FINANCE:

Calif. will consider fund to offset future tax increases with auction revenues

California air regulators will consider putting the revenue from auction of greenhouse gas emissions credits into a general fund to offset future tax increases, in line with recommendations yesterday from a key economic committee.

In Sacramento yesterday, the Economic and Allocation Advisory Committee voted to send its 13 recommendations on the allocation of carbon credits and the revenues from their sale to the state's Air Resources Board.

If the ARB decides to accept the group's recommendations when it releases its final allocation plan in the fall, California's will be the second mandatory carbon market in the country to auction 100 percent of its allowances (ClimateWire, Jan. 11).

The final report recommends giving about 75 percent of auction revenues back to ratepayers, either through lump-sum payments that could reach $1,000 per year or through tax refunds or avoided tax increases. The value of auction permits could reach $20 billion per year by 2020, according to the committee.

Committee Chairman Larry Goulder said that the concept of using green revenue to offset tax increases has precedent in British Columbia's carbon tax, introduced in 2008.

State searches for ways to avoid future tax increases

"They stipulated in the legislation that the money would be used to displace other taxes, and they've held firm to that," he said. Using climate-related revenue to fund ordinary expenses is a good long-term policy shift, he said.

"Reducing government reliance on ordinary taxes and increasing reliance on green taxes -- even if in the short term there's some obstacles to doing it, it's important that our committee make a pitch for revamping where revenues come from, because this could be mutually beneficial to the state of California," he said.

Gov. Arnold Schwarzenegger (R) said he would support either method of spending the auction proceeds.

"I continue to believe the best program will be one that returns value to the people through tax cuts, rebates or dividends, and I applaud the Committee for recognizing those options," he said in a statement. "I look forward to the Air Resources Board's assessment of these recommendations as it designs a cap-and-trade program to reduce greenhouse gas emissions at maximum benefit to state economic growth."

Goulder acknowledged California's $20 billion budget deficit might not be resolved by the time auction proceeds start coming in.

"Cutting taxes right now, given California's budget difficulties, seems remote," he said. "But one less dollar that the state of California has to increase in ordinary taxes in order to meet whatever budget deficit it has is a dollar more for consumers. It could really help the general public escape the need for tax increases."

Economic analysis could be lacking

The ARB is preparing to release an updated analysis of the economic effects of A.B. 32 sometime next month that will reflect the effects of the current economic downturn and several emission-reduction programs that were left out of the original analysis (ClimateWire, Nov. 17, 2009).

According to the committee members, the economic models that the ARB is using to recalculate the effect of climate regulations are still leaving out several important factors. One of those is the extent to which businesses inside California will lose market share to companies that aren't subject to costly regulations. The committee recommended giving businesses that are particularly "energy-intensive and trade-exposed" some allowances for free, but more work is needed to identify which companies they are, several economists said.

Jim Bushnell, a committee member and research director at the University of California Energy Institute, identified the impacts on people with different income levels as another area where analysis might be weak.

"We can get a rough sense of the distribution of impacts, but income categories -- it's going to be difficult to predict the distribution of effects on different income categories," he said.

But time is of the essence. The ARB will release its updated economic report next month, followed by an updated draft of its cap-and-trade regulations in April. The full board will consider them in October, and plans to adopt them by November. The first auction is scheduled to take place in the fall of 2011, before trading officially begins Jan. 1, 2012.

"ARB has its work cut out for it on a very tight time schedule," Goulder said.

Kahn reported from San Francisco.