The 2020-21 Budget: Climate Change Proposals

The 2020-21 Budget: Climate Change Proposals GABRIEL PETEK LEGISLATIVE ANALYST FEBRUARY 13, 2020 analysis full gutter 2020-21 BUDGET LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Table of Contents Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Overview of Governor’s Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Key Issues to Consider . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 Cap-and-Trade Expenditure Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Climate Research and Technical Assistance Funding . . . . . . . . . . . . . . . . . . . . . 16 Climate Catalyst Revolving Loan Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Climate Bond . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 www.lao.ca.gov analysis full gutter 2020-21 BUDGET LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Executive Summary In this report, we assess the Governor’s major 2020-21 budget proposals related to climate change. The four proposals we evaluate are: • Cap-and-Trade Expenditure Plan ($965 Million). The budget includes a $965 million (Greenhouse Gas Reduction Fund [GGRF]) discretionary cap-and-trade expenditure plan. Funding would mostly go to a variety of existing environmental programs, including programs related to low carbon transportation, local air quality improvements, and forestry. • Expanded Climate Adaptation Research and Technical Assistance ($25 Million). As part of the cap-and-trade expenditure plan, the Governor proposes $25 million (GGRF) ongoing for several new and expanded climate adaptation research and technical assistance activities. • New Climate Catalyst Loan Fund ($250 Million). The budget proposes $250 million (General Fund) in 2020-21 and an additional $750 million in 2023-24 to establish a new Climate Catalyst Revolving Loan Fund (Climate Catalyst loan fund). The fund would lend money to public and private entities for climate-related projects that have difficulty getting private financing. • Climate Bond ($4.8 Billion). The Governor proposes a $4.75 billion general obligation bond for the November 2020 ballot that would fund various projects intended to reduce the impacts of climate change. Approximately 80 percent of the funds would address near-term risks —such as floods, drought, and wildfires—with the remainder to address the longer-term risks of sea level rise and extreme heat. Key Issues to Consider. There are a variety of important considerations that the Legislature will want to weigh as it constructs a climate change package. Notably, the Governor proposes a significant increase in the amount of General Fund resources allocated to climate-related activities, including significant out-year commitments to pay off the proposed bond. We urge the Legislature to think broadly about its priorities and the role of the General Fund, GGRF, and other funds—as well as nonfinancial tools, such as regulatory programs—in achieving its climate goals. Key considerations when developing an overall approach include: • Is the overall spending amount consistent with legislative priorities, considering the potential need and the wide variety of other potential uses of the funds? • How does the Legislature want to prioritize funding for adaptation versus mitigation? As part of that evaluation, the Legislature might want to consider the existing levels of spending for each type of activity, as well as the relative merits of relying on funding to achieve these goals versus other strategies, such as regulations. • How should funds be allocated in order to most effectively achieve the Legislature’s climate goals? Programs that receive funding should (1) have clearly defined goals and objectives, (2) be well coordinated across different government entities, (3) address clear market failures and complement regulatory programs, and (4) have effective strategies and resources for evaluating future outcomes. Cap-and-Trade. Proposed discretionary spending is about $250 million less than in the current year and would largely go to programs that the Legislature has already committed to funding on www.lao.ca.gov 1 analysis full gutter 2020-21 BUDGET a multiyear basis or that have received one-time funding in past budgets. Significant adjustments from last year’s budget include expanding various climate adaptation research and technical assistance activities and reducing funding for the Clean Vehicle Rebate Project. Overall, we find that the size of the proposed expenditure plan is reasonable given the available resources, though resources available in future years might be even lower. We also find that the rationale and methods used by the administration to prioritize limited funding, as well as the expected outcomes, are unclear. Based on these findings, we recommend the Legislature (1) ensure multiyear discretionary expenditures do not exceed $800 million, (2) direct the administration to provide additional information on expected outcomes, (3) allocate funds according to legislative priorities, and (4) consider other funding sources for high-priority programs. Climate Adaptation Research and Technical Assistance. Providing an additional $25 million in ongoing funding for climate adaptation research and technical assistance activities would be a significant increase compared to existing funding and state-level efforts. We find that the types of activities the Governor includes in his proposals—conducting and disseminating research, clarifying statewide priorities and setting measurable objectives, and assisting vulnerable and under-resourced communities—are worthwhile areas on which to focus state-level efforts. Yet, while the Governor’s proposal represents one approach to answering these questions, an alternative package with a somewhat different design could also be reasonable. We recommend the Legislature increase state-level efforts related to climate adaptation with a package that (1) includes the climate adaptation research and technical assistance activities it views to be the highest priorities, (2) provides funding sufficient to support those activities, and (3) assigns the activities to the state-level entities it believes are best suited to manage their implementation. We also recommend the Legislature adopt statutory language for any high-priority climate adaptation activities over which it wants to provide guidance to ensure greater accountability. Climate Catalyst Loan Fund. There are likely some appropriate climate projects that could benefit from a state-administered revolving loan program—specially, those that (1) provide climate benefits, (2) are low financial risk, and (3) would otherwise be unable to attract conventional financing. However, we find that the administration has not adequately justified the proposal, particularly because the administration has not demonstrated that it will be able to identify such projects, especially at the scale of $1 billion. Furthermore, these funds could be used for other legislative priorities, and existing state programs support many of the same projects that the administration has indicated might be funded through the Climate Catalyst loan fund. We recommend the Legislature reject the proposal. Given the potential merit of a loan program, the Legislature could consider funding a smaller scale pilot program. This would allow the administration to define which projects would be eligible, demonstrate its ability to identify appropriate projects, and establish the actual demand for such loans prior to setting aside a significant amount of money. Climate Bond, The Governor’s proposal lays out one approach to designing a climate bond, but the Legislature has other options. As the Legislature deliberates whether to pursue a climate bond at either the Governor’s proposed level or for a different amount, we recommend it consider the out-year implications for the state budget. We also recommend it focus on the categories of activities it thinks are the highest priorities for the state, including how much to spend responding to more immediate climate effects as compared to preparing for impacts that have a longer time horizon. Additionally, we recommend the Legislature adopt bond language to ensure dollars are used strategically to maximize their impact at addressing climate change risks, as well as include evaluation criteria to ensure the state will measure and learn from project outcomes. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET INTRODUCTION Climate Change Impacts and Recent Actions. Another set of actions—often known as Researchers project that climate change will have climate adaptation—relates to planning for and myriad consequential effects throughout California. implementing projects that reduce the risk of future These include sea-level rise, inland flooding, more damages that could occur as a result of climate severe heat days, more frequent drought, and change even if global GHG emissions are reduced increased risk of wildfires. These climate change substantially in the coming decades. Unlike effects have the potential to damage infrastructure, mitigation, there are no statutory statewide goals adversely affect human health, impair natural guiding climate adaptation, but the state is in the habitats, and affect regional economies. early stages of expanding and increasing its focus State and local governments are already on adaptation activities. taking action to try to reduce the magnitude of Structure of This Report. This report provides future damages from climate change. Perhaps our review of the Governor’s major 2020-21 budget most notably, the Global Warming Solutions Act proposals related to climate change and is of 2006 (Chapter 488 [AB 32, Núñez/Pavley]) structured in six parts. First, we provide a brief established the goal of limiting greenhouse gas overview of the Governor’s “climate budget.” (GHG) emissions statewide to 1990 levels by 2020. Second, we identify key issues for the Legislature Subsequently, Chapter 249 of 2016 (SB 32, Pavley) to consider to help guide its evaluation of the established an additional GHG target of reducing merits of each proposal. Lastly, we discuss each emissions by at least 40 percent below 1990 levels of the Governor’s four major proposals—(1) the by 2030. To achieve these goals, the state has cap-and-trade expenditure plan, (2) expanded adopted a wide variety of regulations and provided funding for climate-related research and technical funding to different programs—largely from the assistance, (3) establishment of the Climate state’s Greenhouse Gas Reduction Fund (GGRF)— Catalyst Revolving Loan Fund, and (4) a $4.8 billion to reduce emissions. Collectively, these activities bond—in detail, including a description, our are often referred to as climate mitigation. assessment, and associated recommendations. OVERVIEW OF GOVERNOR’S PROPOSALS The Governor’s budget for 2020-21 includes a variety of existing environmental programs, wide variety of proposals related to climate change including programs related to low carbon mitigation and adaptation. In this report, we focus transportation, local air quality improvements, on four major proposals: and forestry. • Expanded Climate Adaptation Research • Cap-and-Trade Expenditure Plan and Technical Assistance ($25 Million). As ($965 Million). The budget includes part of the cap-and-trade expenditure plan, a $965 million (GGRF) discretionary the Governor proposes $25 million (GGRF) cap-and-trade expenditure plan. (Total ongoing for a variety of new and expanded cap-and-trade expenditures in 2020-21 climate adaptation research and technical are projected to be $2.7 billion, including assistance activities. These activities would continuous appropriations and other existing be administered by the Governor’s Office of statutory allocations.) Discretionary spending Planning and Research (OPR), the Strategic is about $250 million less than in the Growth Council (SGC), the California Natural current-year budget due to lower available Resources Agency (CNRA), and the California resources. Funding would mostly go to a wide Energy Commission (CEC). www.lao.ca.gov 3 analysis full gutter 2020-21 BUDGET • New Climate Catalyst Loan Fund with SGC and the Labor and Workforce ($250 Million). The budget proposes Development Agency. $250 million (General Fund) in 2020-21 and an • Climate Bond ($4.8 Billion). The Governor additional $750 million in 2023-24 to establish proposes a $4.75 billion general obligation a new Climate Catalyst Revolving Loan Fund bond for the November 2020 ballot that would (Climate Catalyst loan fund). The fund would fund various projects intended to reduce make low-interest loans to public and private future climate risks. Approximately 80 percent entities for climate-related projects that have of the funds would be allocated to address difficulty getting private financing. The Climate near-term risks, such as floods, drought, and Catalyst loan fund would be administered by wildfires. The remaining 20 percent would the California Infrastructure and Economic address longer-term climate risks of sea level Development Bank (IBank) in consultation rise and extreme heat. KEY ISSUES TO CONSIDER The Governor proposes funding Figure 1 for a wide range of climate-related activities—some of which would Key Issues to Consider When Evaluating Climate fund existing programs, while some Budget Proposals would go to new programs. Given 9 the size and complexity of the Allocating Funding Based on Legislative Goals and Priorities major climate-related proposals— • Weighing climate change activities against other legislative priorities. • Relative emphasis on climate adaptation versus mitigation. as well as the interaction between • Balancing areas of focus, such as near-term versus long-term climate the different proposals—we risks, and funding for state-level activities versus local efforts. identify several high-level issues 9 for the Legislature to consider as Selecting Programs That Are Likely to Achieve Goals Effectively it evaluates each of the Governor’s • Mitigation—determining interaction and coordination with existing major climate change proposals. programs, identifying market failures, and emphasizing impact on emission reductions in other jurisdictions. These key issues are summarized • Adaptation—focusing on key state objectives such as projects and in Figure 1 and discussed in more programs of statewide interest and ensuring a coordinated strategy. detail below. 9 Allocating Funding Based on Identifying Appropriate Entities to Administer Program Legislative Goals and Priorities. • Ensuring adequate expertise and capacity. We suggest the Legislature think • Limiting overlap and gaps. broadly when considering funding 9 Determining Appropriate Funding Approach for climate change activities— • Deciding upon funding sources (Greenhouse Gas Reduction Fund, beyond the specific climate-related General Fund, or other) and payment methods (pay-as-you-go or proposals from the Governor. bonds). Notably, unlike prior years, the 9 Governor proposes a significant Ensuring Legislature Provides Clear Direction to Administration • Providing additional direction in statute. amount of new General Fund resources for climate-related 9 Using Data Collection and Program Evaluation to Inform Future activities. The Legislature could Decisions increase or decrease this overall • Ensuring reliable and useful information about program outcomes amount, depending on its priorities. available for future budget and policy decisions and to inform future climate response efforts. Given the potential magnitude 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET of the future impacts of climate change, it could First, when considering how mitigation funding can consider allocating additional funding to help be allocated most effectively to reduce GHGs, we reduce those future impacts. On the other hand, recommend the Legislature consider the following spending more for climate activities means less issues: money for other legislative priorities. For example, • Coordination and Interactions With Other the Governor proposes an additional General Programs. The state has dozens of different Fund allocation of $750 million to the new Climate programs aimed at reducing GHG emissions— Catalyst loan fund in 2023-24. This allocation would many of which are regulatory programs. occur in the same year the Governor proposes Figure 2 (see next page) summarizes some to suspend recent health and human services of the key policies and programs in different program augmentations if the state does not collect sectors. Many of the mitigation activities that sufficient General Fund revenue. The Legislature will would be funded in the budget target the want to consider whether this overall approach is same source of emissions. We recommend consistent with its priorities. the Legislature consider how the proposed Furthermore, the Legislature could adjust budget new programs would interact with the existing allocations between different climate-related programs, including regulatory programs. programs depending on the relative weight This