The 2014-15 Budget: Cap-and-Trade Auction Revenue Expenditure Plan

The 2014-15 Budget: Cap-and-Trade Auction Revenue Expenditure Plan MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • FEBRUARY 2014 Summary The Global Warming Solutions Act of 2006 (Chapter 488, Statutes of 2006 [AB 32, Núñez/Pavley]), commonly referred to as AB 32, established the goal of reducing greenhouse gas (GHG) emissions statewide to 1990 levels by 2020. In order to help achieve this goal, the California Air Resources Board (ARB) adopted a regulation to establish a cap-and-trade program that places a “cap” on the aggregate GHG emissions from entities responsible for roughly 85 percent of the state’s GHG emissions. As part of the cap-and-trade program, the ARB conducts quarterly auctions where it sells emission allowances. These auctions are likely to generate billions of dollars in state revenue over the coming years. The Governor’s 2014-15 budget proposes to appropriate $850 million in auction revenue to various state programs, including programs related to sustainable communities, clean transportation, energy efficiency, natural resources, and waste diversion. In order to minimize the negative economic impact of cap-and-trade, it is important that auction revenues be invested in a way that maximizes GHG emission reductions for a given level of spending. In reviewing the Governor’s proposed expenditure plan for cap-and-trade auction revenue, we find that there is significant uncertainty regarding the degree to which each investment proposed for funding will achieve GHG reductions. This uncertainty is the result of several factors, including there being only limited data and analysis provided by the administration, as well as the fact that the level of emission reductions achieved would depend on the specific projects funded by departments. Consequently, it is very difficult for the Legislature to have assurance that the specific package of programs proposed by the administration would achieve the greatest reduction per dollar invested possible, or whether a different set of programs might yield better outcomes in a more cost-effective manner. Given these concerns, we recommend that the Legislature direct ARB to develop metrics for departments to use in order to prospectively evaluate the potential GHG emission benefits of proposed projects, as well as direct the board to establish a set of guidelines for how departments should incorporate these metrics into their decision-making processes. Having such metrics to use as part of departments’ decision-making processes when determining how program funding will be spent would provide greater certainty regarding the potential GHG emission reductions of projects being considered for funding. 2014-15 BUDGET BACKGROUND Assembly Bill 32 established the goal of How Cap-and-Trade Works to reducing GHG emissions statewide to 1990 levels Reduce Emissions by 2020. Among other provisions, the legislation The Concept of the Cap. A cap-and-trade directed ARB to develop a plan encompassing a set program sets a limit or cap on aggregate emissions. of regulations and programs that, taken together, Typically, the cap declines over time, ultimately would be a means for the state to achieve its 2020 arriving at the target emission level. In order to GHG reduction target in a cost-effective manner. operationalize the cap, the regulator administering This plan is commonly referred to as the AB 32 the program creates allowances equal to the numeric Scoping Plan. The original scoping plan was value of the cap. For example, if the cap were adopted by ARB in December 2008 and identified 100 million tons of carbon dioxide emissions, the various regulations and programs such as the regulator would create 100 million allowances, each state’s Renewables Portfolio Standard, Low Carbon equal to one ton of emissions. The regulator then Fuel Standard, and energy efficiency programs. requires specified emitters to obtain allowances equal (At the time of this analysis, ARB is considering to their total emissions in a given period of time. an update to the scoping plan.) In order to Because the cap declines and allowances become fund administrative activities associated with more scarce over time, allowance prices (which we implementing the plan, AB 32 authorized ARB to discuss below) would be expected to increase. As assess a fee on the state’s largest GHG emitters. This allowances become more expensive, regulated parties fee, which is commonly referred to as the AB 32 have a greater incentive to find ways to reduce their Cost of Implementation (COI) fee, provides roughly emissions in order to avoid having to purchase as $40 million annually to various state departments many of the relatively more expensive allowances. that have roles in developing, implementing, and Consequently, to the extent that it is less expensive evaluating the regulations and programs included for a regulated entity to reduce its emissions—for in the scoping plan. example, by installing a more efficient technology— Assembly Bill 32 also authorized (but did not than it is to purchase allowances, the entity will require) ARB to include, as part of the scoping reduce its emissions. As such, it is the supply and plan, a market-based mechanism to reduce the demand for allowances, affected by the scarcity state’s GHG emissions. The legislation defined a of allowances created by the declining cap, that market-based mechanism as a system that includes forces the achievement of the environmental goal of an annually declining limit on GHG emissions, reducing emissions to a targeted level. as well as a trading component whereby sources Distribution of Allowances. Three ways of GHG emissions may buy and sell carbon regulators can distribute allowances are to allowances in order to comply with the regulation. (1) distribute all available allowances for free, Such a system is commonly referred to as a (2) distribute all allowances via an auction, or cap-and-trade program. (3) have some portion allocated for free while the other portion is auctioned. The way in which allowances are distributed affects the overall cost of compliance for regulated parties (which, 2 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET in turn, affects consumers, businesses, and the decline from 409 million metric tons of CO2e in economy at large). The way in which allowances 2012 to 341 million metric tons of CO2e in 2020. are distributed, however, does not impact the As the cap declines, the number of allowances ARB program’s environmental goal. This is because, as makes