To nobody’s surprise, the mere rumor of billions in new cap-and-trade auction revenues has incited a feeding frenzy among legislators and spending advocates. Unfortunately – and unsurprisingly – this frenzy has revealed either widespread ignorance or deep cynicism about how greenhouse gases can be reduced in California.
Typically I would not bother with how legislators (or the Administration) choose to spend the proceeds of the cap-and-trade auction. Pending before the Third District Court of Appeal is California Chamber of Commerce v. ARB, which challenges the legality of the auction, based on our belief that (1) the Legislature did not grant the necessary authority to ARB in AB 32 to conduct the auction, and (2) in the absence of 2/3rds approval by the Legislature, the auction is an unlawful tax levied on GHG emitters. No matter how the revenues may be spent, they are ill-gotten and should never have been collected in the first place.
Moreover, raising the cost of compliance with AB 32, by requiring purchases of allowances that must already be acquired to comply with the declining GHG cap, adds a cost that has nothing to do with meeting the carbon reduction goals.
Nevertheless, the discussion surrounding the proposed spending schemes spotlights why we supported a cap-and-trade structure in the first place, and how any regulatory approach, especially after 2020, to reduce GHG emissions in California must double-down on market mechanisms to achieve the reduction goals.
Remember, reducing climate changing emissions is very different from reducing pollutants from traditional sources:
- Reducing GHG emissions has global benefits but local costs. California is less than one percent of global GHG emissions. Reducing emissions here will have an unmeasurable effect on global climate change, but will entail real costs to California households and workplaces.
- On the other hand, a successful approach by California could ease the way for other jurisdictions to likewise reduce GHGs, which in turn would reduce our competitive disadvantage and improve the global response to climate change.
Taken together, this means California has a strong imperative to take actions that minimize costs and maximize success. A case study in how not to approach this may be a recent proposal to divert cap-and-trade auction revenues to subsidize urban affordable housing.
Senate leader Darrell Steinberg recently proposed using as much as forty percent of the expected auction revenues for affordable housing, including communities built near transit options. This could amount to hundreds of millions of dollars a year, depending on the market price of emissions allowances. The only condition on the use of the money – in Legislature’s interpretation of the law – is that the program have an effect on reducing greenhouse gas emissions.
To that end, Senator Steinberg recently released a study by the California Housing Partnership Corporation and TransForm that described how a major investment in funding affordable housing near transit would result in reduced GHG emissions. According to this study,
Investing 10% of cap-and-trade proceeds in (the state Housing and Community Development’s transit-oriented development) program would result in 15,000 transit-connected homes that would remove 105 million miles of vehicle travel per year from our roads. Over the 55-year estimated life of these buildings, this equates to eliminating 5.7 billion miles of driving off of California roads. That equates to over 1.58 million metric tons of GHG reductions, even with cleaner cars and fuels anticipated.
These are outwardly impressive numbers: 10% investment of auction revenues for a GHG reduction of 1.58 million tons. But let’s unpack them.
Taking at face value the numbers generated by the study, the total cost of the program would be $750 million invested over three fiscal years. The return is an annual reduction of 105 million miles driven, which the study estimates would result in a 55-year total reduction of 1.58 million metric tons of GHG emissions. That’s a cost of $475 per ton of carbon reduced.
Under a cap-and-trade program, the cost of each ton of carbon reduced is equal to the allowance price of the emissions, which varies on the open market, depending on the availability of allowances. The driver of GHG emission reductions is the cap. Any firm or facility regulated under the cap will be motivated to purchase sufficient allowances (or make efficiencies) to stay in business. Therefore, the price of the allowance represents the cost at a point in time of reducing GHG emissions.
The most recent auction of GHG allowances this month revealed a market price of $11.50 per ton for 2014 vintage allowances and $11.34 for 2017 vintage allowances. Since the first auction in November of 2012, the allowance prices have ranged from $10.00 to $14.00.
At a price of $14 per metric ton of CO2 equivalent gasses, a 1.58 million ton reduction would cost $22 million. Double that carbon price would cost $45 million. Tripling the highest allowance price so far revealed at auction would produce a cost of $67 million to reduce the same amount of tons as called for in the TransForm/CHPC report – or less than 10 percent of the cost of the proposed affordable housing project.
This is not to say that subsidizing affordable housing for needy Californians is not a worthwhile public policy, and that a residual benefit of the creation of affordable housing near transit stops may reduce vehicle use and greenhouse gas reductions. The ripples from increasing attractiveness of urban lifestyles for more affluent workers have disrupted affordability for many low income urban families. This is a legitimate area of policy inquiry to address poverty and economic opportunity. Same goes for other measures whose champions are clamoring to use auction proceeds, like transit, wetlands restoration and the purchase of electric vehicles. There may be legitimate public policy reasons to use the power of the state to subsidize these activities or amenities.
But as a lever to reduce greenhouse gas emissions, using cap and trade auction revenues to subsidize more affordable housing – or for any other program outside the cap and trade structure – unnecessarily raises costs and reduces the effectiveness of the climate change programs, which in the long run will harm its reputation and reduce the likelihood that other governmental jurisdictions will follow California’s lead.
When our lever to influence global policy on climate change is so small and so sensitive, we should make every effort to ensure the flagship policies are as cost-effective and replicable as possible. Otherwise, California will remain an irrelevant island of carbon reduction in a warming world.