could include assessing whether the given to adaptation, GHG mitigation, and other state needs multiple programs targeted at environmental goals. For example, given the the same sources of emissions, how well the wide variety of existing regulatory programs in multiple programs would be coordinated, and place intended to reduce GHG emissions and the the degree to which the proposed funding limited funding that has historically been used for program actually would reduce emissions adaptation activities, the Legislature could prioritize versus simply reduce the costs of complying more funding for adaptation activities. with one or more of the regulatory programs. Additionally, once it determines the amount of • Identifying Market Failures. When funding for either adaptation or mitigation, the considering how to target programs Legislature will want to consider how it prioritizes effectively, the Legislature might want to across potential areas of focus. For example, it consider whether private entities currently has a choice between how much emphasis to lack appropriate incentives and adequate place on—and funding to dedicate for—addressing information to undertake cost-effective the climate impacts the state has already begun GHG reduction activities (also known as experiencing (like more severe wildfires and market failures). For example, when private droughts) as compared to longer-term challenges firms invest in research and development (like sea-level rise). Furthermore, the Legislature activities for new technologies, they often could increase funding for activities such as do not capture all of the benefits from those research and technical assistance to help guide investments. This is because other firms—and climate mitigation and adaptation activities, but consumers—are often able to benefit from the will want to balance those priorities along with new knowledge and innovation that is created. providing funding directly to implement projects. This is sometimes referred to as “knowledge The Legislature could also consider how much spillovers.” Knowledge spillovers serve as funding it wants to dedicate to addressing risks to a key rationale for government programs state assets and programs compared to risks to that provide grants or subsidies for research local communities. and development of new technologies. Selecting Programs That Are Likely to An assessment of this issue might include Achieve Goals Effectively. After the Legislature whether new program proposals—such as establishes its goals and priorities for the use the Climate Catalyst loan fund—address a of state funds, it will want to consider which clear market failure and if there is a clear programs achieve these goals most effectively. explanation of how the proposed program www.lao.ca.gov 5 analysis full gutter 2020-21 BUDGET would be the most effective strategy for a way that is most likely to encourage GHG addressing the problem. reductions in other jurisdictions. • Impact on Emission Reduction Activities Second, when considering which adaptation in Other Jurisdictions. California emits programs are likely to be the most effective use of roughly 1 percent of global GHGs. As a state resources, we recommend the Legislature result, perhaps the most significant effect consider the following: of California’s climate policies will be how they influence GHG emission reduction • Key Climate Resilience Objectives. activities in other jurisdictions. For example, Unlike with mitigation, the state has not demonstrating to other countries how to yet established specific statutory goals design and implement cost-effective policies to guide its climate adaptation efforts. to reduce GHGs could make them more As such, policymakers should carefully likely to implement such policies. In addition, consider the key outcomes they hope policies that encourage innovation and to achieve from investments in climate low-GHG technologies could make such adaptation projects, and whether proposals technologies less expensive to implement would contribute toward meeting those in other parts of the country or world. As objectives. In considering the merits of a result, this could increase the likelihood adaptation proposals, the state may want of these technologies being adopted in to start by focusing on issues that have the other jurisdictions. The value of these GHG most statewide interest, such as activities reductions could far exceed those that occur that would meaningfully reduce the risk of strictly within California. Therefore, when damage from climate change to state-owned reviewing various climate proposals, the infrastructure and public trust natural Legislature might want to consider how the resources, as well as those that would help state can best design its climate policies in protect public health and safety. Figure 2 Major Policies to Meet Statewide Greenhouse Gas Limits 9 Cap-and-Trade. Regulation that establishes a “cap” on overall emissions from large emitters by issuing a limited number of permits (also known as allowances). Allowances can be bought and sold (traded), which creates a market price for allowances and an incentive for lowest cost reductions. 9 Short-Lived Climate Pollutants. Regulations and financial incentives (such as grants) intended to reduce certain types of emissions from dairies, landfills, and refrigeration equipment. 9 Renewable Portfolio Standard. Regulations that require utilities to provide 60 percent of electricity from qualifying renewable sources, such as wind and solar, by 2030. 9 Energy Efficiency. Regulations and financial incentives to encourage more efficient energy use in commercial buildings, homes, and manufacturing facilities. 9 Low Carbon Fuel Standard. Regulation that requires transportation fuel suppliers to reduce the amount of greenhouse gases per unit of fuel used in California—also known as the carbon intensity of fuels. 9 Vehicle-Related Programs. Regulations and incentives (such as grants and rebates) to encourage more efficient light- and heavy-duty vehicles, as well as promote certain types of technologies such as electric vehicles. 9 Vehicle Miles Traveled. Planning strategies and financial incentives intended to reduce the amount of light-duty vehicle use through such things as increased transit and changes to land use. 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET • Strategic Coordination Across Efforts. To recommend the Legislature consider in weighing its effectively respond to the challenges posed by funding approach include the following: climate change, the state should employ an • Available GGRF Funding More Limited organized and deliberate strategy. Individual Than Prior Years. The amount of GGRF adaptation projects that are geographically funding available for the budget year is a few isolated or undertaken without a larger plan hundred million dollars less than prior years, will have limited effectiveness at reducing risk and this lower amount could continue over at and could be easily counteracted if conflicting least the next few years. land-use decisions are implemented nearby. • General Fund Faces Many Competing Therefore, we recommend the Legislature Priorities, but Smart Investments Could consider whether proposed adaptation Avert Future Costs. Dedicating General programs and projects are part of a regional Fund to climate change activities means less coordinated approach towards reducing resources available for other types of state climate risk. expenditures. However, spending on effective Identifying Appropriate Entities to Administer climate adaptation activities now could help Programs. For all programs—and especially new prevent higher disaster response and recovery ones—we suggest the Legislature consider the costs in the future. entity that is most appropriate to administer the • Bonds Most Appropriate for Funding Large program. Such a decision should be based, in large Capital Projects. Bond funds are best suited part, on whether the entity has the appropriate for large, discrete capital projects that would expertise and capacity to administer the program. ordinarily not be able to be supported by For example, when evaluating the proposal for the ongoing funding mechanisms and that will last new Climate Catalyst loan fund, the Legislature several decades. will want to consider whether IBank has adequate • Bonds Result in Long-Term Commitment expertise to identify appropriate private projects of General Fund Resources. After selling and assess their risks. bonds, the state must make regular payments Also, the Legislature will want to consider from the General Fund towards principal and whether related activities occurring in many interest for several decades until they are paid different departments are likely to be well off, regardless of the condition of the state’s coordinated. For example, the proposed climate fiscal condition or health of the state budget. adaptation research activities would be conducted in several different departments and agencies. It is Ensuring Legislature Provides Clear Direction worth considering whether there is a risk that such to Administration. We believe the Legislature a structure results in important gaps or overlap in should play a central role in developing the state’s activities. overall strategy in responding to climate change. To do this, it will be important to ensure its Determining Appropriate Funding Approach. priorities and goals are reflected in whatever plan is Once the Legislature has identified its climate ultimately adopted. This direction could be provided priorities and made decisions about program through adjustments to various budget allocations, structures, it will face choices about the best ways as discussed above. In addition, to the extent to fund its selected mitigation and adaptation some of these programs are new and ongoing, activities. This includes decisions about both the Legislature might want to consider adopting funding sources and payment methods. The statutory language to ensure the administration Governor uses a mix of funding sources for his implements these ongoing programs in ways proposals, including GGRF, General Fund, and that are consistent with legislative priorities. For bonds (which ultimately are repaid from the General example, the Governor proposes to expand funding Fund), and proposes a mix of “pay-as-you-go” for new climate adaptation research and technical and bond funding methods. Some factors we assistance activities without any new statutory www.lao.ca.gov 7 analysis full gutter 2020-21 BUDGET direction. The Legislature could consider whether effects of cap-and-trade spending, which makes it it wants to adopt statutory language that specifies more difficult to determine the most cost-effective the role of each state agency, what research way to direct this funding in future years. To priorities should be, and/or criteria used to prioritize address these types of evaluation challenges, the different projects within a program. Legislature could consider directing agencies to Using Data Collection and Program consult with academic researchers or establish Evaluation to Inform Future Decisions. Climate formal structures for independent review of mitigation and adaptation are both long-term program outcomes. Conducting a robust evaluation activities that are likely to span over multiple of the effects of the state’s GHG mitigation decades. Given the long time frames, the policies is important for informing future policy Legislature will have an opportunity to update and decisions in California. It also has the potential to modify its programs in future years. As a result, provide valuable information to other jurisdictions it is important to ensure that reliable and useful considering implementing additional mitigation information about program effectiveness is available policies about the effectiveness of policies that in future years to help inform future policy and have been implemented in California. budget decisions. We encourage the Legislature to Developing structures for evaluating and consider opportunities to ensure there are adequate communicating outcomes from investments in data collection and program evaluation structures climate adaptation is equally important. Because in place as programs are implemented. In some facing the impacts of climate change represents a cases, this might require providing additional new challenge for the state, investing state funding resources for program evaluation activities. In our in adaptation projects provides an opportunity to view, the costs of data collection and evaluation learn which strategies work best—as well as which activities are often relatively small compared to are less effective. Such information can be used the overall costs of the program, and the benefits to inform and improve future climate response for future decision-making can be substantial. efforts and replicate successful strategies in other Moreover, the information collected will be more locations. However, obtaining and disseminating valuable if the state can establish effective ways to this important information will require the state disseminate findings and share lessons learned. ensuring that project implementers monitor and For example, in past reports, we found key report on adaptation projects after construction is limitations in the methods used to evaluate the completed. CAP-AND-TRADE EXPENDITURE PLAN In this section, we assess the Governor’s a “cap” on aggregate GHG emissions from large proposed cap-and-trade expenditure plan. The emitters, such as large industrial facilities, electricity following three sections address the other three generators and importers, and transportation major proposals—climate adaptation research and fuel suppliers. Capped sources of emissions are technical assistance, the Climate Catalyst loan responsible for roughly 80 percent of the state’s fund, and the climate bond. GHGs. To implement the program, CARB issues a limited number of allowances, and each allowance Background is essentially a permit to emit one ton of carbon Cap-and-Trade Part of State’s Strategy for dioxide equivalent. Entities can also “trade” (buy Reducing GHGs. One policy the state uses to and sell on the open market) the allowances achieve its GHG reduction goals is cap-and-trade. in order to obtain enough to cover their total The cap-and-trade regulation—administered by emissions. Covered entities can also purchase the California Air Resources Board (CARB)—places “offsets” generated from projects that reduce emissions from sources that are not capped. (For 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET more details on how cap-and-trade works, see about the future of the program. The Legislature our February 2017 report The 2017-18 Budget: subsequently passed Chapter 135 of 2017 Cap-and-Trade.) (AB 398, E. Garcia), which effectively eliminated Auction Revenue Has Been Volatile in Past, legal uncertainty about the future of the program but Stable Since Program Extension. About half by extending CARB’s authority to continue of the allowances issued by CARB are allocated cap-and-trade from 2020 through 2030. Since for free to utilities and certain industries, and most then, quarterly auction revenue has consistently of the remaining allowances are sold by the state exceeded $600 million—reaching over $800 million at quarterly auctions. The allowances offered at in some auctions. quarterly auctions are sold for at least a minimum Current Law Allocates Over 65 Percent of price—set at $16.68 in 2020—which increases Annual Revenue to Certain Programs. Over the annually at 5 percent plus inflation. Revenue from last several years, the Legislature has committed the auctions is deposited in the GGRF. to ongoing funding for a variety of programs, Figure 3 shows quarterly state auction revenue including: since 2015. Quarterly revenue has been relatively • Statutory Allocations to Backfill Certain consistent, except in 2016 and early 2017 when Revenue Losses. Assembly Bill 398 and revenue dropped substantially in a few auctions. subsequent legislation allocates GGRF This was because very few allowances offered to backfill state revenue losses from by the state were purchased. Several factors (1) expanding a manufacturing sales likely contributed to this decrease in allowance tax exemption and (2) suspending a fire purchases, including (1) an oversupply of prevention fee that was previously imposed allowances in the market because emissions were on landowners in State Responsibility Areas well below program caps and (2) legal uncertainty (known as the SRA fee). Under current Figure 3 Auction Revenue Has Been Volatile in Past, but Stable in Recent Years (In Millions) $1,000 900 800 700 600 500 400 300 200 100 2015 2016 2017 2018 2019 www.lao.ca.gov 9 analysis full gutter 2020-21 BUDGET law, both of these backfill allocations are State law establishes other requirements and subtracted—or taken off the top—from direction on the use of the funds. For example, annual auction revenue before calculating the at least 35 percent must be spent on projects continuous