available will decline proportionately. Thus, addressed above, it is the declining cap, not the a covered entity will need to determine if it is more manner in which allowances are distributed, that cost-effective to purchase allowances or to reduce achieves the environmental goal of the program. its emissions (such as by making energy efficiency Once allowances have been distributed, entities can upgrades in its facility). then “trade” (buy and sell on the open market) the Cap-and-Trade Auction Revenue allowances in order to obtain enough to cover their total emissions for a given period of time. Revenue Collected to Date. Between November 2012 and November 2013, ARB conducted five California’s Cap-and-Trade Program auctions that have generated a total of $532 million In conjunction with the AB 32 Scoping Plan, in state revenue. The 2013-14 Budget Act included ARB adopted a cap-and-trade regulation that provisions to loan $500 million of this amount to places a cap on aggregate GHG emissions from the General Fund. (The Governor’s budget proposes entities responsible for roughly 85 percent of to repay $100 million of that amount in 2014-15.) California’s total GHG emissions. While these In addition, the 2013-14 budget provided $578,000 entities are not assigned an individual reduction to the Office of Environmental Health and Hazard target, entities that emit at least 25,000 metric tons Assessment (OEHHA) for the development of a or more of carbon dioxide equivalent (CO2e) per method for identifying disadvantaged communities, year are subject to the cap-and-trade regulation which we discuss in more detail below. and are therefore considered to be “covered Future Auction Revenues. The amount entities.” When the program is fully operational, of revenue that future allowance auctions will approximately 600 of the state’s largest emitters of generate will depend on the price of allowances GHGs will be subject to the regulation, including and the number of allowances purchased versus oil producers, refiners, and electricity generators. allocated for free. The price of allowances could In order to comply with the regulation, a covered range greatly depending on demand for allowances entity must obtain one allowance (or equivalent relative to the cost of directly reducing GHG thereof) for every metric ton of CO2e that it emits emissions, the state of the economy, and other during a given compliance period. factors. The ARB has adopted regulations to keep Under ARB’s cap-and-trade program, covered auction prices within a certain range by setting a entities have an opportunity to obtain allowances minimum and maximum price for allowances sold in multiple ways. The ARB has designed its at auctions—from $10 per ton of emissions to $40 cap-and-trade program to provide a portion of per ton of emissions. Under ARB’s current auction allowances for free, while another portion are schedule, over the life of the program, roughly half available for purchase at quarterly auctions. of all allowances will be allocated at auctions, with Covered entities also have the opportunity to trade the remainder allocated for free. We note, however, allowances in the open market. Over time, the that ARB is currently considering a change to cap on aggregate annual emissions will gradually increase the amount of allowances allocated for free to 60 percent. www.lao.ca.gov Legislative Analyst’s Office 3 2014-15 BUDGET California’s cap-and-trade program is expected • Chapter 807, Statutes of 2012 (AB 1532, to raise billions of dollars in auction revenues Perez). Chapter 807 directed the from 2012 through 2020. The actual amount of Department of Finance to develop revenue that will be raised is difficult to predict, and periodically update a three-year particularly because of the uncertainty about investment plan that identifies feasible and future allowance prices. Using ARB’s floor and cost-effective GHG emission reduction ceiling prices for allowances, and assuming that investments. Chapter 807 also requires that ARB provides 60 percent of all allowance for free, cap-and-trade auction revenues be used to the total cap-and-trade revenues from all auctions reduce GHG emissions and, to the extent through 2020 could range from $12 billion to feasible, achieve co-benefits such as job $45 billion. Several economists who have evaluated creation, air quality improvements, and California’s cap-and-trade program have estimated public health benefits. that, over the life of the program, average allowance • Chapter 830, Statutes of 2012 (SB 535, price may be in the $15 to $20 range. If this were de León). Chapter 830 requires that to occur, total revenue for the program through 25 percent of auction revenue be used 2020 could be roughly $15 billion. To the extent to benefit disadvantaged communities. that ARB does not increase the percentage of free Chapter 830 also requires that 10 percent allowances, the above revenue estimates would be of auction revenue be invested in higher. disadvantaged communities. Prior Legislative Direction for Use of Revenue. Three statutes enacted in 2012 provide some Potential Litigation Over Use of Auction requirements and direction on the use of cap-and- Revenues. Given the scope of cap-and-trade and trade auction revenue. the amount of revenue that the auctions are likely • Chapter 39, Statutes of 2012 (SB 1018, to generate, it is reasonable to expect litigation over the coming years regarding how these revenues Committee on Budget and Fiscal Review). can be used. In 2012, the California Chamber of Chapter 39 created the Greenhouse Gas Commerce filed a lawsuit against the ARB claiming Reduction Fund (GGRF), into which all that cap-and-trade auction revenues constitute auction revenue is to be deposited. The illegal tax revenue. In November 2013, the superior legislation requires that before departments court ruled that the “charges” from the auction can spend monies from the GGRF, they have characteristics of a tax as well as a fee, but must prepare a record specifying: (1) how that, on balance, the charges constitute legal the expenditures will be used, (2) how the regulatory fees. This ruling is subject to appeal. It expenditures will further the purposes is also possible that even if ultimately determined of AB 32, (3) how the expenditures to be a fee, the courts would put limits on how the will achieve GHG emission reductions, revenues can be used, just as all other state fees (4) how the department considered other have spending constraints. Final decisions from the non-GHG-related objectives, and (5) how appellate courts on these issues would likely take the department will document the results years. of the expenditures. 