Appropriate Appropriations? Amendment Aims at Allocations

Under California's cap-and-trade program, the legislature appropriates money from the Greenhouse Gas Reduction Fund to administering agencies for programs that result in greenhouse gas emission reductions. Image courtesy

Last July, California lawmakers reauthorized the state’s cap-and-trade program until 2030. To complement that emissions reduction strategy, they also added a plan for community air monitoring via a companion bill. Both pieces of legislation made headlines, while a third bill that passed as part of the package received little attention. But now Assembly Constitutional Amendment 1 (Mayes) is grabbing its share of the spotlight, as it will be submitted to California voters in the form of Proposition 70 on the June 2018 ballot.

If passed, it wouldn’t actually have any effect until 2024, when it would require a legislative supermajority to approve the spending of cap-and-trade funds on greenhouse gas reduction projects around the state. Some view this as a prudent review of spending; others see it as unnecessary and potentially harmful to achieving the program’s goals.

Cap-and-trade revenue comes from emissions “credits” that greenhouse gas producers purchase from the state in quarterly auctions. The credits represent the difference between the state-mandated cap on greenhouse gas emissions for a facility, and that facility’s actual emissions. As the cap is lowered and the price for credits rises, the facility has a greater incentive to reduce emissions. Initiated in 2013, the program is a key component of California’s attempts to mitigate the effects of climate change.

Currently, revenue from the cap-and-trade auctions goes into the Greenhouse Gas Reduction Fund, and is allocated through the legislature’s budget process. The legislature has decided that 60 percent of the funds — about $2.5 billion this year — will be continuously allocated without further approvals. This portion of revenue goes to high-speed rail, sustainable communities grants and affordable housing, intercity rail capital projects, and low-carbon transit projects. The other 40 percent — roughly $1.5 billion this year — funds a variety of programs that support sustainable forests, restore wetlands, promote urban tree planting, and reduce methane emissions from livestock manure. There are also requirements that a certain amount of the total funding must be devoted to the “disadvantaged communities” most impacted by pollution.

The state Department of Finance, consulting with the Air Resources Board, sets out a three-year plan for allocating cap-and-trade funds. Proposition 70 would interrupt the current allocations process with a budgeting checkpoint in 2024, approximately midway through the reauthorization period. Beginning that year, the revenues would go into a reserve fund. They could not be spent until the legislature, by a two-thirds vote of both houses, approved at least one appropriation from the money in the reserve fund. Once the two-thirds approval was achieved, all revenues would be budgeted as before, until the program expires in 2030.

Voters in June will need to consider whether this budget interruption — possibly for a considerable period of time — is desirable. How will they evaluate it, given its potential effect on a program they appear to strongly support? According to a July 2017 poll conducted by the Public Policy Institute of California (PPIC), “Majorities of Californians favor state policies to address global warming, including the law mandating statewide reduction of greenhouse gas emissions. Most adults and half of likely voters favor the state’s cap-and-trade program.”

“We have no idea what it’s going to be like in 2024,” said Loren Kaye, president of the California Foundation for Commerce and Education, a think tank affiliated with the California Chamber of Commerce, which favors the ballot measure. “We expect [cap-and-trade] will continue to be a popular program, but the Air Resources Board is basically given a whole lot of money to implement the program over a 10-year period,” Kaye pointed out, suggesting that Proposition 70 could provide “an opportunity for the legislature to go back and revisit how the program has been going — a mid-course spot check.”

It’s that “opportunity for the legislature” that concerns opponents like Bill Magavern, policy director for the Coalition for Clean Air. “It will give the minority party a magnified role and a disproportionate impact on the spending of the investments,” he explained, harking back to the time when a mandated two-thirds vote on the state budget could delay its passage by months. “It could introduce a lot of mischief. It brings uncertainty into a program that’s been working pretty well, and could get us into a real boondoggle,” he added.

Although an extended stalemate may seem unlikely, the legislature did not specify what will happen to funds in the reserve account if the cap-and-trade program ends in 2030 without at least one authorization following the 2024 checkpoint. Magavern noted the Legislative Analyst’s Office has concluded that a two-thirds vote on appropriating any of the money in the reserve fund would meet the measure’s requirements to return to the usual budget process. “But a minority could still block a vote even on a minor project, to prevent release of the rest of the funds,” he observed.

He is particularly concerned about the effect of funding interruptions on programs for disadvantaged communities, one of the cap-and-trade benefits which voters value the most, according to the July 2017 PPIC poll.

Magavern also believes that industries would like to steer funding to their expensive emissions reduction equipment. “These are rich companies — we think they should pay for their own equipment,” he commented.

For a regulatory agency like the Bay Area Air Quality Management District, a significant delay in appropriating funds in 2024 could affect on-going programs to clean up the region’s air quality. “We get Greenhouse Gas Reduction Fund funds for our grant programs. That’s the biggest game in town by far for dirty engines — trucks, ships, and trains,” according to the Air District’s Tom Addison. He foresees a chilling effect on long-term projects if Proposition 70 passes, noting, “It introduces market uncertainty — we couldn’t plan ahead for our programs.”
Kaye acknowledges this possibility, but “we’re not stressed about an agency not being assured of a continuing flow of money. There’s an underlying skepticism or suspicion about how agencies will implement [cap-and-trade]. This shortens the leash.”

In previous legislative debates, critics of cap-and-trade spending have targeted funding for affordable housing and sustainable communities, and for the high-speed rail project. These programs have indirect benefits to the environment — based on reducing vehicle travel — unlike programs for disproportionately impacted communities that are directly affected by the cap-and-trade facilities in the state. Some environmental groups have argued that cap-and-trade funds should pay for additional benefits to these impacted communities or the environment, while high-speed rail opponents don’t think any funding should be available for that controversial capital infrastructure project. A recent announcement that the bullet train’s estimated costs have increased again means it would surely be one of the sticking points for a two-thirds appropriation of cap-and-trade funds in 2024.

Proposition 70 can be seen as a reasonable checkpoint, or a potential tripwire. How it turns out depends initially on the electorate in June, but if the measure passes, its effect will also depend on the partisan makeup of the legislature in the future. Historically, a two-thirds supermajority has been difficult to achieve, particularly without major concessions from the majority party. However, as Democrats continue to hold a strong position in the state, a few years from now they may have that supermajority when the time comes to consider the mandated re-appropriations vote. Proponents of the proposition may win the June election battle and still lose the appropriations war in 2024.

Leslie Stewart covers air quality and energy for the Monitor.