Second cap and trade auction needs big bucks

6:43 PM, Feb 19, 2013   |    comments
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In a private and somewhat secret event on Tuesday, Gov. Jerry Brown's proposed state budget inched a little more towards balance... or further towards a multi-million dollar hole created by what's turned out to be relatively low demand for greenhouse gas pollution credits.

It was the second of three initial auctions of carbon dioxide credits, and the first since November's offering came up significantly short in revenues available to the state.

Net proceeds won't be revealed by the California Air Resources Board until Friday.  The first auction brought in $55.8 million, less than a third of the $200 million expected in the governor's budget through the end of June.

For his part, Brown has dismissed concerns about the weak interest from utilities and other companies in buying credits that they could ease their mandate to reduce greenhouse gas (GHG) emissions under the state's 2006 climate change law.

"Look, the point of cap and trade is not to make money," said the governor when asked recently about the weak cash report from November's auction.  "It's to reduce greenhouse gases, and protect our climate and our environment going forward."

Even so, Brown's January 10 budget assumes a fair amount of money from the proceeds of the first three auctions of carbon credits, money that would offset existing state expenses and thus help balance the budget.

And the expectations only grow in the 2013-2014 budget year, with $400 million scored from the proceeds of future auctions.

Tuesday's auction, which gave companies three hours on which to bid on credits that could be used in 2013 and 2016, was conducted in relative secrecy by the Western Climate Initiative. As was the case in November, state officials will ultimately only release general data about the pollution credits sold, the average price, and the proceeds.

While that first auction was hailed by state officials as a success, there have been questions raised about its results.  One news organization reported that a single utility company mistakenly bought way too many credits, thus suggesting the already low revenues would otherwise have been even lower.

The auction came on the same day as new questions raised by the nonpartisan Legislative Analyst's Office about the Brown administration's assumptions on cap and trade revenues -- namely, the total dollar amount that should be expected, and how much of the revenues can legally be used to help balance the budget under 2006's AB 32.

Given that relatively strict rule on where the cash can be spent, the Legislature will need "to seek the advice of Legislative Counsel and consider any potential legal risks," says the LAO report.

And the entire program is already being challenged in the courts. As the first auction was taking place last fall, the California Chamber of Commerce filed a lawsuit in Sacramento Superior Court claiming that the 2006 law doesn't allow the state to make a profit from selling carbon credits.  That lawsuit, which now features a host of environmental groups intervening on behalf of the state, is slated to go to trial in May.

The business group suggests the debate about both the legality of the auction revenue, plus questions about how broadly or narrowly it can be spent, should lead lawmakers to simply set the cash aside.

"The prudent thing for the Legislature to do would be to put that money in an escrow account and be prepared to have it refunded," said Loren Kaye, president of the Cal Chamber's economic think tank.

Of course, the Legislature could remove all legal uncertainties about either the revenues or their use by passing new legislation, though analysts suggest any such action would take a supermajority vote.  That would no doubt be a test of Democratic dominance, given Republican opposition in the statehouse to almost all of the AB 32 climate change program.

Asked on February 5 about his projections of cap and trade revenues, Gov. Brown seemed unfazed by the potential budget impacts of missing the mark.

"My budget assumes a lot of things," said Brown at a climate change event for electric delivery vehicles.  "Hopefully, some of them will happen."


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