Whither cap and trade? California’s high-profile – and highly controversial – program of selling greenhouse gas emission allowances will be tested again next week in the year’s first quarterly auction.
Three 2016 auctions fell below expectations and produced almost no funds for the state, while the final 2016 auction in November perked up a bit. To some, it was a sign the earlier decline was an isolated event, but to analysts who follow the emission market closely, the November uptick was more likely investor response to a mandatory 2017 price increase to $13.57 per metric ton of carbon dioxide.
This month’s auction will offer about 65 million tons, with 35 million coming from utilities, which receive allowances free of charge, and Quebec, which sells allowances in the California auction.
That leaves 30 million tons from the state itself, and were all to sell, it would generate about $400 million for programs and projects dependent on auction proceeds, most notably Gov. Jerry Brown’s bullet train project, which gets 25 percent of revenue.
Buyer interest in the emission auctions has been dampened by a glut of allowances in the secondary market (which are now trading at the 2017 floor price), by a legal cloud raised by a pending lawsuit, and by political uncertainty over whether the program survives beyond 2020, its current cutoff date.
Brown wants it to be renewed by a two-thirds legislative vote, which would insulate it from another legal challenge, but so far that’s not happening. He’s using a carrot-and-stick approach – promises of more spending on legislators’ projects and programs if cap and trade is reauthorized, and threats to business to hit them harder with a carbon tax or harsh regulatory crackdowns on emissions if cap and trade isn’t renewed.
Last Monday, nine days before the Feb. 22 auction, the Legislature’s budget analyst, Mac Taylor, urged his bosses to reauthorize cap and trade, but reject some of Brown’s spending strings and allow themselves to use auction proceeds for purposes other than greenhouse gas reduction.
The machinations illustrate one of the program’s underlying dilemmas. Supposedly, it’s all about saving the planet by reducing carbon emissions, with a 2030 goal of dropping them by 40 percent under 1990 levels.
However, to politicians, it’s often more about raising and spending billions of dollars without directly taxing their constituents, but indirectly doing so via higher prices for goods and services as business folds in costs of compliance.
Business groups don’t oppose cap and trade per se, but say that auctioning emission allowances, rather than supplying them free of charge, constitutes an indirect tax and should be enacted openly, rather than clandestinely through the Air Resources Board.
That’s the essence of the lawsuit pending before a state appellate court, and the legal nut that Brown wants to crack with a two-thirds legislative vote.
Meanwhile, everyone will be watching the next auction to see whether the flow of money will resume – and odds are it won’t as long as legal clouds remain.