appropriations discussed below. that benefits disadvantaged communities These allocations are roughly $100 million and/or low-income households. In addition, annually. AB 398 expressed the Legislature’s intent that • Continuous Appropriations. Several GGRF be used for a variety of priorities, including programs are automatically allocated reducing toxic and criteria air pollutants, low carbon 65 percent of the remaining annual revenue. transportation alternatives, sustainable agriculture, State law continuously appropriates annual healthy forests, reducing short-lived climate revenue (minus the backfills taken off the pollutants, climate adaptation, and clean energy top) as follows: (1) 25 percent for the state’s research. high-speed rail project; (2) 20 percent Governor’s Proposal for affordable housing and sustainable communities grants (with at least half of this Assumes $2.4 Billion of Auction Revenue in amount for affordable housing); (3) 10 percent 2019-20 and $2.5 Billion in 2020-21. Figure 4 for intercity rail capital projects; (4) 5 percent summarizes the Governor’s proposed framework for low carbon transit operations; and for GGRF revenue and expenditures. The budget (5) 5 percent for safe and affordable drinking assumes cap-and-trade auction revenue of about water, beginning in 2020-21. $2.4 billion in 2019-20 and $2.5 billion in 2020-21. The 2019-20 amount continues the revenue Legislature Has Provided Additional assumption used when the 2019-20 budget was Guidance and Direction on GGRF Spending. adopted last year. The 2020-21 amount is based The remaining spending—sometimes referred on an assumption that all allowances offered by the to as “discretionary”—is allocated through the state will sell at the minimum auction price. annual budget process. Historically, some of these $965 Million Discretionary Expenditure Plan expenditures have been allocated on a one-time Spends Most of Available Funds. The budget basis while, for other programs, the Legislature allocates a total of about $2.7 billion GGRF has expressed its intent to fund the programs on a in 2020-21 for various programs—including multiyear basis. Multiyear expenditures adopted in continuous appropriations ($1.5 billion), ongoing recent budgets include: statutory allocations and administrative costs • $200 million for the Clean Vehicle Rebate Project Figure 4 (CVRP), which provides Summary of GGRF Revenues and Expenditures consumer rebates (In Millions) for purchasing new zero-emission vehicles 2019-20 2020-21 (ZEVs). (The 2019-20 Budget Beginning Fund Balance $543 $116 Act provided an additional Revenue $2,526 $2,630 $38 million in one-time Auction revenue 2,386 2,490 funding for this program.) Interest income 140 140 • $165 million for forest health. Expenditures $2,953 $2,704 • $35 million for prescribed fires Continuous appropriations 1450 1,527 and fuel reduction. Other statutory allocations and administrative costs 216 212 Discretionary expenditures 1,287 965 • $18 million for healthy soils. End Fund Balance $116 $42 GGRF= Greenhouse Gas Reduction Fund. 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET ($212 million), and discretionary spending allocated one-time GGRF funding in past ($965 million). This spending comes from years that would not receive funding under $2.5 billion in anticipated 2020-21 auction revenue, the Governor’s proposal, including the as well as additional funds from interest earnings Transformative Climate Communities, urban and one-time allocations from the fund balance. greening, and low-income weatherization. Under the Governor’s proposal and revenue The plan provides an increase in GGRF for assumptions, about $40 million would remain local air district administrative costs to implement unallocated at the end of 2020-21. Chapter 136 of 2017 (AB 617, C. Garcia) from Lower Spending Amount Largely Reflects $20 million to $25 million. It is worth noting, Less Carryover Funds From Past Auctions. however, that the budget does not continue the The overall proposed spending amount from $30 million from the Air Pollution Control Fund that GGRF is about $250 million less than in 2019-20, supported these activities the last couple of years. largely because there is very little money available As a result, on net, the budget provides $25 million in the fund balance at the end of 2019-20 for less for local air districts’ administrative costs use in 2020-21. In contrast, in recent years, the from all fund sources. The budget also provides cap-and-trade expenditure plan allocated hundreds $200 million in one-time GGRF funding for local of millions of dollars available from large prior-year air district incentive programs under AB 617. This fund balances. is $45 million (18 percent) less than the amount Spending Plan Largely Continues Funding provided last year—a reduction that is slightly less for Existing Programs. As shown in Figure 5 (see than the overall decrease in discretionary spending next page), funding would largely go to programs commitments (25 percent). that the Legislature has already committed to Proposed Language Provides the funding on a multiyear basis—either in statute or Administration Authority to Reduce Certain prior budgets—as well as some programs that have Allocations. Similar to previous budgets, the received one-time funding in past budgets. Some of administration proposes budget bill language (BBL) the significant differences from last year’s package that (1) restricts certain discretionary programs are: from committing more than 75 percent of their • Expansion of Climate Research, Technical allocations before the fourth auction of 2020-21 Assistance, and Adaptation. The plan and (2) gives the Department of Finance (DOF) includes $25 million ongoing to expand authority to reduce these discretionary allocations various climate research and adaptation after the fourth auction if auction revenues are activities at OPR, CNRA, and CEC. We not sufficient to fully support all appropriations. describe and assess this proposal in the next DOF must notify the Joint Legislative Budget section of this report. Committee of these changes within 30 days. This BBL is meant to ensure the fund remains solvent • Reduced Funding for CVRP. The plan if revenue is lower than estimated. Under the provides $125 million for CVRP. This is proposal, DOF could reduce funding for air pollution a $75 million reduction relative to the reduction (AB 617) incentives, heavy-duty and $200 million multiyear appropriation that was freight equipment programs, transportation equity approved as part of the 2018-19 Budget Act. projects, dairy methane reductions, waste diversion (As previously noted, the 2019-20 budget grants and loans, agricultural equipment upgrades, includes an additional $38 million for the and workforce development. Other discretionary program on a one-time basis.) programs would continue to be funded at budgeted • No Funding for Some Programs That levels under this scenario. Previously Received One-Time Funding. There are several programs that were www.lao.ca.gov 11 analysis full gutter 2020-21 BUDGET Figure 5 Cap-and-Trade Expenditure Plan (In Millions) Program Department 2019-20 2020-21 Continuous Appropriationsa $1,450 $1,527 High-speed rail High-Speed Rail Authority $563 $587 Affordable housing and sustainable communities Strategic Growth Council 450 470 Transit and intercity rail capital Transportation Agency 225 235 Transit operations Caltrans 113 117 Safe drinking water programb State Water Board 100 117 Statutory Allocations and Ongoing Administrative Costs $216 $212 SRA fee backfill CalFire/Conservation Corps $76 $80 Manufacturing sales tax exemption backfillc N/A 60 61 State administrative costs Various 80 71 Discretionary Spending Commitments $1,287 $965 Air Toxic and Criteria Pollutants (AB 617) $275 $235 Local air district programs to reduce air pollution Air Resources Board 245 200 Local air district administrative costs Air Resources Board 20 25 Technical assistance to community groups Air Resources Board 10 10 Forests $220 $208 Healthy and resilient forests (SB 901) CalFire 165 165 Prescribed fire and fuel reduction (SB 901) CalFire 35 35 Fire safety and prevention legislation implementation (AB 38) CalFire — 8 Urban forestry CalFire 10 — Wildland-urban interface and other fire prevention CalFire 10 — Low Carbon Transportation $485 $350 Heavy-duty vehicle and off-road equipment programs Air Resources Board 182 150 Clean Vehicle Rebate Project Air Resources Board 238 125 Low-income, light-duty vehicles and school buses Air Resources Board 65 75 Agriculture $127 $88 Agricultural diesel engine replacement and upgrades Air Resources Board 65 50 Dairy methane reductions Food and Agriculture 34 20 Healthy Soils Food and Agriculture 28 18 Other $180 $84 Workforce training for a carbon-neutral economy Workforce Development Board 35 33 Climate change research and technical assistance Various 7 25 Waste diversion and recycling CalRecycle 25 15 Energy Corps Conservation Corps 6 7 Coastal adaptation Various 3 4 Transformative Climate Communities Strategic Growth Council 60 — Urban greening Natural Resources Agency 30 — Low-income weatherization Community Services and Development 10 — Study transition to a carbon-neutral economy CalEPA 3 — High-global warming potential refrigerants (SB 1013) Air Resources Board 1 — Totals $2,953 $2,704 a Allocations based on Governor’s estimate of $2.4 billion in revenue in 2019-20 and $2.5 billion in 2020-21. b 2019-20 budget provided $100 million allocation. c Governor’s estimate. SRA = State Responsibility Area; CalFire = California Department of Forestry and Fire Protection; N/A = not applicable; AB 617 = Chapter 136 of 2017 (AB 617, C. Garcia); SB 901 = Chapter 626 of 2018 (SB 901, Dodd); AB 38 = Chapter 391 of 2019 (AB 38, Wood); CalRecycle = California Department of Resources Recycling and Recovery; CalEPA = California Environmental Protection Agency; and SB 1013 = Chapter 375 of 2018 (SB 1013, Lara). 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Assessment revenue. As a percentage of annual revenue, this fund balance would be consistent with many other Overall Revenue Estimates Reasonable, state funds. but Slightly Lower Than Our Projections. Our Future Discretionary Revenue Might Not auction revenue estimates are very similar to the Exceed About $800 Million Annually. If nearly administration’s. We estimate revenue will be about all allowances continue to sell at the floor price, $2.6 billion in 2019-20 and $2.4 billion in 2020-21. revenue over the next few years will be about Our estimates assume that all future allowances sell $2.4 billion to $2.5 billion annually. After allocating at the minimum auction price—generally consistent funds for continuous appropriations, other statutory with recent market trends. Relative to the allocations, and ongoing administrative costs, administration, our estimates are about $170 million less than $800 million annually would be left for higher over the two-year period—$250 million discretionary programs. This is substantially less higher in the current year and about $80 million than the amount that has been allocated in recent lower in the budget year. years. For example, discretionary allocations were There are two primary factors driving these $1.4 billion in 2018-19 and about $1.3 billion differences. First, the administration has not in 2019-20. Of the $965 million in discretionary updated its 2019-20 revenue estimates to spending proposed by the Governor for 2020-21, reflect actual revenue from the August 2019 $420 million would be ongoing over multiple years. and November 2019 auctions. As a result, the Explanation for How Administration administration’s revenue assumptions for these Prioritized Funding Is Unclear. The cap-and-trade auctions are about $200 million lower than actuals. expenditure plan reflects the Governor’s spending Second, we have minor differences in estimates priorities. However, the rationale and methods for the number of allowances offered and minimum used by the administration to prioritize limited prices at future auctions. Additional information funding among different programs is unclear. about revenue from the remaining two auctions For example, according to the Governor’s in 2019-20 will be available by late May, at which budget summary, it prioritized funding for clean point the Legislature can reassess the overall transportation. However, on net, funding for low amount of resources available. carbon transportation programs is 36 percent of Size of Proposed Expenditure Plan total discretionary spending, which is slightly lower Reasonable. As discussed above, the than the 38 percent provided in last year’s budget. administration projects a $42 million fund balance It is unclear how this proposed mix of funding at the end of 2020-21. This is a relatively low fund reflects a prioritization of low carbon transportation balance given the size of the fund and the overall programs. revenue uncertainty. However, two factors mitigate Basic Information About Expected Projects some of the fiscal risks: and Outcomes Lacking. Similar to last year, the • Under our slightly higher revenue estimates, administration has provided limited quantitative the fund balance would be about $110 million. information about what outcomes it expects • The BBL proposed by the administration to accomplish with the proposed funding would allow DOF to reduce budget allocations amounts. For example, the administration has not if revenue is lower than expected. Up to consistently provided information on the expected $125 million of the budget allocations depend level of GHG reductions or co-benefits for each on whether future auctions raise adequate program. The lack of information about expected revenue. outcomes limits the Legislature’s ability to evaluate the merits of each program, making it more difficult In our view, given these factors, the overall size to ensure funds are allocated in a way that is of the expenditure plan is reasonable. Under our consistent with its priorities and achieves its goals revenue estimates, the fund balance would be more most effectively. By not having this information than 10 percent of estimated annual discretionary before programs are implemented, it also limits www.lao.ca.gov 13 analysis full gutter 2020-21 BUDGET the Legislature’s ability to hold departments Recommendations accountable when evaluating the performance of Ensure Multiyear Discretionary Expenditures these programs after they are implemented. (State Do Not Exceed $800 Million. If cap-and-trade law requires DOF to produce an annual report allowance prices remain near the minimum over in March that should contain some information the next few years, annual auction revenue would on outcomes associated with prior GGRF not support annual discretionary spending much expenditures.) above $800 million. As a result, we recommend Reduction to CVRP Program Inconsistent the Legislature ensure its multiyear GGRF spending With Recent Legislative Action. At various times commitments do not exceed about $800 million over the last few years, CARB has implemented annually. As mentioned above, the Governor’s a rebate waitlist for CVRP because funds were budget includes $420 million in multiyear insufficient to meet demand. This created discretionary GGRF spending commitments— uncertainty for consumers considering purchasing substantially less than $800 million. However, ZEVs and businesses selling ZEVs. As part of although the remaining $545 million allocated to the 2018-19 budget package, the Legislature discretionary programs are technically budgeted expressed intent to provide at least $200 million on a one-year basis, all of these programs have annually for five years to CVRP. This was meant received consecutive years of funding, and many to provide CARB with greater certainty about the of the program activities are expected to continue CVRP budget so it could structure the program into the future. For example, $235 million is accordingly. CARB recently made changes to the allocated to AB 617 activities on a one-time basis program intended to help it stay within budget even though many of the activities are expected to and avoid waitlists as demand for the program continue in the future. This adds a long-term cost continues to grow. For example, CARB lowered pressure on the fund that is not reflected in the rebates for most vehicles by $500 and targeted $420 million multiyear allocations in the Governor’s rebates to ZEVs that have a price of less than budget. The Legislature might want to identify the $60,000. core discretionary programs it would like to fund The proposed reduction in funding for CVRP on a multiyear basis with a budget of $800 million creates the type of uncertainty that the Legislature annually. was trying to avoid. If adopted, CARB would have Direct Administration to Provide Additional to make additional adjustments to reduce costs Information on Expected Outcomes. We in the program. For example, based on CARB recommend the Legislature direct the administration projections of CVRP demand in 2020-21, rebates to report at spring