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California to Use Revenue from Carbon Auctions to Reduce Huge Fund Deficit

And you thought the California Global Warming Solutions Act (AB32) was all about limiting greenhouse gas emissions, didn’t you?  Think again.

There is a brewing fight in Sacramento over how to spend the gold expected to start pouring in when the Golden State starts its carbon cap and trade program.  The original intent of AB32 was to use the proceeds from the carbon permit auctions to invest in technologies and programs that reduce greenhouse gas emissions.  Makes sense, right?

But the law was passed in the boom times of 2006.  Today six years later as the first carbon cap auction is being readied for later this year, California has a $16 billion general fund deficit and more than a few pet projects are going begging for money.  The State has acted like a giant vacuum cleaner suctioning up money from cities, counties and schools.  It abandoned a decades old economic redevelopment program and seized the revenue from redevelopment agencies to help close the budget gap.

The only way California is going to dig itself out of this fiscal hole is by winning the lottery.  But wait—it believes it has the winning ticket, but first it wants to try the ‘soak the rich’ play one more time before all the rich move to Texas or Nevada or anywhere else.

Governor Brown has proposed tax increases on the wealthiest Californians on the November 2012 ballot but one tax measure to increase cigarette taxes by one dollar per pack on the June primary election ballot is still losing in the recount process.  Not a good omen for the November election.

So what does this have to do with cap and trade revenue?

California’s mega-millions winning ticket is Governor Brown’s 2012-2013 State Budget proposal to take 80% of the carbon tax revenue or about $500 million per year to reduce the budget deficit for the coming two years.  The quarterly carbon credit auctions are expected to produce $660 million to $3 billion per year. The Governor’s budget assumes California will net $1 billion from such auctions to start. The $500 million of revenue take assumed in the first year proposed budget will be used to offset existing General Fund costs for current emissions regulation activities, and the remaining revenues will be used on new programs to reduce emissions.

Environmental advocates—all Friends of Jerry—are screaming.  They squeezed the members of the State Assembly and State Senate to each pass bills that restrict spending the cap and trade money.  Those bills are now being considered in the opposite house and their reconciliation fate is uncertain.  The Legislature is scheduled to adjourn sine die August 31, 2012 and if the bills are not approved in final form they die.

Meanwhile, the budget must be approved by June 15, 2012 but the Legislature has rarely met that goal.  If a budget deal is approved that includes taking the $500 million in year one cap and trade revenue, it seems unlikely the Legislature will then pass the other spending restriction bills thus creating a half-billion hole in the budget they must then fill with other politically unacceptable cuts.

On the other hand the sleight of hand could get worse.  The Cap and Trade revenue projections from first-year proceeds of the AB32 auctions range from $600 million to $1.8 billion in year one since many permits are being given away the first year.  But if the cap and trade revenue comes in above the $660 million floor estimate the Governor’s budget leaves wiggle room with the 80% take to transfer even more than $500 million in year one and to extend it to subsequent years to balance the budget and fund those pet projects like the high speed rail project.

You can bet that if the voters turn down the soak the rich tax increase measures in November that giant sucking sound will go after cap and trade gold faster than the 49rs at Sutter’s Mill.

By. Gary L Hunt


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