4 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET GOVERNOR’S PROPOSALS The Governor’s budget includes the first budget loan to the General Fund. In regards to the expenditure plan for cap-and-trade revenues (aside remaining loan balance, the Governor is proposing from the small amount provided in 2013-14 for budget trailer legislation specifying that when the OEHHA to identify disadvantage communities). remaining $400 million is repaid, the funds will be As shown in Figure 1 (see next page), the plan directed to HSRA. Below, we provide a description proposes to spend $850 million in 2014-15, all of each proposal. from the GGRF, on various programs. (The Sustainable Communities and administration proposes $31 million in 2013-14 for Clean Transportation these activities.) The administration’s expenditure plan provides the same level of funding for most High-Speed Rail—HSRA. The Governor’s programs in 2015-16 as it proposes for 2014-15. budget requests $250 million in 2014-15 to support However, the administration is proposing that construction of the high-speed rail system. beginning in 2015-16, 33 percent of all GGRF Specifically, this includes (1) $58.6 million for revenues be continuously appropriated to the environmental planning and permitting for the High-Speed Rail Authority (HSRA) for the state’s first phase of the project (which would extend from high-speed rail project. These funds would support San Francisco to Anaheim) and (2) $191.4 million the construction of the project’s Initial Operating to purchase land and partially support construction Segment (IOS), which is estimated to cost for the Initial Construction Segment (which would $31 billion and be completed by 2022. At this time, extend 130 miles from Madera to Bakersfield). the administration has not provided an estimate of According to the administration, the availability projected cap-and-trade auction revenues; thus, it is of a high-speed rail system in California will unclear how much funding would go to high-speed reduce vehicle miles traveled in cars, as well as rail in 2015-16 and beyond. planes, thereby reducing total GHG emissions. The proposed expenditure plan provides As described above, the administration also funding to 11 different departments and boards to proposes budget trailer legislation to continuously administer 23 distinct program components, such appropriate 33 percent of GGRF revenues to HSRA as energy efficiency projects, low-emission vehicle beginning in 2015-16. rebates, and the state’s high-speed rail system. The Low Carbon Transportation—ARB. The administration states that it took into consideration Governor’s budget requests $30 million in 2013-14, several factors when developing its cap-and-trade $200 million in 2014-15, and $200 million in expenditure plan, including consistency with 2015-16 to support the expansion of ARB’s existing ARB’s investment plan for GHG reductions, the clean transportation program. This program Governor’s overarching energy and transportation funds a range of programmatic activities such as policy priorities, the ability to meet Chapter 830’s incentive programs for zero and low-emission requirements regarding disadvantaged passenger vehicles, clean buses and trucks, and communities, and other potential co-benefits sustainable freight technology. Of the additional (such as the public health benefits of reducing air funding proposed for the program, ARB will pollution). The Governor’s budget also includes a receive $2 million annually for 15 new positions partial repayment of $100 million of the 2013-14 to administer additional grants and monitor www.lao.ca.gov Legislative Analyst’s Office 5 2014-15 BUDGET Figure 1 Governor’s 2014‑15 Cap‑and‑Trade Expenditure Plan (In Millions) Department Activity Amount Sustainable Communities and Clean Transportation High-Speed Rail Authority Rail planning, land acquisition, and construction $250.0 Air Resources Board Low-emission vehicle rebates 200.0 Strategic Growth Council Transit oriented development grants 100.0 Caltrans Intercity rail grants 50.0 Energy Efficiency and Clean Energy Community Services and Low-Income Weatherization Program $80.0 Development General Services Energy efficiency upgrades in state buildings: Zero Net Energy Buildings $10.5 Energy Retrofit Loan Program 8.5 Distributed renewable generation at state buildings 1.0 Subtotal ($20.0) Food and Agriculture Reducing agricultural waste: Grant funding for dairy digesters $12.0 Agricultural greenhouse gas research 5.0 Biofuel standards 3.0 Subtotal ($20.0) Water Resources Water Action Plan–water use efficiency: Water efficiency grants $10.0 State Water Project upgrades 10.0 Subtotal ($20.0) Natural Resources and Waste Diversion Forestry and Fire Protection Fire prevention and urban forestry: Grants for urban and community forestry $18.0 Vegetation management program 12.7 Forest legacy program 8.4 Reforestation services 5.1 Research at demonstration state forests 2.6 Forest pest control programs 1.7 Regulation of timber harvests 1.4 Subtotal ($50.0) Fish and Wildlife Water Action Plan–wetlands restoration $30.0 CalRecycle Waste diversion: Grant programs to encourage diversion of waste from landfills $20.0 Loan program for recycling and composting facilities 10.0 Subtotal ($30.0) Total $850.0 CalRecycle = California Department of Resources Recycling and Recovery. 6 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET funded projects. In addition, the Governor’s budget budget proposes $50 million in 2014-15 and proposes $2.6 million and ten new positions to 2015-16 for Caltrans to implement a new rail support ARB’s administration of the cap-and-trade modernization grant program. According to the expenditure plan. Specifically, ARB staff would administration, grant funds would support projects develop metrics for other departments to use to intended to enhance mass transit operations in evaluate the effectiveness of their programs at the state, with the intent of increasing transit reducing GHG emissions. ridership and reducing vehicle miles traveled in Sustainable Communities—Strategic Growth cars. For example, grants could be given to projects Council (SGC). The SGC is comprised of eight to integrate the payment and fare systems of members representing six state agencies, the high-speed rail, intercity rail, commuter rail, and Governor’s Office of Planning and Research (OPR), transit systems. Grants could also be provided for and a public member appointed by the