budget hearings on key metrics would have to be cut nearly in half to stay within the and outcomes it expects to achieve with new proposed budget (assuming no other programmatic discretionary spending. This information would changes are made). help the Legislature evaluate the merits of these Furthermore, state law establishes a goal of proposals and, in the future, hold departments 1 million ZEVs in California by 2023, and executive accountable by comparing the projected orders establish goals of 1.5 million by 2025 and outcomes to the actual outcomes achieved. If the 5 million by 2030. Currently, there are roughly administration is unable to provide such information 600,000 ZEVs in California. The administration for certain programs, the Legislature could consider has not provided an assessment of (1) how the adjusting allocations to those programs downward proposed reduction CVRP will affect the number of accordingly. ZEVs purchased and (2) whether such a change will Allocate Funds According to Legislative adversely affect the state’s ability to meet its ZEV Priorities. When allocating funds among different goals. programs, we recommend the Legislature first consider its highest priorities. These priorities could 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET include such things as GHG reductions, improved In addition, since California represents only local air quality, forest health and fire prevention, about 1 percent of global GHG emissions, some of and climate adaptation. As discussed above, the most significant impacts California programs these decisions about priorities should take into will have on global GHGs could depend on the account other funding sources that are available degree to which state programs (1) help promote and other regulatory programs aimed at achieving the development of new technologies that can be the same goals. For example, the state has a wide deployed in other jurisdictions and (2) influence the variety of regulatory programs aimed at reducing adoption of policies and programs in other parts of GHG emissions. These programs have been the the country and world. As a result, the Legislature primary drivers of emission reductions in the might want to evaluate each program, in part, state and are expected to be the primary drivers based on its assessment of its potential effects on of future reductions. As a result, the Legislature actions elsewhere. For example, state programs could consider giving greater priority to adaptation that effectively serve as policy demonstrations activities or local air pollution activities that could for other jurisdictions and programs that promote benefit from state funding. advancements in GHG-reducing technologies that Once the Legislature has identified its priorities, can be used in other jurisdictions could have a it can then allocate the funds to the programs that more substantial long-term effect on global GHG it believes will achieve those goals most effectively. emission reductions. For example, to the extent the Legislature considers Consider Other Funding Sources for GHG emission reductions the highest-priority use High-Priority Programs. The Legislature might of the funds, the Legislature will want to allocate want to consider utilizing other funding sources funding to programs that achieve the greatest to supplement spending on the climate-related GHG reductions. As we have discussed in previous activities it prioritizes. For example, the Governor reports (The 2018-19 Budget: Resources and proposes $51 million one time from the Alternative Environmental Protection, for example), determining Renewable Fuel and Vehicle Technology Fund which programs achieve the greatest amount of (ARFVTF) for ZEV fueling infrastructure. This is net GHG reductions is challenging for a variety of in addition to the roughly $80 million in annual reasons. Many of the spending programs interact baseline funding for CEC that goes to ZEV with other regulatory programs in ways that make it infrastructure, and hundreds of millions of dollars complicated to evaluate the net GHG effects of any in investor-owned utility (IOU) funding going to ZEV one program. However, even with this uncertainty, infrastructure. So, to the extent that the Legislature the Legislature might want to consider focusing on prioritized transportation-related programs (such spending strategies that are generally more likely as CVRP) more than is reflected in the Governor’s to reduce emissions in a cost-effective way. This spending plan, it could consider using ARFVTF to could include, for example, focusing on reductions support these activities in lieu of targeting them from sources of emissions that are not subject to towards ZEV fueling infrastructure. the cap-and-trade regulation or other regulations. The Legislature could also consider targeting other “market failures” that are not adequately addressed by carbon pricing, such as promoting innovation through research and development programs. www.lao.ca.gov 15 analysis full gutter 2020-21 BUDGET CLIMATE RESEARCH AND TECHNICAL ASSISTANCE FUNDING Background focused research initiatives over the past several years. These include ongoing state-funded New Program to Provide Technical Assistance scientific research programs looking into the effects to Under-Resourced Communities Seeking of climate change run by several state departments, State Grants. In 2018, the Legislature passed including the Delta Stewardship Council, Ocean Chapter 377 (SB 1072, Leyva), creating a Protection Council, and Department of Water program under SGC intended to increase access Resources (DWR). Some other key state-led by under-resourced communities to available research efforts have included: grant funding for climate change mitigation and adaptation projects. This “Regional Climate • California Climate Change Assessments. Collaboratives” program will provide technical The state has undertaken four comprehensive assistance and start-up grants to community climate change assessments. Each groups to build the expertise, partnerships, and assessment included a series of reports local capacity necessary to develop successful summarizing the current scientific applications for state funding programs. For understanding of possible climate change example, these start-up grants might be used risks and impacts to the state and identifying to host community meetings and grant writing potential suggestions to inform policy actions. workshops. While it has funded three positions The Legislature has not adopted statute at SGC to begin designing the program, the requiring or guiding these assessments, Legislature has not yet allocated funding to provide nor has it provided much funding for them grants to local collaborative groups as required by through explicit budget appropriations. SB 1072. Rather, the first assessment in 2006 was Integrated Climate Adaptation and Resilience carried out in response to an executive order, Program (ICARP) Intended to Help Coordinate and subsequent updates in 2009, 2012, State’s Climate Response. Chapter 606 of 2015 and 2018 were undertaken as priorities of (SB 246, Wieckowski) established ICARP at OPR. prior administrations. These assessments The program is intended to develop a coordinated were supported primarily using existing staff response to the impacts of climate change and funds from various state departments across the state and has two statutorily required (including the CEC-funded research programs components. First, a Technical Advisory Council described below), as well as probono was created to help OPR and the state improve and contributions from researchers and other coordinate climate adaptation activities. Second, partners. (The state did provide $5 million OPR has created a searchable online public from the Environmental License Plate Fund in database of adaptation and resilience resources 2014-15 to support development of the fourth known as the State Adaptation Clearinghouse. The assessment.) Clearinghouse includes resources for state and • SGC Climate Change Research Program. local agencies, such as local plans, educational Since 2017-18, SGC has received three materials, policy guidance, data, research, and one-time GGRF appropriations totaling case studies. The state currently spends $283,000 $34 million to provide grants for research to annually from the General Fund for two staff to inform state and local responses to climate oversee ICARP activities. change. The program’s first two grant rounds State Has Undertaken Several Climate awarded funding to a total of 14 projects, Change Research Initiatives. The state has mostly led by University of California (UC) funded and participated in multiple climate change campuses. (SGC is in the process of soliciting 16 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET applications for a third round of grants for the this collection of initiatives represents the most remaining funding.) According to SGC, the significant new proposal within the Governor’s Climate Change Research program focuses GGRF package. While the $25 million is proposed on projects that “aim to both advance the on an ongoing basis, the administration’s spending implementation of California’s climate policies plan shifts the allocations among the four and result in real benefits to disadvantaged categories over the next five years, as shown in and climate-vulnerable California the figure. The administration indicates that after communities.” For example, one funded 2024-25 it would come back to the Legislature with project is developing tools that state agencies a new budget proposal for approval of specific uses can use to assess whether vulnerable for these funds in future years. populations might be displaced by potential Implements SB 1072 to Expand Access climate change strategies and policies. to State Funding by Under-Resourced • Energy Research by CEC. CEC has several Communities ($5 Million). The Governor proposes research initiatives intended to help make $5 million in 2020-21 ($35 million total over the next California’s energy system more clean, five years) for SGC to implement the requirements reliable, safe, and affordable. These are of SB 1072. As noted earlier, this legislation— funded through charges to electricity and for which programmatic funding has not yet natural gas users. For example, the Electric been appropriated—requires SGC to develop a Program Investment Charge program spends program and provide grants to local groups to form more than $130 million annually in research to regional climate collaboratives. These groups are promote clean energy technologies and help intended to help build capacity for under-resourced meet the state’s energy and climate goals. communities to develop climate-response projects The CEC used funding from its research and successfully apply for and receive state grant programs to fund a large portion of the first awards. Of the proposed funding, $495,000 per four statewide climate change assessments. year would support three staff at SGC with the remainder being used for capacity-building grants Governor’s Proposal to local collaborative groups. Expands Scope of Existing ICARP Activities The Governor proposes to spend a total to Help Guide State’s Climate Change Response of $25 million annually from 2020-21 through ($7.4 Million). The Governor would provide 2024-25—for a total of $125 million—from the $7.4 million in 2020-21 ($34 million total over five GGRF for climate change research and technical years) to expand the existing ICARP activities at assistance activities that fall into four categories. OPR. As noted above, ICARP was established These categories are summarized in Figure 6 and in statute with two primary duties: convening described in more detail below. As noted earlier, Figure 6 Governor’s New Climate Change Research and Technical Assistance Proposals (In Millions) Category Department 2020-21 2021-22 2022-23 2023-24 2024-25 Totals SB 1072a implementation SGC $5.0 $8.0 $6.0 $8.0 $8.0 $35.0 Expand ICARP activities OPR 7.4 6.8 6.5 6.7 6.7 34.0 5th climate change assessment OPR, SGC, CNRA, CEC 7.6 3.2 11.7 3.3 3.3 29.2 Climate Change Research program SGC 5.0 7.0 0.8 7.0 7.0 26.8 Totals $25.0 $25.0 $25.0 $25.0 $25.0 $125.0 a Chapter 377 of 2018 (SB 1072, Leyva). SGC = Strategic Growth Council; ICARP = Integrated Climate Adaptation and Resilience Program; OPR = Governor’s Office of Planning and Research; CNRA = California Natural Resources Agency; and CEC = California Energy Commission. www.lao.ca.gov 17 analysis full gutter 2020-21 BUDGET a Technical Advisory Council to help inform state, and a series of technical reports on selected the state’s climate response and creating and topics. (The first three assessments did not include managing a web-based clearinghouse of adaptation regional reports.) The proposal also includes resources. The Governor’s proposal would funding to expand tribal outreach and involvement fund four OPR staff and the following additional in the research (to be coordinated by CEC), as activities: well as for outreach efforts to solicit input on the reports and to disseminate their findings. The • Establish Regional Resilience Coordinators. work to develop these reports would be managed The proposal would provide $5 million across four state entities—OPR, SGC, CNRA, and annually for grants to fund staff at local CEC—and includes funding for six positions (two government or nongovernmental agencies each at OPR and CEC, and one each at SGC and located in approximately ten regions around CNRA). In addition to the requested funding from the state. These coordinators would support GGRF, the assessment would be supported by up local adaptation projects and planning efforts to $8.8 million in CEC’s energy-related research and provide input to the ICARP Technical funding. Advisory Council. Continues Funding for SGC’s Climate • Develop Vulnerability Assessment Tools. Change Research Program ($5 Million). OPR would enter into contracts to develop The Governor’s proposal includes $5 million in standardized online tools that state and local 2020-21 ($26.8 million total over five years) for entities could use to identify climate risks and the SGC Climate Change Research program. As vulnerabilities for communities around the noted above, this program has received GGRF in state. each of the last three years totaling $34 million. • Develop Resilience Metrics. OPR would The administration states that SGC will conduct enter into contracts to develop “measurable outreach to stakeholders to identify specific areas resilience outcomes and metrics” to help of focus for future rounds of grants from this guide the state in prioritizing its climate program and try to identify research gaps not being adaptation efforts and enable the state to funded by other sources. Of the proposed funding, track its progress in increasing resilience. $540,000 per year would be used to support three • Convene Working Groups. OPR staff would positions at SGC to oversee the grant program. organize multiple working groups to provide Based on the average grant amounts from prior input to the ICARP Technical Advisory Council, years, we estimate the proposed funding might including a science advisory group that could support approximately 12 new research grants over provide scientific expertise and guidance to the next five years depending upon the sizes of the inform state efforts and identify research gaps projects and grants. that the state should address. Assessment Develops Fifth California Climate Change Proposals Represent Significant Expansion Assessment ($7.6 Million). The Governor of State’s Climate-Related Research and proposes providing $7.6 million in 2020-21 Technical Assistance Efforts. Providing an ($29.2 million total over five years) to conduct the additional $25 million in ongoing funding for climate Fifth California Climate Change Assessment. This adaptation research and technical assistance would be the first time the state budget provides activities would be a significant increase compared substantial funding explicitly for this research to existing funding and state-level efforts. As initiative. Similar to the fourth assessment that noted above, the state currently supports only was completed in 2018, this update would include two staff to work on the relatively narrowly scoped a series of reports summarizing the most recent ICARP program, has not appropriated significant climate science relevant to California, including a funding from the state budget for previous climate statewide summary report, regional reports tailored to issues and data relevant to different areas of the 18 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET assessments, and has provided just limited-term and universities—and greater emphasis on funding for climate change research at SGC. providing technical assistance and support to local Proposals Focus on Important State-Level stakeholders. In conducting research for our recent Activities. Given the significant challenges that report, Preparing for Rising Seas: How the State the impacts of climate change pose