manufacturing is the wrong direction for California. 

See Assembly Budget Subcommittee 3, Resources Dorothy Rothrock, CMTA's V.P., was there to testify.


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