Governor. marketing efforts intended to increase ridership. The SGC is responsible for coordinating a variety of Energy Efficiency and Clean Energy state programs and activities related to sustainable communities and the environment, such as the Low-Income Weatherization—Department implementation of Chapter 728, Statutes of 2007 of Community Services and Development (CSD). (SB 375, Steinberg), commonly referred to as The Governor’s budget requests $80 million in SB 375, which incorporates sustainable community 2014-15 and $80 million in 2015-16 for CSD to development into transportation planning. The continue funding its existing weatherization and Governor’s budget requests $100 million in solar programs. In recent years this program has 2014-15 and $100 million in 2015-16 to establish been largely funded by one-time federal monies. a SB 375-related grant program within OPR to The CSD’s federal Weatherization Assistance be administered by SGC. While details of the Program provides low-income Californians with program have not been developed at the time of weatherization services such as weather stripping, this analysis, OPR indicates that grants could insulation, and water heater replacement. In be available for local government sponsored addition to weatherization services, in recent projects that implement a regional “sustainable years CSD has used federal funds to operate communities strategy” plan as required by SB 375. programs that install solar photovoltaic systems Specifically, funding could support transit capital on low-income homes. Of the annual amount of and operating costs, bicycle facilities, development cap-and-trade auction revenue proposed for CSD, near transit stations, and other projects intended $4.6 million would support 10.5 new temporary to reduce vehicle miles traveled. According to positions, 14 existing positions that had previously the administration, priority would be given for been funded by federal funds, and consulting activities serving disadvantaged communities. services to administer the program and evaluate Under the Governor’s budget, $800,000 of the program effectiveness. proposed $100 million from the GGRF would Green State Buildings—Department of be used to support the continued operations of General Services (DGS). The Governor’s budget the SGC and relocate it from under the Natural requests $20 million in both 2014-15 and 2015-16 Resources Agency to OPR. for DGS to support energy efficiency and renewable Rail Modernization—California Department energy programs. First, $10.5 million would of Transportation (Caltrans). The Governor’s help convert 12 state-owned facilities to be “zero www.lao.ca.gov Legislative Analyst’s Office 7 2014-15 BUDGET net energy” by implementing a combination of equally for (1) grants to local agencies to fund energy efficiency measures and renewable power water conservation measures intended to reduce generation so that the buildings do not use any the amount of energy used to move, treat, and more energy than they generate over the course heat water; and (2) upgrading two generating of a year. Second, $8.5 million would support units on the State Water Project (SWP) to become the expansion of the existing Statewide Energy more energy efficient. In addition, $1 million Retrofit Loan Program, which loans funding to of the proposed annual funding would support departments for energy efficiency projects. Third, 3.5 existing positions (previously funded by bond $1 million would be used to install renewable funds) to administer the above grants. energy generation at state buildings. Of the Natural Resources and Waste Diversion total requested, the Governor’s budget proposes $1.3 million each year to support nine new Fire Prevention and Urban Forestry— positions for program administration. California Department of Forestry and Fire Agricultural Energy—California Department Protection (CalFire). The Governor’s budget of Food and Agriculture (CDFA). The Governor’s requests $50 million for each of the next two budget requests $20 million in both 2014-15 and years to expand seven existing programs at 2015-16 for CDFA to support three new programs CalFire. Specifically, the proposed funding would related to agriculture energy. support (1) local assistance grants for urban and community forestry; (2) CalFire’s vegetation • $12 million in grants to fund “digesters” management program, which is a cost-sharing that capture methane from animal waste program with landowners designed to reduce in order to generate electricity or create the risk of wildland fire; (3) the forest legacy transportation fuel. program, which invests in forestlands to prevent • $5 million for research related to GHG conversion to non-forest use; (4) reforestation emissions from fertilizer application and services; (5) research at demonstration state forests agriculture management practices that and cooperative wildlands; (6) forest pest control reduce those emissions. programs; and (7) the forest practice program, which regulates timber harvests. According • $3 million to develop technical standards to the administration, each of these programs that would allow low-carbon agricultural would reduce GHG emissions by increasing the biofuels to be sold in California. number and health of forests, as well as reducing Under the Governor’s proposal, some of the the frequency and severity of wildland fires. Of requested funding—$1.4 million in 2014-15 and the total amount proposed, CalFire would receive $1.5 million in 2015-16—would support 15 existing $2.5 million in 2014-15 to support 13 new positions positions that are currently funded from various (growing to $2.6 million and 14 positions in funds such as motor oil fees. 2015-16) for program implementation. Water Use Efficiency—Department of Water Wetland and Watershed Restoration— Resources (DWR). The Governor’s budget proposes Department of Fish and Wildlife (DFW). The $20 million in both 2014-15 and 2015-16 for DWR Governor’s budget requests $30 million in 2014-15 to support water-energy efficiency activities. For and 2015-16 to support DFW’s wetland restoration each year, the proposed funding would be split efforts. The proposed funding would support 8 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET grants for ecosystem restoration throughout the proposes $20 million for grants to expand existing state—including in the Delta, on the coast, and in facilities or develop new facilities that process mountain meadows—which would increase the organic or recyclable materials, and $10 million amount of land that can naturally capture and to