Gov. Brown proposes to borrow $500M from cap-and-trade revenue

California Gov. Jerry Brown yesterday proposed borrowing $500 million in revenues from the state's landmark carbon cap-and-trade auctions and using those to help balance the general fund budget.

The Democratic governor presented a $96.4 billion revised spending plan for the coming fiscal year that included the loan from the carbon trading program, a move that triggered outrage from environmental and community groups. By law, the Golden State must spend the funds on efforts that reduce carbon emissions or otherwise meet the purposes of California's climate measure, A.B. 32.

State officials said shifting the money from the Greenhouse Gas Reduction Fund -- where emissions trading money lands -- would be the most "prudent" option. Because this is the first full year that California is selling carbon allowances, there isn't a good estimate of how much revenue to expect, said state EPA Secretary Matthew Rodriguez. The delay also provides time to pick the best places to spend the proceeds, he said.

"We're trying to figure out frankly how much money we're going to be dealing with and trying to set priorities among the various programs that are out there," Rodriguez said. "We're trying to be prudent and ensure that when we commit funds to programs, they really are the most effective."

The loan from cap and trade is a relatively small part of Brown's proposed $96.4 billion budget, a blueprint that also cut $1.3 billion from a version offered in January. The governor said the state expected lower revenues because of the federal sequestration and projections that income tax revenues will decline. But Brown's recommendation marks the latest skirmish over the funds, which could grow to billions of dollars in the years ahead. Some members of the state's Air Resources Board (ARB) last month said that better scrutiny is needed to ensure the revenues fund the best choices for cutting greenhouse gas emissions.


California is the first state in the nation with an economywide carbon-trading program. The first two sales of greenhouse gas permits generated about $140 million for the state. The $500 million loan includes money from the first auctions plus allowances still to be sold this coming fiscal year. Brown and other state officials said that the loan was a one-time option and that they expected the monies beginning next year to go toward programs that shrink carbon.

The Legislature will have to approve the revised budget, and it was not immediately clear how lawmakers would respond. There have been several bills earlier offering alternatives for spending the revenues.

There also have been a series of meetings where communities and environmental groups have offered feedback on where the money should go. During a conference call with state officials, some with activists groups questioned whether the delay in spending the money on climate causes would "undermine public support for the program."

'Playing a dangerous game'

Some of those groups pounced on Brown's latest proposal.

"This means the governor will be delaying opportunities to use those funds to actually get critical reductions in global warming pollution at the time when all science shows that we must reduce those emissions as much and as quickly as possible," Kathryn Phillips, executive director of Sierra Club California, said in a statement.

"This shift in funds is extraordinarily disappointing," she added. "The governor is using bizarre accounting to 'balance' the budget and making future generations pay the price with climate disruption."

A group that represents low-income communities located near power plants accused Brown of subverting the intent of S.B 535, legislation passed last year that requires part of the auction money go toward helping economically disadvantaged areas.

"The governor is playing a dangerous game that could wreck California's push toward clean energy," said Ryan Young, legal counsel at Greenlining Institute, in a statement. "Voters of color turned out in force to protect A.B. 32, the clean energy law, when it was under attack by Prop. 23, and they did it based on the promise that it would bring clean energy investments to polluted and struggling communities."

"Seizing these funds for other uses will hurt our state's neediest communities, and it's simply not necessary," Young added.

State officials said there is no plan to spend the cap-and-trade revenue on any particular expense.

"It's helping to allow the state to have a budget that's in balance with a healthy reserve fund," said ARB Chairwoman Mary Nichols. "It's part of the overall fiscal prudence that I think the governor's budget has shown."

Nichols said that the loan would not hurt the state's greenhouse gas reduction goals. By 2020, the state wants to cut emissions to 1990 levels and by 2050 aims to cut greenhouse gas pollution 80 percent.

"The part about the cap-and-trade program that is reducing greenhouse gas emissions, it's the cap, it's the lowering of the cap," Nichols said. "It's not the revenue that we get from the allowances.

"Having that revenue gives us the opportunity to invest in some longer range programs that clearly are beneficial to achieving our longer term goals," Nichols added. "One of the reasons why we support this decision is that we do not believe that it will have any adverse effect on our progress toward meeting the goals of A.B. 32."

Repayment schedule not known

State officials did not commit to any repayment plan for the cap-and-trade revenues, but state EPA Secretary Rodriguez said that the loan "is short term and the money will be repaid with interest."

Karen Finn, program budget manager for the California Department of Finance, said that the money would be refunded as it became needed, once the Legislature approved specific programs.

"The repayment will be done according to when the [greenhouse gas reduction] fund needs it and when any expenditures get appropriated," Finn said. "With no plan, with no program yet, it's hard to say exactly when repayment would happen, but there's a commitment to do it."

Separately, ARB yesterday released the final version of its investment plan for cap-and-trade proceeds, for fiscal years 2013-14 through 2015-16. Nichols said that there were no substantive difference from a draft issued last month. It envisions funding sustainable communities located near transit, clean vehicles, energy efficiency, renewable power, resource conservation and waste diversion.

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