California's Cap and Trade Expenditures

For decades, California has been at the forefront of the American struggle to preserve natural resources. In 2006, the state passed Assembly Bill 32 which created the nation’s first cap and trade system on carbon emissions. The goal of AB 32 was to reduce California's carbon emissions to 1990 levels by 2020, a mark the state is projected to reach early. The first year of auctions generated over $400 million, but this year the governor's office is projecting over $1B for the first time ever.

According to AB 32, revenues after the $18 million administrative costs for CARB must be spent on improving air quality. The tables on the next page compare the expenditure plans for cap and trade revenue. The first table is the adopted expenditure plan for 2014-15 and the second shows the governor’s proposal for expenditures for 2015-16, sourced from here. 

High speed rail in California has been an expensive boondoggle thus far, but it is Governor Jerry Brown's pet project. With HSR under fire, the budget appears as though its line item has been cut, but a new item in the 2015 budget - "Transit and Intercity Rail Capital Program" - can be raided for HSR purposes.

The cap and trade expenditures plan has also come under fire for its allocations to the Strategic Growth Council, which doubled from $100M to $200M in 2015. Part of the Strategic Growth Council’s mission is to provide affordable housing and transit-oriented development – smart growth, in a sense – but the law requires that cap and trade money must be spent to improve air quality. In order to justify its spending, the Strategic Growth Council patented an innovative technology called the California Emissions Estimator Model (CalEEMod) which quantifies the effect of a development on carbon emissions. Another computer model, CalEnviroScreen, was developed to ensure compliance with SB 535, which requires 25% of cap and trade money to provide benefits to disadvantaged communities.

Although California’s state budget is the largest in the United States, cap and trade has enabled even more spending on environment-related issues as the program ramps up. From 2011 to 2013, the state increased its total spending in that area from $1.4B to $2.6B, which more than doubles Florida, the second-biggest environmental spender.

The next few years are pivotal. The most conservative estimates are over $5B of revenue annually, but some believe that figure could be over $10B. Governor Brown and the high speed rail backers are counting on cap and trade to fund HSR, while environmental justice advocates see cap and trade money as the best route to reducing California’s high poverty rates. Last June, Los Angeles Mayor Eric Garcetti unveiled a plan to invest the revenues in mass transit.

The wisest course of action would be to remember the initial intent of the bill to reduce carbon emissions. Investments in urban areas, public transit, and the Strategic Growth Council’s policies will go the furthest to achieve that goal. How California invests this money in the next five years will determine if the example is one for the rest of the nation to follow, or just a grand experiment.