establish a new revolving loan fund to provide store carbon. The proposed funding would also low-interest loans to encourage the establishment support measures to reduce the energy needed to or expansion of recycling businesses. These two transport water to wetlands currently managed by programs are intended to reduce GHG emissions DFW. Of the total amount requested, the Governor by (1) redirecting organic waste from landfills to proposes $2.2 million in 2014-15 to support 17 new anaerobic digestion facilities, which would reduce positions (increasing to $3 million and 27 positions methane emissions at landfills; and (2) increasing in 2015-16) for program implementation. recycling, which could produce fewer GHG Waste Diversion—California Department of emissions than the manufacturing of new products. Resources Recycling and Recovery (CalRecycle). Of the amount proposed, the budget provides The Governor’s budget requests $30 million CalRecycle with $392,000 in 2014-15 to support for each of the next two years for CalRecycle to four new positions ($477,000 and five positions in support projects designed to increase recycling 2015-16) for program implementation. and composting. Specifically, the administration FINDINGS AND LEGISLATIVE CONSIDERATIONS In reviewing the Governor’s proposed may not occur until after 2020, the statutory goal expenditure plan for cap-and-trade auction for reaching 1990 levels. In addition, we find that revenue, we find that there is significant the Governor’s plan raises some implementation uncertainty regarding the degree to which each and coordination issues. investment proposed for funding would achieve Various Uncertainties Make It Unlikely GHG reductions. This uncertainty is the result of Proposal Will Maximize GHG Reductions several factors, including there being only limited data provided by the administration. While we In order to minimize the negative economic acknowledge that estimating emission reductions impact of cap-and-trade, it is important that is challenging, the uncertainty that is created auction revenues be invested in a way that increases the risk that the administration’s plan maximizes GHG emission reductions for a given would not maximize GHG reductions with the level of spending. Maximizing emission reductions level of funding available. Consequently, it is very reduces the demand for allowances, thereby putting difficult for the Legislature to have assurance downward pressure on the price of allowances. that the specific package of programs proposed This, in turn, reduces the overall cost for covered by the administration would achieve the greatest entities to comply with AB 32, which reduces the reduction per dollar invested possible, or whether potential costs that would be borne by consumers, a different set of programs might yield better businesses, energy ratepayers, and the economy at outcomes in a more cost-effective manner. In this large. While the administration has provided some section, we also note that some GHG reductions information to suggest that proposed activities www.lao.ca.gov Legislative Analyst’s Office 9 2014-15 BUDGET may reduce GHG emissions at some level, there quantifying the potential emission reductions of is significant uncertainty regarding how much their proposed activities. In addition, some of the emissions would be reduced by the administration’s information provided by departments may not be proposed investments, thereby making it unlikely applicable to California. The lack of data makes it that the total package of activities proposed by difficult for the Legislature to determine how much the Governor would maximize GHG emission of a reduction these activities are likely to achieve reductions. for the amount proposed to be spent. Proposed Activities Could Contribute to GHG Moreover, the type of analysis that would Reductions. . . Departments have provided our have been most helpful would have included an office with some research and other information evaluation of the relative marginal costs and suggesting that certain types of activities proposed benefits of the different investments. Without this in the plan have the potential to reduce GHG type of analysis, the state has little information emissions. For example, according to CDFA, the with which to make investment decisions. Lack proposal to fund dairy digesters would reduce of analytical information leads to increased risk GHG emissions by 15,000 to 21,600 metric tons that the activities the state chooses to fund will per year by capturing the methane emissions from not achieve the greatest return on investment. animal waste. In addition, wetland restoration While we acknowledge that good data is not could sequester GHG emissions. According to always available and this type of rigorous analysis DFW, estimates of the carbon storage potential is difficult, we nonetheless find that an effort from restored wetlands and meadows range widely, to estimate potential outcomes would provide but can be as much as 25 metric tons of CO2e important information to allow the Legislature to per acre restored per year. The amount of carbon make informed decisions on how to achieve the stored depends on numerous factors, including: greatest return on investment with these hundreds (1) the type of wetland, (2) whether the land is of millions of dollars in new state funds. adequately maintained, (3) the type of vegetation Some Activity May Have Happened on the in the ecosystem, (4) the rate at which the soil Natural. The lack of an analysis evaluating the accumulates, and (5) whether the restoration degree to which the proposals would result in increases methane emissions. GHG emission reductions is further complicated . . .But Administration Has Not Estimated because it is unclear to what extent some proposed Likely Reduction Amounts. While some programs are subsidizing activities that would information provided to our office indicates that have happened on the natural (meaning without certain types of proposed activities may reduce the support of cap-and-trade auction revenues). GHG emissions at some level, the administration This is important because to the extent that GHG did not conduct any analysis to identify which reductions would have happened even in the activities would provide the greatest level of GHG absence of additional funding, the state’s efforts emission reductions. In fact, for some programs, do not actually yield additional net emission the administration has been unable to provide reductions. For example, it is unclear to what extent any data or research to substantiate