for California, Can Help Support Local Coastal Adaptation Efforts, we believe the Governor’s focus on increasing interviewees repeatedly cited a lack of—and desire the state’s adaptation efforts has merit. While for—a state-level entity upon which they might much of the work to prepare for the effects of be able to call for advice, technical assistance, climate change needs to happen at the local comparison data, and real-world examples to help level, it is appropriate for the state to help support inform their adaptation decisions. The Governor’s those efforts. The state can take advantage of proposal to fund regional climate coordinators its economies of scale and provide guidance to through ICARP could help address this need, but help ensure that local governments’ adaptation so too would establishing a state-funded center of efforts are both cost-effective and consistent. climate expertise upon which local stakeholders As such, we find that the types of activities the could rely for support. Governor includes in his proposals—conducting Additionally, the Governor’s proposed funding and disseminating research, developing tools that level of $25 million does not represent a “right” can be widely used, clarifying statewide priorities number for state-level climate research and and setting measurable objectives, and assisting technical assistance efforts—the Legislature could vulnerable and under-resourced communities—are provide a greater or lesser amount of funding worthwhile areas on which to focus state-level depending on what is needed to support the efforts. activities it deems to be priorities. Moreover, the Proposals Are Not Only Approach for Governor assigns most of his proposed climate Expanding State Climate Adaptation Activities. response activities to OPR and SGC. While these While the types of state-level activities the Governor offices have been involved in the state’s nascent proposes are reasonable, his package of proposals adaptation efforts, so too have CNRA and several is not the only way the state can effectively respond of its departments. The Legislature could consider to climate change. The Governor’s proposed a different governance structure around which to funding increase provides an important opportunity organize augmented climate adaptation technical for the state—and the Legislature—to set an assistance and research efforts. For example, agenda for how it wants to enhance and expand it could follow a more centralized approach— California’s state-level climate adaptation efforts such as by tasking most responsibilities to one in the coming years. Specifically, the proposed department—or a more decentralized approach— augmentation creates a decision-making juncture such as by assigning discrete initiatives and funding around (1) what climate adaptation research and to a wider array of state departments. technical assistance activities the state wants Lack of Statutory Framework for New to undertake, (2) how much the state wants to Policy Initiatives Limits Legislative Direction spend on those activities, and (3) which state-level and Oversight. The Governor does not propose entities should undertake them. The Governor’s statutory language to implement any of the proposal represents one approach to answering components of this new $25 million GGRF these questions, but an alternative package proposal. While the Legislature frequently grants with a somewhat different design could also be the administration broad authority to implement reasonable and help achieve key statewide climate programs through budget appropriations, such adaptation objectives. an approach does not provide the same level For example, the Legislature could develop a of legislative input and oversight as legislation. package that places a comparatively lesser focus Clarifying program goals and design components on research—given all of the climate research in statute provides more specific direction to the being conducted by other state departments administration about how the program should www.lao.ca.gov 19 analysis full gutter 2020-21 BUDGET be implemented in a way that reflects legislative climate knowledge gaps and have a particular priorities. Moreover, such statutory guidance gives focus on vulnerable communities; and (3) a new the Legislature—and the public—a legal framework science advisory workgroup that would synthesize for holding the administration accountable in existing climate research to help guide decisions following those directions. by the state and the ICARP Technical Advisory The Governor’s various proposals would Council. These proposals are in addition to represent a significant expansion of the state’s ongoing climate-related research related to the climate adaptation efforts and would make several energy sector at CEC, as well as other existing new or previously limited-term activities into state-level climate research managed by state ongoing state programs. Given the Legislature’s departments such as the Delta Stewardship considerable interest in responding to climate Council, Ocean Protection Council, and DWR. change—and its previous involvement in setting Moreover, many academic institutions around the goals for climate mitigation efforts—it may not state—including the UC system, Stanford, and the want to cede full discretion to the administration University of Southern California—are also making by establishing these efforts only through the climate change a central focus of their research. budget without accompanying statute to guide their As noted above, we believe conducting scientific implementation. We believe a greater emphasis on research to inform adaptation decisions at both climate adaptation in state policy warrants a more the state and local levels is both an appropriate explicit role for the Legislature. and worthwhile activity for the state to take on. Because of their scale, state-level efforts often are For example, the Governor’s proposal to expand more cost-effective than individual jurisdictions ICARP activities without a statutory framework attempting to conduct their own research, and would mean that this program would have some can help ensure that adaptation efforts undertaken of its activities explicitly directed by statute, and across the state are informed by data that is other activities—with significantly greater levels consistent. However, the multiple initiatives and of associated funding—guided primarily by OPR’s departments associated with the Governor’s discretion. A more consistent approach would be proposal could make it difficult to ensure that state to define all of the program’s funded responsibilities funding for research is used in the most effective in statute. The Legislature could also adopt and strategic manner. Careful coordination would statute that helps to direct those activities, be necessary to ensure these numerous research such as by specifying the types or categories of efforts are complementary and not duplicative, each adaptation goals on which ICARP should focus initiative and managing department has a specific when developing the proposed resilience metrics. and distinct focus, and the selected research topics Similarly, it might want to specify areas of focus are broadly beneficial and applicable for informing for climate research, including the Fifth California state and local adaptation decisions. Climate Change Assessment, to help guide future state actions. This could include specifying that Recommendations the research identify the state’s highest climate vulnerabilities and the best approaches to prioritize Expand Climate Adaptation Activities With and “buy down” that risk. Approach That Reflects Legislative Priorities. We recommend the Legislature increase state-level Multiple Research Initiatives Might Make efforts related to climate adaptation with a package Strategic Coordination Difficult. The Governor’s that (1) includes the climate adaptation research proposal includes funding for three separate and technical assistance activities it views to be climate change research programs—(1) the Fifth the highest priorities, (2) provides funding sufficient California Climate Change Assessment, for which to support those activities, and (3) assigns the four separate state entities would contract for activities to the state-level entities it believes are original research on a number of topics; (2) the best suited to manage their implementation. While SGC Climate Change Research program, intended the Governor’s proposals are reasonable, the to fund original research projects that address 20 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Legislature could adopt an equally worthwhile mix Legislature adopt statutory language for any of activities with a somewhat different emphasis. high-priority climate adaptation activities over For example, the Governor’s package places a which it wants to provide guidance and assure significant emphasis on research. As noted above, greater accountability. If the Legislature decides our interviews with local governments seeking to to provide funding to significantly expand the implement climate adaptation projects suggest state’s climate adaptation research and technical a strong interest across the state for increased assistance activities, it will also want to ensure it technical assistance that is user-friendly and has a role in designing and overseeing how these easily accessible. The Legislature could respond efforts will be implemented. Adopting a statutory to that need and increase funding for technical framework describing those activities and their assistance—such as by establishing an adaptation intended outcomes is the best avenue available information center upon which stakeholders could to the Legislature to express its priorities and call when needing support—by spending somewhat ensure they are reflected in the administration’s less on climate research compared to the Governor. program-specific implementation decisions. In Additionally, as we discuss in the “Climate Bond” particular, we recommend maintaining a consistent section later in this report, the Legislature could use approach with ICARP and adopting statute to some of these GGRF monies for activities to help define any expansion of that program’s activities. improve how bond funds are used. Such activities Additionally, if the Legislature opts to expand could include designing tools to evaluate the the state’s climate change research efforts—by anticipated cost-effectiveness of potential projects adopting the Governor’s proposals or a modified seeking bond funds, or supporting development approach—it could ensure these efforts will of regional climate adaptation plans that local investigate key issues that are priorities for the collaborative groups could use to prioritize Legislature by specifying such direction in statute. bond-funded projects with the greatest regional Statutory language could also clarify the specific benefits. focus and scope of each of the various state-level research efforts to try to help avoid duplication. Delineate Key Climate Policy Goals and Activities in Statute. We recommend the CLIMATE CATALYST REVOLVING LOAN FUND Background at below-market rates. In 2019, there were approximately 100 outstanding ISRF loans IBank Provides Financing for Variety totaling about $400 million. of Private and Public Projects. IBank is a • California Lending for Energy and general-purpose finance authority created in Environmental Needs (CLEEN) Center. 1994 with a broad mandate to help finance Similar to the ISRF program, the CLEEN public infrastructure and private development. Its Center was established in IBank in 2014 to operations generally are funded from the interest make low-cost loans to local public agencies earnings of its financing programs. IBank is for renewable energy generation projects, governed by a five-member Board of Directors. energy conservation projects, and energy IBank administers a number programs that finance storage projects. To date, the CLEEN Center private and public projects, including projects has made 14 loans totaling about $75 million. with climate-related benefits. Specifically, IBank • Conduit Bonds for Public Agencies, administers the following programs: Nonprofits, and Certain Private Projects. • Infrastructure State Revolving Fund (ISRF). The state has many programs that allow IBank lends money to local public agencies public agencies, including IBank, to issue www.lao.ca.gov 21 analysis full gutter 2020-21 BUDGET bonds whose interest is exempt from state an additional $750 million in 2023-24 to establish and federal taxes. Some of these programs a new financing program at the IBank. The Climate allow the proceeds to finance nonprofit Catalyst Revolving Loan Fund would lend money to and private projects. IBank annually private companies and public agencies for projects issues between 10 and 20 conduit bonds, that would advance the state’s climate mitigation mostly for projects sponsored by qualified and adaptation goals, along with other priorities— 501(c)(3) nonprofit organizations. such as creating high-quality jobs. Eventually, the • Small Business Finance Center (SBFC). administration intends for the Climate Catalyst loan IBank partners with financial development fund to be self-sustaining from interest earnings. corporations to make loans and loan It would lend to climate-related projects that face guarantees to small businesses and farms some barrier to getting financing from conventional that cannot otherwise get financing from sources. In addition to directly lending money, the conventional sources. (A loan guarantee is proposed Climate Catalyst loan fund would have when the state promises to repay a loan in the flexibility to provide other forms of financial the event the borrower defaults.) The SBFC assistance and credit enhancements to eligible annually guarantees hundreds of small projects, including loan guarantees. business loans. SGC Would Determine Categories of Project Eligibility. As shown in Figure 7, SGC would Governor’s Proposal initially establish several categories of eligible projects. These categories would help IBank Proposes New Revolving Loan Fund for prioritize loan applications for projects that reflect Climate-Related Projects. The budget includes the state’s climate mitigation and resilience $250 million from the General Fund in 2020-21 and Figure 7 Proposed Governance Structure of Climate Catalyst Revolving Loan Fund IBank Board of Directors Approves underwriting standards and procedures Strategic California Infrastructure Growth Determines categories of eligible projects and Economic Development Council Bank (IBank) Climate Catalyst Revolving Loan Fund Makes loans Sets labor standards Projects with climate-related benefits Repay loans with interest Labor and Workforce Development Agency 22 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET priorities. The administration’s proposed trailer • Total number and type of applications bill language would require SGC to consider three received. specific project categories: (1) transportation • Recommendations for changes or emission reductions, such as electric vehicle (EV) improvements to the program to make it more charging infrastructure; (2) sustainable agriculture effective. and forestry, such as dairy digesters; and (3) projects focused on the recycling or reuse of Assessment materials. The Labor and Workforce Development Agency would advise the SGC on setting labor A Revolving Loan Fund Could Be standards. IBank and SGC would be required to Self-Sustaining and Relatively Inexpensive . . . revisit these categories every two years to make A loan program is able to use one-time funding changes in response to advances in technology, to help finance projects with public benefits on changes in capital markets, or changes in the an ongoing basis. As borrowers repay their loans, state’s climate priorities. If needed, SGC would the loan fund is replenished, and the program have the flexibility to adjust the project eligibility may continue making new loans to qualified categories more often. projects indefinitely without continued support. In comparison, a grant program may only continue IBank Could Begin Accepting Loan making grants so long as the program receives Applications in January 2021. After receiving ongoing funding. Another potential benefit of a guidance from the SGC, IBank staff would develop loan program is that the administration costs are the lending standards and procedures for the new typically paid from interest earnings, whereas program. As shown in Figure 7, the IBank Board of the administration of grant programs requires Directors would review and approve the standards supplementary funding. and procedures. The administration anticipates that IBank could begin accepting Climate Catalyst . . . But Success of the Proposed Program applications as soon as January 2021. IBank staff Depends on Identifying Appropriate Projects. would present all loans to the board for approval. Despite the potential benefits of a loan program, the Climate Catalyst loan fund would only be IBank Would Report Expected Climate successful if IBank is able to identify appropriate Benefits of Loans. IBank would be required to projects and accurately evaluate their risks. annually report the following information to the Appropriate projects would need to (1) provide Governor and the Legislature: a qualified climate benefit, (2) be able to repay • Specific information about each project the loan, and (3) be otherwise unable to attract receiving financial assistance from the conventional financing. program, including: Administration Has Not Demonstrated it » The eligibility category of the project. Will Be Able to Identify Appropriate Projects. » A description of the project and its location. Given the state’s ambitious GHG reduction goals and the potential impacts of climate change, we » The amount of financial assistance provided agree with the administration that a substantial to the project and the balance outstanding. amount of public and private investment is needed » A description of the expected contribution for climate mitigation and adaptation. However, of the project to the state’s climate policy the administration has not demonstrated that objectives, including GHG reduction and the Climate Catalyst loan fund would be the climate resilience benefits. appropriate way to finance many of these projects. » Information about any jobs created by the One area of need is researching and demonstrating project. emerging technologies, but these types of projects • Total number and type of financial assistance are more appropriately funded with grants. Another provided to small businesses. need is the continued deployment of established technologies, but these projects generally can www.lao.ca.gov 23 analysis full gutter 2020-21 BUDGET obtain private financing. In between emerging For example, such a project might be a novel and established technologies, there may be some application of an otherwise established technology, relatively well-developed concepts that are suitable have a low but otherwise reliable revenue stream, to be supported by a low-interest public loan. It or be located in an area of the state with poor is not clear, however, that enough such projects access to private financing. Although such exist—and can be identified by the administration— opportunities probably exist, the state may be to necessitate a program of the scale proposed by unable to correctly identify them for two reasons: the Governor. We discuss our reasoning below. • Conflicting Goals. First, the objectives of Research and Demonstration Projects the SGC and IBank could be misaligned. The Probably Too Risky. Projects that would research SGC might prefer to prioritize riskier projects new technologies or demonstrate the deployment that are the most effective at reducing GHG and commercialization of emerging technologies at emissions and mitigating climate change, scale could provide significant climate mitigation while IBank might seek to minimize risk as benefits if they were successful. In addition, as we much as possible to increase the likelihood discussed above, there is often a strong rationale of repayment. Consequently, the SGC might for government support of these types of research, have difficulty defining the categories of development, and demonstration activities because eligible projects. For example, if the SGC they help create knowledge spillovers that are defines a category too broadly, IBank might socially beneficial. However, such projects typically make loans to projects that might have been are very risky because many may not (1) prove to able to get conventional financing. If the SGC be feasible, (2) be able to get regulatory approval, defines a category too narrowly, otherwise or (3) have a way to repay a loan. While there might appropriate and highly effective projects might be a public interest in helping to finance such be inadvertently excluded. projects, it would probably be inappropriate to lend • Lack of Technical Expertise. Second, neither funds from the proposed Climate Catalyst loan the staff of SGC nor IBank will necessarily fund given these risks. Accordingly, the state has have the deep technical knowledge or traditionally used grant programs to help subsidize practical expertise that might be needed to demonstration and pilot projects. accurately assess the risks of the eligible Healthy Private Capital Markets Exist to Fund projects—especially those projects that Projects Using Well-Established Technologies. conventional lenders, who have access to the Lower-risk projects that use well-established necessary expertise, have refused to finance. technologies, such as renewable energy generation Other Types of Funding Already Available. projects and energy efficiency projects, are often The state already provides funding through a wide able to get low-cost financing from conventional variety of other programs for many of the types lenders in California. The state would not reduce of projects the administration intends to finance its GHG emissions if the Climate Catalyst loan fund with the Climate Catalyst loan fund. For example, lent to projects that could have otherwise received the California Department of Food and Agriculture a conventional loan because it would not increase competitively awards grants to install dairy digester the overall amount of investment in such projects. projects. Dairy digester projects might also be In such cases, the public loan would supplant able to access financial incentives through existing private financing. regulatory programs—such as selling credits SGC and IBank Might Lack Knowledge generated through CARB’s Low Carbon Fuel Needed to Identify Appropriate Projects. Standard, reimbursement for electricity generated Appropriate projects will be climate mitigation or through an IOU electric feed-in tariff program, or climate adaptation projects that (1) are not too selling offsets generated through the cap-and-trade risky and (2) have a good business plan and are program. able to repay the loan, but cannot get conventional financing. Such projects likely exist to some extent. 24 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET Similarly, the state administers or oversees Catalyst loan fund means that less money will be programs that currently support EV charging available for other legislative priorities. infrastructure. As discussed above, the CEC Recommendations provides tens of millions of dollars annually for grants for EV charging infrastructure. The Reject Funding for the Climate Catalyst administration also is proposing an additional Revolving Loan Fund. The administration has not $51 million (ARFVTF) in one-time funding for sufficiently justified this proposal. We acknowledge EV charging as part of the 2020-21 budget. that appropriate projects could benefit from access Additionally, over the last few years, the California to the low-cost financing this fund would provide. Public Utilities Commission has authorized However, the administration has not demonstrated IOUs to collect about $1 billion from ratepayers the actual size of this need. Moreover, we are to pay for EV charging infrastructure, and it is concerned that SGC and IBank may be unable to currently considering proposals for an additional identify appropriate projects. For these reasons, we $930 million. recommend the Legislature reject funding for the Proposed Fund Might Be Too Large. The Climate Catalyst loan fund. administration has not clearly explained why it Consider a Pilot Project to Gauge Demand has asked for $1 billion to establish the Climate for Loans. While a program of the scale proposed Catalyst loan fund. There are several reasons to by the Governor might not be appropriate, this think $1 billion could be more funding than needed type of loan program could have some benefits. for such a program. The administration has not In light of this, the Legislature could consider carefully documented the demand for these loans providing limited funding and position authority for and overall size of the need. Little precedent a pilot program. A pilot program would allow the exists for a program like the Climate Catalyst loan administration to continue to develop the proposal fund. Public climate-focused lending programs in and generate much needed information about other states, such as New York and Connecticut, the actual demand for these loans. Under the have focused on established technologies for time line proposed by the administration, a limited which robust private financing exists in California. pilot program could begin receiving applications In addition, an existing program at IBank with a in January 2021. Applications would demonstrate somewhat similar scope and objective, the CLEEN the number and types of projects that would apply program, has received only limited interest to for financing—which might be smaller or larger date. In 2016, IBank requested additional position than the $250 million requested for 2020-21 (or authority in the expectation the CLEEN program the additional $750 million for 2023-24). If the would make more than 20 new loans annually. Legislature adopts a pilot program, we recommend However, the CLEEN Center has made only it require IBank to report annually summary 14 loans in total since it was established in 2014. information about the overall loan portfolio and Despite their similarities, the CLEEN program might additional information about each project receiving not fairly represent the demand for the Climate financial assistance, including: Catalyst loan fund because its underlying funding structure is different. Nonetheless, the CLEEN • Information about the performance of each program illustrates the difficulty of predicting future loan, such as the interest rate, outstanding demand for a new program. balance, amortization period, whether the project has been completed, and whether the Funds Could Be Used for Other Legislative borrower is in default. Priorities. The state must balance many competing priorities as it works to reduce GHG emissions • A description of the total financing plan for and mitigate the effects of climate change. As we each project. (In addition to the state loan, have noted above, the state currently has many this could include grants, other public financial climate-related programs—many of which are incentives, equity investments, and loans.) oversubscribed. Spending to establish the Climate • A description of the barriers to conventional financing each project confronted. www.lao.ca.gov 25 analysis full gutter 2020-21 BUDGET CLIMATE BOND Background proposed new $15 billion bond for school and university facilities—we estimate annual General General Obligation Bonds Frequently Used Fund payments will increase by an average to Support Natural Resources Projects. The of $740 million per year over the next several state uses bonds as a way to borrow money, decades. particularly to support state and local infrastructure projects. Over the past several decades, California Governor’s Proposal voters have approved numerous general obligation $4.8 Billion Bond to Fund Climate bonds—which are repaid from the General Fund— Change-Related Activities. The Governor to provide funding for various types of natural proposes budget trailer legislation that would resources projects. Recent examples include place a new general obligation bond on the Proposition 1, a 2014 measure that provided November 2020 ballot for voter approval. The $7.1 billion for water-related projects, and proposed bond would total $4.8 billion and be Proposition 68, a $4.1 billion bond approved in dedicated for activities intended to respond to the 2018 that funded water, parks, and other natural effects of climate change. Figure 8 summarizes resources-related activities. While these bonds how the funding from the proposed bond would included funding for certain categories of projects be directed. As shown in the figure, the proposal that could help the state prepare for climate would task implementation of 17 bond-funded change—such as increasing water supplies, which programs to nine different state agencies. Funds could help the state respond to more frequent and would be appropriated by the Legislature through severe droughts—that was not the explicit focus of the annual budget act. those measures. Would Provide Funding in Five Categories State Currently Spends About $6 Billion of Activities. As shown in Figure 8, the proposed From the General Fund Each Year for Bond bond would provide funding for projects to respond Debt Service. After selling general obligation to the following five categories of climate risks: (as well as certain other) bonds, the state makes regular payments until they are paid off, which • Drinking Water, Flood, Drought typically takes a few decades. The state currently ($2.9 Billion). These activities would seek has about $80 billion of General Fund-supported to increase water supplies—such as by bonds on which it is making principal and interest recycling wastewater; managing groundwater payments each year. In addition, the voters and resources; and making current water uses the Legislature have approved about $42 billion more efficient, including in the agricultural of General Fund-supported bonds that have not sector—and lessen the impacts of potential yet been sold. (Both of these totals include bonds floods. Some funding is also included for for natural resources purposes as well as other projects that would enhance conditions for types of state programs.) Most of these bonds fish and wildlife, including at the Salton Sea. are expected to be sold in the coming years as • Wildfire ($750 Million). These activities would additional projects need funding. We estimate that seek to make critical infrastructure (such the state currently is spending about $6 billion as hospitals and drinking water systems) annually from the General Fund to repay bonds, less prone to damage from wildfires, such representing about 4 percent of annual General as by removing surrounding vegetation and Fund revenues. Over $1 billion of these annual upgrading to more fire-resistant building payments is associated with debt service for materials. Funding is also included for projects natural resources-related bonds. If voters approve intended to reduce the severity of wildfires by Proposition 13 in the March 2020 election—a 26 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET improving forest health, such as by removing and shown in Figure 9 (see next page). The undergrowth to make the forest less dense. proposal tasks SGC with developing overarching • Sea-Level Rise ($500 Million). These guidance informed by the resilience principles to activities would seek to lessen the impacts help the administering agencies design specific of sea-level rise along the California coast, guidelines for each program. The bond also including by restoring coastal wetlands includes language directing the agencies to seek to and piloting techniques for protecting (1) reduce administrative complexity by allocating infrastructure located along the coast. funding through existing programs when possible, Funding is also provided for projects (2) leverage other funding sources (such as by that would improve the health of coastal requiring grantees to provide a funding “match” in ecosystems, such as by enhancing eelgrass some cases), and (3) increase collaboration across beds and kelp forests. agencies when reviewing and selecting projects. Most bond funds would be allocated through a • Extreme Heat ($325 Million). These activities would seek Figure 8 to lower temperatures in communities—particularly Governor’s Proposed Climate Bond in warmer inland regions— (In Millions) by creating more green Administering spaces and parks, and by Program Departments Amount encouraging the use of Drinking Water, Flood, Drought $2,925 building materials that are Regional and inter-regional water resilience DWR, SWRCB $1,000 designed to reflect rather than Sustainable groundwater management DWR 395 trap heat. Safe drinking water SWRCB 360 • Community Resilience Urban/USACE flood projects DWR 340 ($250 Million). These Systemwide multibenefit flood projects DWR 270 Salton Sea restoration CNRA 220 activities would support Environmental farming incentives CDFA 200 communities in developing Enhanced stream flows and fish passage CDFW 140 plans for how they will respond to the effects Wildfire $750 of climate change, and Hardening of community infrastructure CNRA, CalFire, $500 OES in building or retrofitting Forest health CalFire 250 locations for community members to gather in Sea-Level Rise $500 emergency situations. Coastal wetland restoration OPC $320 Nature-based solutions to build resilience OPC 130 Bond Expenditures Would Be Demonstration projects to protect OPC 50 Guided by Resilience Principles. infrastructure The Governor would require that Extreme Heat $325 the state agencies administering Urban greening and forestry CNRA $200 the bond design the programs Cool surface materials SGC 125 around a set of climate resilience Community Resilience $250 principles. These principles were Community resilience centers SGC $225 developed by the ICARP Technical Community resilience planning SGC 25 Advisory Council—described Total $4,750 earlier in the “Climate Research and Technical Assistance” section DWR = Department of Water Resources; SWRCB = State Water Resources Control Board; USACE = U.S. Army Corps of Engineers; CNRA = California Natural Resources Agency; of this report—and are included CDFA = California Department of Food and Agriculture; CDFW = California Department of Fish and Wildlife; CalFire = California Department of Forestry and Fire Protection; OES = Office of in the proposed bond language Emergency Services; OPC = Ocean Protection Council; and SGC = Strategic Growth Council. www.lao.ca.gov 27 analysis full gutter 2020-21 BUDGET Figure 9 Administration’s Climate Resilience Principles 9 Multiple Benefits. Prioritize integrated climate actions, those that both reduce greenhouse gas emissions and build resilience to climate impacts, as well as actions that provide multiple benefits. 9 Social Equity. Prioritize actions that promote equity, foster community resilience, and protect the most vulnerable. Explicitly include communities that are disproportionately vulnerable to climate impacts. 9 Natural Processes. Prioritize natural and green infrastructure solutions to enhance and protect natural resources, as well as urban environments. Preserve and restore ecological systems (or engineered systems that use ecological processes) that enhance natural system functions, services, and quality and that reduce risk, including but not limited to actions that improve water and food security, habitat for fish and wildlife, coastal resources, human health, recreation, and jobs. 9 Avoid Shifting the Problem. Avoid maladaptation by making decisions that do not worsen the situation or transfer the challenge from one area, sector, or social group to another. Identify and take all opportunities to prepare for climate change in all planning and investment decisions. 9 Scientific Basis. Base all planning, policy, and investment decisions on the best-available science, including local and traditional knowledge and consideration of future climate conditions out to 2050 and 2100, and beyond. 9 Collaboration. Employ adaptive and flexible governance approaches by utilizing collaborative partnership across scales and between sectors to accelerate effective problem solving. Promote mitigation and adaptation actions at the regional and landscape scales. 9 Multiple Timescales. Take immediate actions to reduce present and near future (within 20 years) climate change risks for all Californians; do so while also thinking in the long term and responding to continual changes in climate, ecology, and economics using adaptive management that incorporates regular monitoring. competitive grant process to local governments requires making decisions on four key design and nongovernmental organizations, although elements: for some programs the bond language would • Size of Bond. In determining the size of the allow administering agencies more discretion over bond for which it will seek voter approval, the which projects to fund, including funding projects Legislature will want to balance the demand implemented by state departments. The bond for near-term funding to prepare for climate would require that at least 35 percent of total funds change against the ongoing General Fund be allocated for projects benefiting disadvantaged obligation to which the state commits when communities (defined as having a median approving a general obligation bond. household income that is less than 80 percent of • Areas of Focus. Decisions over how funds the statewide average) or socially disadvantaged should be allocated include (1) the broad farmers or ranchers (defined as members of spending categories on which to focus, (2) the specific ethnic groups). specific programs within those categories, Assessment and (3) the relative emphasis and distribution of funding across those categories and Structure of a Bond Should Be Informed programs. This includes consideration of how by Four Key Design Elements. Development of much to spend responding to more immediate a bond entails making choices about how much climate effects as compared to preparing for funding to borrow and how those funds will be effects that have a longer time horizon before spent. In our view, structuring a climate bond they seriously impact the state. 28 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET • Project Selection Criteria. The likely have been made more severe by the warming decision-making process to determine how of the earth’s climate. The Governor characterizes individual projects will be selected can be these types of worsening conditions that the state specified in bond language. In particular, this is already beginning to experience as near-term process could define the strategy for how climate challenges, and would dedicate the majority the state will approach prioritizing amongst of his bond funding towards addressing them. potential projects to maximize resilience to the Specifically, roughly 80 percent of the proposed impacts of climate change. funding is for projects intended to prepare for and • Evaluation Measures. Establishing in the respond to the effects of droughts, wildfires, and bond language processes for how the state floods. As shown in Figure 8, by far the largest will evaluate bond-funded projects can category of the proposed bond ($2.9 billion, lead to better outcomes for those projects, 62 percent) is for water-related activities, as well as inform how best to implement including to increase water supplies and manage future projects. Specific strategies might floodwaters. Projects to address the effects of include (1) setting explicit objectives, such as wildfires represent the second largest category what climate resilience outcomes the state ($750 million, 16 percent). A much smaller share expects to achieve with bond expenditures; of the bond would be dedicated to implementing (2) specifying how attainment of those projects in preparation for sea-level rise and goals will be measured and monitored; and deteriorating ocean conditions ($500 million, (3) establishing processes for communicating 11 percent) and extreme heat ($325 million, and disseminating that information to inform 7 percent)—climate impacts that scientists suggest future climate response efforts. will manifest and intensify in the coming decades. We find the Governor’s proposed areas of focus Below, we discuss how the Governor’s proposal to be one reasonable approach. Placing a greater addresses each of these four structural decisions emphasis on addressing the near-term climate and some of the trade-offs associated with those risks California is experiencing makes sense, as specific choices. the next damaging drought, wildfire, or flood could Approximately $200 Million in Annual General occur at any time, and could be exacerbated by Fund Costs for Next Several Decades. The increasing average annual temperatures. However, Governor’s bond proposal would provide funding taking actions now to address longer-term risks for climate-related projects and activities totaling such as sea-level rise can allow the state more $4.8 billion. We estimate the total cost to the state time to adopt proactive and strategic adaptation for this bond—including costs to pay off principal approaches, rather than being forced into a reactive and interest—would be about $8.3 billion. This mode with the need to address threats more would require annual payments averaging about immediately in the future. As such, a somewhat $200 million from the General Fund over about the different mix with a greater share of total bond next 40 years. The exact costs and time period funding to respond to longer-term impacts would would depend on the specific details of the bond’s also be reasonable. Similarly, the Legislature could sales. Should the Legislature adopt (and voters design a bond that has a comparatively different approve) a smaller or larger bond than proposed balance of funding across programs—such as more by the Governor, the total cost and out-year funding for forest health and less for groundwater General Fund spending commitments would vary management—depending upon what it views to be correspondingly. the most urgent threats facing the state. Governor Focuses Primarily on Near-Term In determining how to prioritize across the Climate Challenges and Water. Scientists suggest proposed areas of focus, the Legislature may also that some of the extreme conditions that California want to consider the availability of other funding has experienced over the last decade—including a sources. While the state is not fully prepared to prolonged drought and multiple serious wildfires— address any of the potential impacts of climate www.lao.ca.gov 29 analysis full gutter 2020-21 BUDGET change, some sectors might be further along in adjacent to other forest health projects, are located their preparation efforts based on previous state in a watershed that provides drinking water to a actions. For example, water projects have been significant number of downstream communities, or a major focus of recent bonds and state-level are located near significant population centers. expenditures. Specifically, Proposition 1 included The administration is not suggesting that more $7.1 billion and Proposition 68 included about detailed criteria are unnecessary—the bond $1.8 billion for water-related projects. In addition, language would require SGC and administering beginning in 2019-20, the Legislature approved agencies to define statewide resilience goals, roughly $130 million in ongoing GGRF funds to program design, and grant-making criteria after the provide safe drinking water for disadvantaged bond has passed. This approach, however, defers communities. Similarly, the state has made major significant decision-making to the administration investments in wildfire prevention and forest over how bond funds will be prioritized and spent. health activities in recent years, including nearly Neglecting to specify program criteria in bond $900 million from GGRF since 2014 and $50 million language foregoes legislative input in shaping those from Proposition 68. In comparison, the state has priorities and fails to provide voters clarity around only provided a total of about $70 million over the the state expenditures they are being asked to past five years explicitly for planning and projects to authorize. prepare for sea-level rise. In addition to considering how to prioritize Bond Does Not Include Clear Criteria for across individual projects, it is also important to How Projects Would Be Selected. The bond think about how to coordinate among projects to lays out the ICARP-developed climate resilience maximize effectiveness. To effectively respond to principles displayed in Figure 9 and defers to SGC the challenges posed by climate change, the state and the administering agencies to apply those will need an organized and deliberate strategy. principles in designing specific programs. This Yet, strategic coordination has not been a notable contrasts with some other natural resources bonds, feature of previous bonds. Previous bond programs which included specific criteria for how the state have tended to weigh the merits of projects on agencies administering the bond should prioritize an individual basis, awarding funding based potential projects. We find that the resilience primarily on an assessment of whether the project principles focus on important factors and provide would benefit specific jurisdictions or parcels. a helpful framework in which to ground the bond’s However, individual projects that are geographically proposed programs. However, the principles isolated or undertaken without a larger strategy are very high level and do not provide specific often will not provide significant and meaningful guidance to administering agencies about how resilience to the impacts of climate change. For they should select amongst projects for allocating example, the advantages of thinning one parcel of bond funding. For example, if two similar projects forestland could be undone by a severe wildfire on submitted applications to the California Department a neighboring parcel that remains thick with dead of Forestry and Fire Protection for a share of the trees and undergrowth; removing fish passage proposed $250 million to improve forest health, barriers in streams would yield limited benefits to the resilience principles would not provide a clear a declining species if additional barriers are left in pathway to evaluating the relative merits of which place just upstream; restored wetlands might easily project would be more effective at responding become flooded by rising seas if a coastal neighbor to climate risks. An alternative approach would fortifies a seawall. This highlights the importance be to include specific program criteria in bond of the state prioritizing projects that are part of a language guiding the prioritization of forest health larger, coordinated strategy. projects depending upon the state’s specific Moreover, the challenges presented by climate goals. Examples for the forest health program change likely will require new and innovative might include criteria that prioritize projects that approaches that have not necessarily been funded meet a certain minimum acreage threshold, are by previous bond programs. The administration’s 30 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET resilience principles recognize these dynamics by clearly stating the objective of the program and highlighting the importance of promoting actions collecting data over a number of years to assess at the regional and landscape scales, avoiding a project’s success in meeting that objective. For maladaptation, and basing decisions on the best example, if a proposed wetland restoration program available science. The administration also states is intended to help make the state’s coastline that it intends to improve communication and more resilient to the effects of sea-level rise, the coordination across departments in administering state ultimately will want to measure not just this bond. However, without specific details how many acres of wetlands are restored by the around how those principles and intentions will funded projects, but how effectively those restored be translated into program design and funding wetlands buffer wave action compared to wetlands priorities, the Legislature cannot have certainty that have not been restored. around how the administration will modify its Second, because facing the impacts of climate historical approach to implementing bonds in order change represents a new challenge for the state, to respond to new climate-related challenges. a bond represents a potential opportunity to learn A shift in focus may be particularly tricky for the which adaptation strategies work best—as well as multiple existing state programs proposed to which are less effective. Such information can be receive new rounds of funding in this bond. used to inform and improve future climate response Bond Does Not Include Clear Criteria for efforts. For example, scientists are still investigating How Funded Projects Would Be Evaluated. the degree to which restoring mountain meadows Because the Governor’s proposed bond language might both decrease the severity of potential lays out high-level guiding principles rather than wildfires, as well as increase downstream water specific objectives, it is similarly vague about supplies. As an eligible activity under the forest how the state will evaluate the degree to which health program, bond funding could allow the expenditures help accomplish state goals. As with state to implement meadow restoration projects project selection criteria, the bond would task in different areas of the state to evaluate which administering agencies with the responsibilities approaches yield the best results under different of developing evaluation guidelines, establishing conditions, with the goal of then replicating metrics of success, and designing monitoring and successful strategies in additional locations. In reporting requirements. This lack of specificity order to verify which types of adaptation projects and transparency raises similar questions for the are most effective, however, the state will need to Legislature about which decisions it is comfortable ensure that implementers continue to observe and deferring to the administration and which potentially modify the projects after construction components it wants to help shape and describe in is completed. Moreover, the ultimate value of the bond language. information collected will be dependent on the We believe developing a robust system for degree to which the state can establish effective evaluating and communicating outcomes for forums for disseminating findings and sharing this climate bond is particularly important for lessons learned. two reasons. First, the overarching goals for this Recommendations bond are more expansive than past bonds, and therefore more