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Cap and Trade Moves Forward

October 5, 2012

Beginning this fall, the State Air Resources Board (ARB) is running a Cap and Trade Auction that is projected in future years to provide a multi-billion annual revenue stream.



A portion of Cap and Trade Auction revenues will likely be available to local government. Gov. Jerry Brown signed two key bills last month that put in to motion discussions on the state’s investment plan for revenues beginning next summer.



A key element of California’s greenhouse gas reduction program under AB 32 (Núñez; 2008) is the state’s “Cap and Trade” program. The program works by establishing a hard cap on about 85 percent of the total statewide greenhouse gas (GHG) emissions. This includes industries like mining, oil production and energy production, manufacturing plants, transportation fuels and others. ARB will issue emission “allowances” equal to the total amount of allowable emissions over a given compliance period. Then, entities that are regulated under the program will be able to “trade” or buy and sell a portion of these allowances. Each allowance is equal to one ton of GHG. As the overall cap declines, fewer allowances will be available.

In August, ARB held a successful practice auction, which will be followed by the first real auction on Nov. 14. In 2013, ARB will begin its regular quarterly auctions which are expected to be held in January, March, August and November.

Over time, the auctions are estimated to generate billions annually for the state. It is estimated that the auctions in FY 2012-13 could generate between $660 million and $3 billion. In future years, it’s estimated that the auctions may annually produce between $3 and $14 billion. Questions surrounding the exact amount the auctions will raise will not be able to be answered until the auctions actually happen. The bulk of the money will be raised after 2015 when the transportation fuel and residential and natural gas sectors are included in the auctions. 

The FY 2012-2013 budget assumes the state will receive revenues of $1 billion from the auctions and assumes that $500 million of that money will go to offset existing greenhouse gas mitigation activities and the other $500 million for new or expanded programs intended to reduce greenhouse gas (GHG) emissions. Potential areas that revenue could be directed to, include: low carbon transportation and infrastructure, clean and efficient energy, and natural resources protection. 

Recent Legislation

While a number of bills emerged this year with plans to spend the revenues, ultimately only two were signed by the Governor.

AB 1532 (Pérez) Chapter 807, Statutes of 2012) establishes a three-year investment plan to set procedures for the investment of regulatory fee revenues derived from the revenues. The bill requires the Department of Finance (DOF), on behalf of the Governor, and in consultation with ARB (and any other relevant state entity), to develop and submit a three-year investment plan to the Legislature for the May Revise (May 1, 2013). Beginning in the FY 2016-17 budget and every three years thereafter, DOF is required to include updates to the investment plan. All money must be appropriated through the annual Budget Act consistent with the investment plan. DOF is also required to submit an annual report to the Legislature on the status and outcomes of projects funded.  

AB 1532 requires the money to be used to facilitate the achievement of reductions of GHG emissions in the state and, where applicable and to the extent feasible:

  • Maximize economic, environmental, and public health benefits to the state;
  • Foster job creation by promoting in-state GHG emissions reduction projects carried out by California workers and businesses;
  • Complement efforts to improve air quality;
  • Direct investment toward the most disadvantaged communities and households in the state in coordination with SB 535 (de León);
  • Provide opportunities for businesses, public agencies, nonprofits, and other community institutions to participate in and benefit from statewide efforts to reduce GHG emissions; and
  • Lessen the impacts and effects of climate change on the state’s communities, economy, and environment.

Funding areas of particular interest to cities are:

  • Reduction of GHG emissions through energy efficiency, clean and renewable energy generation, distributed renewable energy generation, transmission and storage, and other related actions, including at public universities, state and local public buildings, and industrial and manufacturing facilities;
  • Funding to reduce GHG emissions:
    • Through the development of state-of-the-art systems to move goods and freight, advanced technology vehicles and vehicle infrastructure, advanced biofuels, and low-carbon and efficient public transportation;
    • Associated with water use and supply, land and natural resource conservation and management, forestry, and sustainable agriculture;
    • Through strategic planning and development of sustainable infrastructure projects, including transportation and housing;
    • Through increased in-state diversion of municipal solid waste from disposal through waste reduction, diversion, and reuse;
    • Through investments in programs implemented by local and regional agencies, local and regional collaborative, and nonprofit organizations coordinating with local governments.
  • Funding in research, development, and deployment of innovative technologies, measures, and practices related to programs and projects funded by the Green House Gas Reduction Fund (Fund).

SB 535 (de León) Chapter 830, Statutes of 2012) is the second bill the Governor signed last week. A companion piece to AB 1532 (Pérez), SB 535 requires a minimum of 10 percent of revenues deposited in the Fund to be allocated, upon appropriation by the Legislature, to benefit socioeconomically disadvantaged communities impacted by air pollution and climate change. The bill defines “most impacted and disadvantaged communities” as census blocks having the highest 10 percent of cumulative impacts in California that will need to be identified by the Office of Environmental Health Hazard Assessment in a report no later than March 1, 2013.

Next Steps

With the signing of AB 1532 and SB 535, the discussions of how to allocate the revenues from the Fund begin anew. While a number of coalitions and interest groups spent the summer months talking to legislators about how the money should be spent, AB 1532 now directs those discussions to be led by DOF, in consultation with ARB and other relevant state entities. Additionally, while AB 1532 requires at least two public hearings on the investment plan, interest groups are already shifting their focus from the Legislature to ARB, lobbying for funds to go to their issue areas.

The League has been working on two key areas for funding along with a number of other groups. The first, funds for critical transportation system maintenance and operation needs identified in the California Transportation Commission’s Statewide Transportation Needs Assessment over the next ten years. The second area identified is investment in innovative local projects. This broad area has yet to be defined but in earlier versions of AB 1532 included a wide range of projects that could be eligible for the funds.  

The League will continue to keep members apprised of movement on this issue. 

For more information, contact Kyra Ross at (916) 658-8252.

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