how much the the incentives provided by ARB’s low-emission proposed activity would reduce GHG emissions. vehicle program can be credited with consumers’ For example, at the time of this analysis, both decision to purchase one of these vehicles. This is Caltrans and CalFire were unable to provide data because some consumers would have purchased 10 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET more fuel-efficient vehicles on their own to save unclear what the actual GHG emission reductions on fuel costs, even without a rebate. Likewise, would be. It is possible that state funded research SGC’s sustainable communities grant program could contribute to meaningful technological would provide grant funding for projects such as advancements leading to significant GHG emission bike lanes or sidewalks near transit stations that reductions in the future, but it is also possible that developers might have built anyway to meet local the research would not yield such benefits. demand, even without the additional funding. Some Outcomes Would Depend on Changes Reduction Levels Would Depend on Specific in Behavior. In addition, the amount of GHG Projects Selected. The fact that many of the reductions for some proposed programs would proposals included in the Governor’s expenditure depend on changes in behavior that are difficult to plan are grant programs also adds to the uncertain predict. For example, the administration assumes outcomes of the plan. While some of the activities that the high-speed rail, SGC, and Caltrans that would ultimately be funded by these programs proposals would result in some individuals might be effective at reducing GHG emissions, shifting their mode of transportation, resulting in the level of benefits achieved would depend on a net reduction in vehicle miles traveled in cars. the specific projects selected. For example, DFW While such changes might very well occur and proposes to restore ecosystems throughout the could result in net GHG emission reductions, it state to increase the capacity of these lands to store would be difficult to predict with precision the carbon. While ecosystem restoration can reduce likely marginal net GHG reduction due to these GHG emission levels, the total level of reductions efforts. This uncertainty increases the risk that from restoration would depend on several factors, the administration’s plan would not achieve its including the type of ecosystems restored and the maximum potential emission reductions. number of acres restored. Similarly, the actual Some Reductions Would GHG emission reduction benefits that could result Likely Occur Beyond 2020 from the proposed energy efficiency programs at DGS would also depend on the specific projects We also find that some proposed activities selected. The benefits could vary from project to would not contribute significant GHG reductions project depending on factors such as the current before 2020, which as mentioned above, is the condition and type of facility, its location, and its statutory target for reaching 1990 emissions current energy consumption levels. levels. For example, plans for the high-speed rail The administration’s expenditure plan system indicate that the first phase of the project also includes proposals for several research- will not be operational until 2022. Moreover, the related programs, including research for state construction of the project would actually generate demonstration forests and evaluations of GHG GHG emissions of 30,000 metric tons over the emissions associated with fertilizer application. next several years. The HSRA plans to offset these This research may have merit and some impact emissions with an urban forestry program that on GHG emissions in the future. However, is it is proposes to plant thousands of trees in the Central impossible to predict the outcomes or discoveries Valley. We also note that HSRA’s GHG emission that will result from the proposed research estimates for construction do not include emissions activities, and those outcomes might depend on associated with the production of construction exactly how the research is directed. This makes it materials, which suggests that the amount of www.lao.ca.gov Legislative Analyst’s Office 11 2014-15 BUDGET emissions requiring mitigation could be much therefore unclear, for example, what criteria higher than currently planned. Therefore, it is departments administering grant programs will possible that the construction of the IOS may result use to evaluate grant proposals, and whether the in a net increase in GHG emissions, even when level of GHG emission reductions will be given accounting for proposed offsets. top priority in the scoring of those proposals. Similarly, the proposed research projects, Third, the administration has not established forestry, and ecosystem restoration activities GHG reduction goals for the various programs might not achieve much of their GHG emission proposed for funding. So, while many programs reductions until after 2020. For example, research might ultimately demonstrate that they reduced that results in technological breakthroughs and GHG emissions, it will not be clear whether they successful findings might take years to implement; achieved more or less than what had been expected and trees and ecosystems take time to grow and at the time the Legislature approved funding for the recover. program. Coordination Issues Could Affect Certain Plan Raises Several Implementation Issues Programs. In our report Energy Efficiency and Plan Lacks Coordinated Approach to Metrics Alternative Energy Programs (December 2012), and Oversight. Under the Governor’s proposed we found that the state lacks a comprehensive approach, each department will be responsible for framework that fully coordinates the state’s energy developing its own set of criteria to determine how programs. Based on our conversations with CSD to spend its GGRF allocation. This raises several and the California Public Utilities Commission concerns. First, departments will not necessarily (CPUC), it seems that they are making greater have a means to evaluate the potential GHG efforts to coordinate their programs. As the emission reductions of proposed projects. While state makes additional funding available for ARB intends to provide metrics to departments to these types of purposes, it will be important to evaluate program outcomes, they do not intend to continue such coordination efforts. For example, provide metrics to departments to assist in their under the proposed expenditure plan, CSD would investment decision-making process. Furthermore, receive $80 million in additional funding for its the administration will not provide a means for low-income weatherization program, which is departments to evaluate potential co-benefits, such a statewide program serving low-income utility as public health impacts. Consequently, it is unclear customers in investor-owned utility (IOU) territory whether these departments—most of which have as well as non-IOU territory. We also note, however, no experience evaluating GHG emission reduction that CPUC has directed IOUs to establish similar programs—will be able to knowledgably identify programs with the goal of funding 100 percent the specific activities most likely to reduce GHG of all cost-effective, energy efficiency projects in emissions. low-income communities in each IOUs respective Second, our understanding is that the territory by 2020. Based on information from both administration does not intend to provide CSD and CPUC, the two departments are working departments with specific guidance on how to to coordinate their existing programs to reduce weigh GHG emission reductions compared to the potential for duplication. Since the Governor’s co-benefits or other considerations when evaluating budget would provide additional funding to how they will spend their appropriations. It is low-income energy efficiency programs, it would 12 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET be important for CPUC to consider if adjustments cap-and-trade revenue. For example, we describe should be made to IOU programs in order to below potential options such as increasing ensure the cost-effectiveness of both programs. investments in emerging technologies, alternative The Governor’s expenditure plan also includes fuels and transportation, as well as expanding a proposal from DGS that would increase the eligibility for the existing program to implement amount of renewable energy at state buildings. This Proposition 39. Many of these options could align would require that DGS coordinate with the state’s with the Legislature’s long-term energy goals such energy agencies (such as CPUC) to ensure that the as reducing the state’s dependency on traditional additional electricity generation is accounted for in fuels, increasing the integration of renewables into the state’s energy procurement process. the electricity grid, and providing funding for GGRF May Not Be Appropriate Fund Source public entities to make energy efficiency upgrades. for SWP. The SWP is a large water storage and The likely return on investment of these options is delivery system that provides water to homes and unknown. As with other proposals, the Legislature farmland throughout the state. Currently, the would want to evaluate the potential costs and vast majority of SWP expenditures are funded GHG reductions prior to allocating funds for any of by payments from the water agencies (“water these options. contractors”) that receive water from the project, AB 32 COI Fee. The ARB’s 2008 Scoping Plan as they are the direct beneficiaries of the project. considers several uses of cap-and-trade revenue, The generating unit upgrades proposed by DWR including the potential use of auction revenue would benefit water contractors by (1) reducing to support the costs of administering AB 32. As the amount of electricity purchased in order to we described above, such administrative costs operate the SWP, (2) reducing the cost SWP would are currently paid by the AB 32 COI fee. One have to pay to purchase allowances to comply with option the Legislature could consider is using AB 32, and (3) reducing the water used to generate cap-and-trade revenue to support these costs, thus energy, making the water available for delivery to eliminating the need for the COI fee. This would water contractors when needed. Thus, revenues reduce covered entities’ overall cost of compliance from those contractors may be a more appropriate with AB 32. source for funding these upgrades rather than Emerging Technologies. Another option the GGRF. Accordingly, we would recommend that the Legislature could consider is investing in emerging Legislature reject the proposed use of $10 million technologies. For example, the Legislature has in cap-and-trade auction revenues for this purpose. expressed its interest in the development of energy We note that denying this request does not prevent storage technology and the integration of energy DWR from performing the upgrades using storage into the electricity grid by directing the contractor funds if the department considers the CPUC to explore options for expanding the use upgrades necessary. of energy storage by the state’s IOUs. However, widespread use of energy storage technology Other Options Available for has been limited due to high implementation Legislative Consideration costs. Carbon capture and sequestration (CCS) In addition to considering proposals included is another emerging technological process that in the Governor’s budget, the Legislature might is designed to capture carbon dioxide emissions want to consider additional options for investing from large industrial sources that burn fossil fuel www.lao.ca.gov Legislative Analyst’s Office 13 2014-15 BUDGET or biomass. The technology does this by injecting $100 million and provides grants and loans to those emissions into a geological formation that public agencies, private businesses, public-private prevents the carbon from being released into partnerships, and vehicle and technology consortia. the atmosphere. For example, Hydrogen Energy In order to encourage further development of California in Kern County is a pilot project that these fuels and technologies, the Legislature could injects captured emissions into the ground to consider providing additional funding for these increase oil production. The ARB’s cap-and- types of investments. trade regulation includes provisions for covered Proposition 39 Program. Passed by the entities to potentially use CCS technology in voters in November 2012, Proposition 39 changes order to reduce their GHG emissions, thus corporate income apportionment resulting in reducing the compliance obligation. Like energy increased tax revenues. The measure also requires storage technology, CCS generally is considered that for the first five years of implementation a cost-prohibitive. Additional funding for these portion of these revenues be used to improve or other emerging technologies, however, could energy efficiency and expand the use of alternative encourage their development, much like the energy in public buildings. The 2013-14 