Free Carbon—Revenue that is!

Economic regions of California, as defined by ...
Economic regions of California, as defined by California Economic Strategy Panel, October 2006 Northern California Northern Sacramento Valley Greater Sacramento Bay Area Central Coast San Joaquin Valley Central Sierra Southern California Southern Border (Photo credit: Wikipedia)

The cap on greenhouse gas emissions in California imposed by AB32 California’s Global Warming Solutions Act does not go into effect until 2013, but already there is maneuvering by state officials to get their hands on the pot of hoped-for gold at the end of this rainbow.  It is not that we can’t use the money.  California has struggled with huge budget deficits for a decade.

The Governor and Legislature have made billions of cuts in a futile effort to balanced spending with falling revenue in a sinking or stagnant economy.  For politicians, the gold from carbon taxes offers relief from the pain of disappointing special interests each eager to protect their part of the pork barrel that is the California State Budget. Some estimates are that the carbon tax will produce between $1 billion and $3 billion in the early years and perhaps as much as $14 billion by 2015 when it is fully implemented. Last year the state budget deficit was $9 billion—so you see why this is seen as the easy way out—tax the polluters!

In all candor California voters are part of the problem.  We allow ourselves to be seduced into all manner of silly initiative ballot measures that adopt policies, impose costs and target increasingly scarce resources to pet causes.   This is no way to run a railroad—but it is the way California is governed.

We have also made the state revenue picture worse by the steeply progress nature of our tax system which, paradoxically, depends heavily on capital gains taxes and economic growth from the very people the Governor and Legislature now want to ‘soak’ again to get out of the current mess.  It does not take a Cal-Berkeley economist to understand that when the economy sucks and capital gains are reduced that when you target those who are successful they simple change their voting residence from California to Texas or Florida and —POOF!  This double whammy of bad economic luck and bad public policy is strangling the Golden State, driving up the cost of doing business here, driving away successful people tired of game, and worse no longer working to produce the economic growth, opportunity and revenue California depends upon to live into its 21st century potential.

But carbon taxes are going to kick in in 2013 and California hopes to be in the gold again.  There are just a few problems with this calculus:

  • California does not allow the construction of coal fired generation in the state so there are no coal plants to tax.  The once thru cooling water rule will force many older natural gas plants to shut down and most be replaced with much more efficient and less emitting new gas plants.  Neither nuclear power nor hydropower produce carbon emissions and thus are exempt and all that wind and solar also beats the carbon tax.  So what’s left to tax?
  • Well technically this is NOT a tax it is a fee.  This makes a big difference and complicates life for politicians.  A tax in California requires a 2/3 vote of the State Legislature or a Referendum so AB32 imposes a “fee” set administratively each year by the California air Resources Board so no requirements that politicians must ‘vote’ to raises taxes even if they could get a 2/3 majority in the Legislature which all agree would be impossible.  But a ‘fee in California also has limitations under a 1991 California Supreme Court Decision in the Sinclair Paint v California case where the court ruled that the proceeds from a fee can only be used to mitigate or offset the health or environmental impact of the industry affected.  Let the game begin!
  • Eureka!  Charge out of state power plants selling into California!  You can imagine how happy Utah and other states with cheap coal fired generation are to hear of that ‘California dreamin’.  But what if those power producers decide to sell their energy to other states?  Since California is a net importer of about 20% of its electricity requirements it may have trouble meeting peak demand unless the price goes up enough to cover not only the competitive market price but also the carbon tax thus socking California rate payers with their own carbon tax.  Or alternatively California will have to build more power plants to satisfy its own demand.
  • Carbon Taxes and Offset Policies in Europe and the Northeast Are Not Working!  Another problem is that the carbon allowance markets now in operating in Europe (European Trading System) and the Northeast (RGGI) are struggling to survive with falling prices for carbon allowances.  Make no mistake they have raised a lot of money.  In the case of RGGI more than $900 million over the past several years but the states have different policies on how they use those funds and many have just suctioned them up and spent them to reduce deficits or fund pet causes.

This is the situation is facing California now. The carbon tax is not a tax it is a fee.  But fee revenue must be spent on things directly related to the health and environment effects giving rise to the fee.  No problem says Governor Jerry Brown we’ll spend the AB32 money on the high speed bullet train project.  As you can imagine this is going over like methane in a crowded room as the bullet train project is so far over budget, so expensive that is can easily consume all the money the ‘fee’ produces and then some.

Governor Brown’s proposed state budget beginning July 1 2012 includes $1 billion from cap and trade revenue for the fiscal year.  So far it is unclear how that money will be allocated, but $ 1 billion is too rich a pot of gold to be left to the whims of mere Governors so the pigs are lining up at the trough to be fed.

So where is all this going?

With California’s overbuilt electricity market awash in wind and solar resources even if there is new power plant construction it likely will be limited to a few clean natural gas plants or peakers that only run a few days a year.  That will not produce much carbon fee revenue.  Out of state power producers are likely to look for alternatives to doing business in California or raise their prices to recover the carbon fee in bids sticking it to California ratepayers.

The only other source of carbon fee revenue is gasoline prices and since California has a unique set of boutique fuels only sold in the Golden state you can bet fuel prices will get slammed.  That makes the progressive carbon fee among the most regressive of revenue raising schemes going and risks alienating drivers and residents in the faster growing ‘warm side of the hill’ and in the Great Central Valley which demographically tends to vote Republican more than the foggy coastal urban centers.

Welcome to California!

There is one more thing—-the inconvenient truth is the Nunavut Government in Canada reports polar bear populations at an all-time high and climate scientists not intimidated by peer pressure to say so tell us that climate temperatures have not risen in more than a decade.

Holy Carbon Fee!


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