complicated to measure. Evaluation The Governor’s proposal lays out one approach efforts for previous bonds typically focused on to designing a climate bond. However, there is no whether projects effectively implemented their right answer to how the state should address each intended activities—such as whether projects were of the four bond design elements we described completed as initially proposed—a metric that earlier. The Legislature is also considering a is relatively easy to track. In contrast, assessing number of legislatively initiated bond proposals whether a project has an actual impact on reducing which it could opt to pursue. Below, we highlight the state’s climate risk is much more difficult. some key issues we recommend the Legislature Gathering meaningful information will necessitate consider in determining how to structure a bond’s www.lao.ca.gov 31 analysis full gutter 2020-21 BUDGET (1) size, (2) focus, (3) project selection criteria, and economy fluctuates. We therefore recommend the (4) evaluation measures. Legislature consider potential bond debt service Consider Bond Proposal as Part of Future payments in tandem with any other potential General Fund Priorities. Determining the ongoing spending commitments and select a bond appropriate size for a climate bond is difficult amount that would still allow the state to maintain because the state does not have detailed estimates a positive operating balance over the long term, about current climate response funding needs. even under potential recession scenarios. Given Specifically, no comprehensive data exists that the healthy condition of the state budget right now, quantifies and prioritizes climate vulnerabilities and the Legislature could also consider redirecting risks across the state. (Developing these types General Fund from other proposed purposes to of estimates is one of the tasks ICARP proposes instead provide appropriations on a one-time basis to undertake with the proposed “vulnerability for some high-priority climate resilience projects. assessment tools” described earlier in the “Climate To the degree the state supports projects with a Research and Technical Assistance” section of pay-as-you-go approach rather than relying on bond this report.) Nor is information readily available funds, it avoids both committing to General Fund about the number of—or costs associated expenditures in future years—when an economic with—high-priority adaptation projects ready slowdown might decrease available revenues—as to be implemented within the next few years if well as incurring additional interest costs. bond funding were to become available. The Ensure Focus of Any Bond Package Reflects high-level estimates that have been compiled, Legislative Priorities. If it chooses to adopt a however, suggest that the costs of failing to climate bond, we recommend the Legislature focus take action to prepare for the impacts of climate on the categories of activities it thinks are the change would be significant. For example, a highest priorities for the state. For example, while 2015 economic assessment by the Risky Business we find the Governor’s decision to focus most of Project estimated that if current global GHG his bond on addressing the near-term climate risks emission trends continue, between $8 billion of drought, flood, and wildfire to be reasonable, and $10 billion of existing property in California shifting some of that emphasis towards preparing is likely to be underwater from sea-level rise by for longer-term risks would also make sense. 2050, with an additional $6 billion to $10 billion Taking early action to prepare can help the state at risk during high tides. Separate research found to be more proactive and strategic in its approach, a strong benefit-to-cost ratio for undertaking as well as reduce future costs and disruption. mitigation projects ahead of disasters compared Similarly, in light of recent investments and other to spending on disaster response and recovery. As available funds, the Legislature could consider such, the Legislature can have some confidence whether it wants to focus less on water-related that allocating several billion dollars for climate projects compared to the Governor’s proposal and adaptation projects across the state could yield provide additional funding for activities that have benefits if projects are prioritized appropriately. not received comparable levels of resources. While As the Legislature deliberates whether to pursue many new water projects likely would benefit from a climate bond at either the Governor’s proposed additional bond funding—much of the funding level or for a different amount, we also recommend from Propositions 1 and 68 has already been it consider the out-year implications for the state committed to specific projects—the availability of budget. Bond funds can be a helpful tool to funding for water supplies and flood protection in implement large capital programs and projects, recent years has been notably more than funding but the resulting debt service commitments affect to address other climate risks. Moreover, some of the state’s General Fund for several decades. the types of water-related activities the proposed Moreover, while California’s current budget condition bond might fund—such as wastewater treatment, continues to be positive, it likely will experience water recycling, and groundwater management— ups and downs over the coming decades as the are projects that local governments might be 32 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET able to help support with fee revenues from local language could include criteria that would focus ratepayers. funding on projects that have a greater likelihood Ensure Project Selection Criteria Is Designed of effectively addressing climate risks. Figure 10 to Maximize Effectiveness. We recommend the describes some prioritization criteria the Legislature Legislature help ensure bond funds are targeted could consider to strengthen the bond’s emphasis for projects that will be most effective at reducing on strategic and effective climate responses. In the state’s climate risk. While the administration particular, the Legislature could establish metrics to has developed comprehensive resilience principles, identify and prioritize the projects with the greatest those high-level intentions are not sufficiently explicit chance of successfully addressing climate risk to clarify how specific projects will be selected. The based on quantifiable objectives, an assessment state’s traditional approach to implementing bonds of the project’s return-on-investment, or regional will not be adequate; funds should be used in a strategic priorities. The Legislature could adopt more coordinated and strategic manner if they are several of these options to help focus bond to be effective at reducing the impacts of climate expenditures around multiple strategic goals. For change. The criteria used to prioritize funds across example, the Legislature could prioritize funds for projects will be key to defining this approach. As both projects that can point to established scientific such, we believe it is important for the Legislature evidence suggesting their effectiveness as well as to determine funding prioritization factors and those that are seeking to test out new strategies help ensure bond dollars are used strategically to and develop a new scientific understanding of what maximize their impact. We offer two options for how adaptation approaches might work. Moreover, given the Legislature can increase its role in defining how limited resources, part of the Legislature’s strategy bond funds are prioritized. for prioritizing funds could be to focus on issues of statewide importance such as state-owned The most direct and transparent option would infrastructure, natural resources, and public health be for the Legislature to adopt bond language and safety. providing additional guidance to the administration around how funds should be prioritized. This Figure 10 Potential Selection Criteria for Climate Bond-Funded Projects 9 Clear and Measurable Outcomes. The Legislature could establish quantifiable objectives for each bond program (such as number of acres of forestland, wetlands, or floodplains to be restored) and then prioritize projects that explicitly contribute toward meeting those goals. 9 Cost-Effectiveness. The Legislature could establish a tool that evaluates a project’s projected return-on- investment—considering both economic and ecological benefits—and then prioritize projects that meet a certain level of anticipated cost-effectiveness. 9 Strategic Regional Priorities. The Legislature could establish state criteria for locally developed regional climate response plans that identify local risks and priorities, and require that administering departments prioritize projects that are consistent with those state-approved plans. 9 Scientific Basis. The Legislature could require prioritization of projects that demonstrate compelling scientific research—if available—indicating they will be effective at addressing climate impacts and are targeted where risks are greatest. 9 Pilot Strategies. The Legislature could prioritize some funding for projects that are explicitly designed to test new strategies in order to learn which climate adaptation strategies work best. 9 Key Statewide Issues. The Legislature could prioritize projects that focus on issues of state-level responsibility, such as protecting state-owned assets, public trust natural resources, and public health and safety. www.lao.ca.gov 33 analysis full gutter 2020-21 BUDGET Some of these options would require Adopt Evaluation Requirements Sufficient development of tools or plans before they could to Inform Future Climate Response Activities. be employed in project selection decisions, We recommend the Legislature include evaluation such as (1) a tool to estimate a project’s criteria in the bond to ensure the state will return-on-investment and (2) local climate response measure and learn from project outcomes. As plans to help identify regional projects and noted earlier, this should include (1) setting priorities. The fact that these tools and plans are explicit objectives, such as what climate resilience not yet in place need not preclude the Legislature outcomes the state expects to achieve from each from including such provisions to guide bond bond program; (2) specifying how attainment of expenditures, as they could be developed through those goals will be measured and monitored; and separate legislation and funding, as discussed in the (3) establishing processes for communicating and nearby box. disseminating that information to the state, local A second option would be for the Legislature governments, and other stakeholders to inform to defer to the administration to develop program future climate response efforts. Similar to the guidelines based on its resilience principles—as project selection criteria, the Legislature could proposed by the Governor—but adopt bond stipulate such objectives and processes explicitly language requiring the administration to submit in bond language or adopt language requiring the draft criteria to the Legislature for approval and administration to submit its specific evaluation potential modification before they are finalized. plans to the Legislature for approval after the bond These approvals could be granted through the passes. annual budget process in future years along with the administration’s requests for bond appropriations. While this approach would place the Legislature in a more reactive role compared to developing its own prioritization criteria, it would allow additional time for discussion and deliberation with the administration and other experts and stakeholders. Bond Could Be Paired With Other Climate Response Funding and Initiatives The Legislature could think about a potential bond not in isolation, but rather as part of its larger approach to addressing the effects of climate change. The Governor has presented his package of proposals as a “climate budget,” and the Legislature could develop its own integrated approach to support effective bond implementation. This could mean pairing a bond with a complementary and coordinated package of proposals that include policy changes and non-bond funding, such as the proposed climate research and technical assistance Greenhouse Gas Reduction Fund (GGRF) funding discussed earlier in this report. There might be opportunities to target portions of that funding explicitly to help improve the effectiveness of bond-funded projects. For example, the Legislature could direct funding to develop tools to evaluate the projected return-on-investment of specific projects which could then be used to help prioritize uses of bond funding. The Legislature could also adopt statute developing a program for regional climate adaptation planning to identify projects with the greatest benefits across multiple jurisdictions, provide General Fund or GGRF to support development of those plans, and then make bond funds available to implement the identified projects. 34 LEGISLATIVE ANALYST’S OFFICE analysis full gutter 2020-21 BUDGET CONCLUSION Addressing climate change is a long-term • Is the overall spending amount consistent with challenge that requires a wide variety of activities legislative priorities, considering the potential across many different entities. The Governor’s need and the wide variety of other potential budget includes four major proposals related to uses of the funds? climate mitigation and adaptation. We summarize • How does the Legislature want to prioritize our recommendations on these specific funding for adaptation versus mitigation? As proposals in Figure 11. Overall, the Governor’s part of that evaluation, the Legislature might approach includes some positive steps intended want to consider the past and current levels to help reduce climate change risks, including of spending for each type of activity, as well additional focus on adaptation activities. In as the relative merits of relying on funding to many cases, however, the Legislature could achieve these goals versus other strategies, consider modifications to the proposals that such as regulations. might better reflect its priorities and achieve its • How should funds be allocated in order to climate goals more effectively. In one case—the most effectively achieve the Legislature’s proposed Climate Catalyst loan fund—we find climate goals? Programs that receive funding that the administration has not provided adequate should (1) have clearly defined goals and justification to merit adoption. objectives, (2) be well coordinated across There are a variety of important considerations different government entities, (3) address clear that the Legislature will want to weigh as it market failures and complement regulatory constructs a climate change package that best programs, and (4) have effective strategies reflects its priorities and achieves its goals and resources for evaluating future outcomes. effectively. Notably, the Governor proposes a significant increase in the amount of General Fund resources Figure 11 allocated to climate-related Summary of LAO Recommendations activities, including significant out-year General Fund Cap-and-Trade Expenditure Plan commitments to pay off the • Ensure multiyear discretionary expenditures do not exceed $800 million. proposed bond. We urge the • Direct administration to provide additional information on expected outcomes. Legislature to think broadly about • Allocate funds according to legislative priorities. its priorities and the role of the • Consider other funding sources for high-priority programs. General Fund, GGRF, and other Climate Research and Technical Assistance Funding funds—as well as nonfinancial • Expand state’s climate adaptation activities with approach that reflects tools, such as regulatory legislative priorities. programs—in achieving its • Delineate key climate policy goals and activities in statute. climate goals. Some of the key Climate Catalyst Loan Fund considerations when developing an • Reject funding for Climate Catalyst Revolving Loan Fund. overall approach include: • Consider a pilot project to gauge demand for loans. Climate Bond • Consider bond proposal as part of future General Fund priorities. • Ensure focus of any bond package reflects legislative priorities. • Ensure project selection criteria is designed to maximize effectiveness. • Adopt evaluation requirements sufficient to inform future climate response activities. www.lao.ca.gov 35 analysis full gutter 2020-21 BUDGET AUTHORS Ross Brown Cap-and-Trade Expenditure Plan 916-319-8345 Ross.Brown@lao.ca.gov Rachel Ehlers Climate Adaptation Research and 916-319-8330 Rachel.Ehlers@lao.ca.gov Technical Assistance Climate Bond Brian Weatherford Climate Catalyst Loan Fund 916-319-8337 Brian.Weatherford@lao.ca.gov LAO PUBLICATIONS This report was reviewed by Brian Brown and Anthony Simbol. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report 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. 36 LEGISLATIVE ANALYST’S OFFICE