Budget Act administration has proposed for anaerobic appropriates a total of $467 million to support a digesters (CalRecycle) and biomass facilities new grant program, a new revolving loan program, (CDFA). As mentioned above, the Legislature and energy-related workforce training for schools would want to evaluate the potential costs and and community colleges. The budget also required benefits of investing in these technologies prior to the CEC to develop guidelines for schools and providing funding. community colleges to evaluate projects’ potential Alternative and Renewable Fuel and Vehicle energy benefits. The language of Proposition 39 Technology (ARFVT) Program. The California anticipated additional eligible candidates for this Energy Commission (CEC) currently administers funding—including public hospitals, prisons, and the ARFVT—a program geared toward the other state buildings. The Legislature could use development and improvement of alternative some cap-and-trade auction revenue to expand fuels and alternative fuel technology. Funded Proposition 39 to other public projects besides primarily by vehicle license and smog abatement those at schools and community colleges. fees, the program has an annual budget of roughly LAO RECOMMENDATIONS As previously discussed, the amount of recommendations that would help improve the revenues that the state will receive from cap-and likelihood that the state achieves quantifiable GHG trade auctions will be significant, particularly emission reductions with this new funding. in the long run. Compared to a different mix of Consider Full Array of Options to investments that could be made with the cap-and- Meet Legislative Priorities trade auction revenue, the Governor’s proposal is unlikely to maximize GHG emission reductions. The Legislature has many options when Therefore, the Legislature will want to consider the considering how to use cap-and-trade auction most effective use of this revenue. Below, we outline revenue. In appropriating the funding, we 14 Legislative Analyst’s Office www.lao.ca.gov 2014-15 BUDGET recommend that the Legislature consider a full In addition, we recommend the Legislature array of options to help achieve the goals of AB 32 direct the board to use this staff to develop metrics and meet legislative priorities. For example, the for departments to use in order to prospectively Legislature may decide that, while it approves evaluate the potential GHG emission benefits of the Governor’s general overall approach to of proposed projects as well as direct ARB to appropriating auction revenue, it may want to establish a set of guidelines that includes direction increase or decrease funding for specific programs for departments regarding how they should in order to more closely align with legislative incorporate these metrics into their decision- priorities or to increase the likelihood that the making processes. Having such metrics to use total package of proposals will maximize GHG as part of departments’ decision-making process emission reductions. In addition to the Governor’s when determining how program funding is spent budget proposals, the Legislature may wish to would provide greater certainty regarding GHG consider options like those we discussed above, as emission reductions for potential projects. While well as additional options that would reduce GHG this requirement might delay getting funding “out emissions. the door” by a short while, we find that such a short In considering its funding options, the delay would be worthwhile if this were to increase Legislature will also want to consider potential legal the likelihood that the state could better ensure that risks. The use of fee revenue is generally guided the most beneficial projects are being funded. by constitutional constraints. While the recent In order to ensure that all departments use a ruling from the superior court found that auction consistent set of criteria to develop and implement charges constitute legal regulatory fees, it is subject their programs, the ARB should develop guidelines to appeal and does not create a legal precedent. on how criteria such as potential GHG impacts It is possible that there will be additional court and co-benefits for grant applications are to be decisions in the future that affect how cap-and- weighted. These guidelines should include how trade auction revenues legally can be used. Given the metric is to be used as part of departments’ these legal uncertainties, funding certain activities decision-making process. Guidelines should also with these revenues might be riskier than other include parameters and direction for departments’ activities. Therefore, the Legislature may want to grant making programs. These parameters should consult with Legislative Counsel when considering align with the primary goal of maximizing GHG its options for spending auction revenues. emission reductions in a cost-effective way. We further recommend that the Legislature direct the Approve ARB Positions but Expand Scope administration to establish GHG reduction goals We find that ARB’s proposal to create metrics for each program funded by auction revenues. This for the departments to use in order to evaluate the would allow departments and the Legislature to effectiveness of their GGRF-funded projects has evaluate the effectiveness of these programs relative merit. As such, we recommend that the Legislature to what was expected at the time of legislative approve the ARB’s request for $2.6 million and ten approval. positions to develop these metrics. www.lao.ca.gov Legislative Analyst’s Office 15 2014-15 BUDGET Contact Information Tiffany Roberts Energy, Climate Change, and 319-8309 Tiffany.Roberts@lao.ca.gov Cap-and-Trade Ashley Ames CalFire and CalRecycle 319-8352 Ashley.Ames@lao.ca.gov Anton Favorini-Csorba Fish and Wildlife, Food and Agriculture, 319-8336 Anton.Favorini-Csorba@lao.ca.gov and Water Resources Jeremy Fraysse High-Speed Rail 319-8338 Jeremy.Fraysse@lao.ca.gov Helen Kerstein General Services 319-8364 Helen.Kerstein@lao.ca.gov Ginni Bella Navarre Community Services and Development 319-8342 Ginni.Bella@lao.ca.gov Marianne O’Malley Strategic Growth Council 319-8315 Marianne.O’Malley@lao.ca.gov Jessica Peters Caltrans 319-8363 Jessica.Peters@lao.ca.gov LAO Publications This report was reviewed by Brian Brown. The Legislative Analyst’s Office (LAO) is a nonpartisan office which pro- vides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This brief and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 16 Legislative Analyst’s Office www.lao.ca.gov