Brown Sees $500 Million Cap-and-Trade Fees for California

California Governor Jerry Brown
Debt of California, S&P’s lowest-rated state at A-, has benefited from municipal rates near the lowest since at least 2009 and measures by Governor Jerry Brown and Democratic legislators to close a $13 billion budget gap estimated for the next 18 months. Photographer: Ken James/Bloomberg

California Governor Jerry Brown plans to use half of the revenue from the nation’s first state-run cap-and-trade air-pollution program to help ease a $9.2 billion deficit in the most populous U.S. state.

Brown estimates the state will take in about $1 billion in the year beginning July 1 under the landmark legislation, which allows industry to buy and sell carbon credits to reduce greenhouse gases. The 73-year-old Democrat wants to use about $500 million on environmental programs now financed through the general fund, said H.D. Palmer, a Finance Department spokesman.

“There would be an offset to the general fund to the degree that these fees are and can be used for programs currently being funded by the general fund on greenhouse gas emissions,” Palmer said in a telephone interview yesterday.

California will auction tradable allowances that permit industries such as power generators and oil refiners to release carbon into the atmosphere if they can’t meet requirements to lower their pollution to 1990 levels. Brown is seeking to boost general-fund spending by 7 percent to $92.6 billion while asking voters to raise income and sales taxes to ward off further cuts to schools.

Freeing up that money also could help ease strains on the budget if voters reject his tax proposal or revenue falls short of expectations. The state’s Legislative Analyst’s Office said yesterday that Brown’s tax increases, proposed Jan. 5, would raise $2 billion less than the $6.9 billion he projects.

Ceiling on Emissions

California regulators in October approved the design of the cap-and-trade program, so named because it will put a ceiling on carbon emissions and allow companies to trade pollution permits to comply. Known as AB 32, it is the first mandatory regulation of its kind in the U.S.

Emission reductions will be enforced by decreasing the number of allowances over time. Allocations will start at 90 percent of industries’ recent levels and gradually shrink, from a peak of 394.5 million tons in 2015 to 334.2 million in 2020.

Large industrial sources such as power plants and oil refineries must hold a permit for every ton of carbon they release beginning Jan. 1, 2013. Transportation-fuel distributors will follow in 2015.

Once the state knows how much the auctions will generate, Brown will submit a plan on how he wants to spend the money to the Legislature for approval. Democrats control both the Senate and Assembly. In his budget, Brown said he will use the money on clean energy, as well as environmental and natural-resource protection programs, and alternative-energy infrastructure.

‘Some Flexibility’

“We have some flexibility there,” said Stanley Young, spokesman for the California Air Resources Board, which administers the carbon-trading program. “We’ll be consulting with the Department of Finance and the governor’s office on our options.”

The California Manufacturers and Technology Association opposed the law and is part of a group monitoring how cap-and-trade is implemented. Dorothy Rothrock, a lobbyist for the association, said the money shouldn’t be used to balance the general fund.

“AB 32 and cap-and-trade is not intended to be a revenue source for the state of California,” she said. “We are very concerned that the governor’s budget doesn’t respect the limitations that need to apply to monies raised under the cap-and-trade program.”

Futures Down

Futures for California carbon allowances were trading at $13 a ton yesterday, according to CME Group Inc.’s Green Exchange in New York, down from a high of $23.50 on Sept. 7.

Brown is working to gather enough signatures to put an initiative on the November statewide ballot asking voters to raise income taxes on individuals making at least $250,000 a year to 10.3 percent from 9.3 percent. For those earning $300,000 to $500,000, the rate would climb to 10.8 percent. For single filers with income above $500,000, the tax would rise to 11.3 percent. Californians with income of more than $1 million are now taxed at 10.3 percent.

He also wants to boost the statewide retail-sales tax to 7.75 percent from 7.25 percent. The higher income and sales levies would expire after five years.

If voters reject those taxes, Brown’s budget proposes to cut $4.8 billion from schools, the equivalent of taking three weeks from the academic year.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE