The 2022-23 Budget: Cap-and-Trade Expenditure Plan

The 2022-23 Budget: Cap-and-Trade Expenditure Plan JANUARY 2022 Summary. The Governor proposes a roughly Budget: Overview of the Governor’s Budget, $1 billion discretionary cap-and-trade expenditure likely will be a key consideration in the Legislature’s plan. In our view, the Governor’s plan is based budget deliberations.) on conservative revenue assumptions. We think Governor’s Proposal several hundred million dollars more could be available for discretionary expenditures in the Governor Proposes Almost $1 Billion budget. We will provide additional information Discretionary Spending. The Governor’s budget later this spring after the results from next assumes cap-and-trade auction revenue of couple of quarterly cap-and-trade auctions are $3.6 billion in 2021-22. Based on this revenue available. Of the proposed spending, the vast estimate, there would be roughly $600 million majority would go to existing programs, including in carryover funding available to be allocated in incentives for zero-emission vehicles (ZEVs) and 2022-23, plus an estimated $2.3 billion in revenue programs to reduce local air pollution. The most collected in 2022-23. As shown in Figure 1 on significant new proposal—$30 million for mobile the next page, about $1.5 billion would go to air quality monitoring—raises a variety of questions continuously appropriated programs in 2022-23, that the Legislature might want to explore in budget $239 million would go to other existing spending hearings this spring. commitments, and $979 million would go to proposed discretionary spending. Also, based Background on these revenue assumptions, there would be a Cap-and-Trade Auction Revenue. Revenues roughly $200 million fund balance at the end of from quarterly cap-and-trade auctions are 2022-23 (also known as a reserve). deposited in the Greenhouse Gas Reduction Fund Proposal Mostly Provides Funding for (GGRF) and the funds are generally allocated Existing Programs. Almost all of the proposed to climate-related programs. Under current discretionary spending would support existing law, about 65 percent of auction revenue is programs that have received GGRF allocations in continuously appropriated to certain projects and past years. Specifically, $676 million would support programs, including high-speed rail, affordable ZEV programs at the California Air Resources Board housing, transit, and safe drinking water. (CARB) and $240 million would go to continued In addition, beginning in 2022-23, $200 million is implementation of Chapter 136 of 2017 (AB 617, continuously appropriated for forest health and C. Garcia). (The proposed ZEV-related spending wildfire prevention. This $200 million is taken “off is part of the Governor’s broader package of the top” before calculating the other continuous ZEV-related proposals.) The proposed expenditure appropriation percentages. The remaining plan also provides $33 million in discretionary revenue is available for appropriation by the funding for safe and affordable drinking water. This Legislature through the annual budget for other funding—in addition to the estimated $97 million ongoing funding commitments (such as state provided through continuous appropriations— administrative costs and statutory transfers), as well would bring total funding for safe and affordable as discretionary spending programs. (These funds drinking water to $130 million in 2022-23, consistent do not count toward the state appropriations limit with past budgets. which, as we discuss in our report The 2022-23 2022-23 Budget Series 1 The only new major spending proposed in the Figure 1 discretionary spending package is $30 million one Proposed 2022-23 Cap-and-Trade time for expanded community-level air monitoring. Mobile monitors would be used to provide a Expenditure Plan one-time snapshot of air pollution at the local (In Millions) level. According to the administration, the data would be integrated into CARB tools that help Program Amount visualize local pollution, and potentially inform Continuous Appropriationsa $1,465 future AB 617 activities to reduce community High-speed rail $487 pollution in disadvantaged communities. The Affordable housing and sustainable communities 389 Forest health and fire prevention 200 budget also includes several proposals to continue Transit and intercity rail capital 195 or increase staff and resources to administer Transit operations 97 GGRF programs. Some of these proposals are Safe drinking water program 97 related to implementing recently enacted legislation. Other Existing Commitments $239 Funding would support staff at CARB, the Office of SRA backfill $79 Planning and Research, the Coastal Commission, Manufacturing sales tax exemption backfill 72 and the Office of Environmental Health Hazard Other state administrative costsb 88 and Assessment. We are reviewing these smaller Discretionary Spending $979 proposals as part of our analyses of the budgets Heavy-duty vehicle incentives (ZEV Package) $600 AB 617 local air pollution reduction incentives 180 of the associated departments, but they are not a Clean Cars 4 All (ZEV Package) 76 primary focus in this analysis. AB 617 local air district implementation 50 Safe drinking water program 33 Assessment of Revenue Estimates and Expanded air monitoring 30 Discretionary Spending Resources AB 617 technical assistance grants 10 Total $2,683 In this section, we assess the Governor’s revenue a Based on Governor’s revenue assumption of $2.3 billion in 2022-23. assumptions and the amount of GGRF available for b Includes $2.3 million in state administrative costs to continue existing discretionary spending. programs and implement recently enacted legislation. Governor’s Revenue Assumptions Are SRA = State Responsibility Area; ZEV = zero-emission vehicle; and AB 617 = Chapter 136 of 2017 (AB 617, C. Garcia). Conservative. In our December 2021 post, Cap-and-Trade Auction Update and consider the most likely of our three scenarios, GGRF Projections, we estimated GGRF revenue total revenue over the two-year period would under three different allowance price scenarios. be $2.8 billion higher than assumed under the As shown in Figure 2, the administration’s revenue Governor’s budget. We will provide the Legislature assumptions in both 2021-22 and 2022-23 are with updated revenue forecasts in the coming slightly below our low revenue scenario, where months as more information becomes available, we assume all allowances sell at the floor price. including the results of future quarterly auctions. Although the administration also assumes that all allowances will sell at the floor price, its estimates Several Hundred Million Dollars More Could of the number of allowances offered and the level of Be Available for Discretionary Spending. As the floor price are slightly lower than ours. shown in Figure 3, there is roughly $1.2 billion available for discretionary spending and a reserve There is substantial uncertainty in auction under the Governor’s revenue assumptions. This revenue, so it is possible that revenue could drop amount is somewhat lower than the amount that below our low revenue scenario. However, even would be available under our low revenue scenario under relatively conservative assumptions, we think ($1.4 billion) and significantly lower than the amount total auction revenue will be at least $600 million that would be available under our base revenue higher than the Governor’s budget assumes over scenario ($2.3 billion). the two-year period. Under our base revenue scenario (stable allowance prices), which we 2022-23 Budget Series 2 Ultimately, the amount of Figure 2 discretionary funding allocated in the 2022-23 budget will depend Governor's Revenue Assumptions on both (1) revenue assumptions Compared to LAO Scenarios and (2) how much the Legislature (In Billions) chooses to leave as a reserve in the GGRF to address revenue $6 $5.7 uncertainty. These two factors are $5.2 related and the Legislature could 5 $4.5 $4.2 take different budgeting approaches. 4 $3.7 If the Legislature assumes higher Governor's Budget revenues, it might also want to 3 $2.7 maintain a substantial reserve in the 2 Governor's Budget GGRF in case revenue is lower than 1 expected. For example, in previous reports, we suggested a reserve of 2021-22 2022-23 about 10 percent of estimated annual Drop to Price Floor Stable Prices Continued Price Growth revenue is a reasonable starting point. Under our base revenue forecast, a 10 percent reserve would be slightly more than $400 million— which would leave about $1.9 billion Figure 3 available for discretionary programs. Summary of 2022-23 Funding Available If the Legislature assumes lower revenues, there is less of a need Under Different Revenue Scenarios to maintain a substantial reserve (In Billions) because there is little risk that revenues would be lower than $8 expected. Under our lower revenue Available for Discretionary Spending and Reserve scenario where allowance prices drop 7 Continuous Appropriations to the floor, the Legislature would Other Existing Commitments collect enough revenue to allocate 6 $1.4 billion to discretionary programs, $3.1 but leave very little money in the 5 reserve. Under both budgeting approaches, the Legislature would 4 $2.3 have several hundred million dollars in additional funding available for 3 discretionary spending. $1.4 $1.2 2 $3.5 Issues for Legislative $2.6 Consideration 1 $1.5 $1.7 In this section, we identify several key questions for the Legislature $0.2 $0.2 $0.2 $0.2 Governor's Budget Drop to Price Floor Stable Prices Continued to consider as it evaluates the (Base Forecast) Price Growth Governor’s proposal and develops its LAO Scenarios cap-and-trade spending plan. 2022-23 Budget Series 3 Do Continuous Appropriations Continue to want to consider is what other funding sources are Reflect Legislative Priorities? The Legislature available and already allocated to climate-related will want to consider the degree to which both programs. For example, the Governor’s proposed continuous appropriations and past discretionary budget includes $6.1 billion in total a five-year ZEV spending programs continue to be consistent package, which includes $676 million from the with its current priorities. Most of the continuous GGRF. This is in addition to a $3.9 billion three-year appropriations were established as part of the package for ZEVs included in the 2021-22 budget 2014-15 budget, and it is possible that legislative agreement. (For more detail on the multiyear priorities have changed over the last several years. funding packages included in last year’s budget In addition, as revenues increase, continuous agreement, see our post The 2021-22 Spending appropriations going to these programs would be Plan: Natural Resources and Environmental much higher than in prior years. Under our base Protection.) The Legislature will want to consider forecast, about $2.4 billion would be continuously the degree to which cap-and-trade funding should appropriated to these programs in 2022-23 (not be used in 2022-23 to supplement these other including the $200 million continuous appropriation ZEV efforts versus targeting other programs that for forest health and wildfire prevention). This is would not receive any new funding as part of the roughly twice the average annual continuous Governor’s proposal, such as waste diversion appropriation provided in past years. The programs and other climate-related programs. Legislature might want to consider whether these Also, as we have emphasized in previous appropriation levels continue to reflect its priorities. reports, the Legislature is not limited to focusing Depending on its spending priorities, the its cap-and-trade expenditure plan on spending Legislature could consider a variety of modifications options. We recommend the Legislature consider to the continuous appropriations. For example, using a portion of GGRF revenue to provide direct if the Legislature considers certain discretionary financial support to households and/or businesses. programs higher priority, it could give those For example, the Legislature could use GGRF to discretionary programs first call on future auction provide lump sum rebates to households, reduce revenue. This could be similar to the Legislature’s other state taxes (such as sales tax rates), or action to allocate $200 million off the top to forest use the funds to reduce retail electricity rates. health and wildfire prevention as part of the Importantly, each of these “revenue recycling” 2021-22 budget agreement. The Legislature could options could be structured in a way that maintains also consider allocating a specific annual amount cap-and-trade’s incentive for households and to each continuously appropriated program, rather businesses to reduce GHGs, while also partially or than a set percentage of auction revenue. This fully offsetting the financial impact of cap-and-trade approach would provide a more consistent funding prices on businesses and consumers— amount for these programs. Plus, if annual revenue particularly low- and moderate-income households. continues to grow, this structure would allow the In our view, these revenue recycling options Legislature to use the annual budget process to become even more attractive if allowance prices— determine how to allocate the additional funding in and associated impacts on energy prices— a way that best reflects its changing priorities. continue to increase. How Should the Legislature Allocate What Benefits Will New Air Monitoring Effort Discretionary Funding? The Governor’s proposal Provide? As discussed above, the only new largely allocates funding to existing programs. program proposed is $30 million for expanded As always, the Legislature will have to weigh many air monitoring using mobile monitors. In concept, different spending priorities when considering efforts to improve the scope and quality of air how to allocate discretionary funding, including quality monitoring could have merit, as there are how to balance greenhouse gas (GHG) reductions, some gaps in the existing air quality monitoring local air quality improvements and monitoring, networks, particularly at the neighborhood level. and other spending priorities. One factor it might The network of monitors used to assess state 2022-23 Budget Series 4 compliance with federal ambient air quality that can help the state track changes in air standards is relatively sparse in some areas of pollution over time? the state, and these monitors are not intended • How many areas of the state would be to measure air quality at the community level. To monitored? How does the administration address this gap, in recent years, funding provided plan to select which communities will to local air districts through the AB 617 program be monitored? has been used to establish 14 community-level • How will this funding be used to inform air quality monitoring networks in heavily polluted future air quality improvement activities? communities. However, many communities in the For example, once the additional information state still do not have robust community level air is collected, how will that information quality monitoring systems. be used to inform future regulatory or Although there are likely some benefits to spending decisions? additional air quality monitoring, based on our initial • Will the state have any ongoing costs review, it is unclear why the Governor’s proposal associated with undertaking this is the most effective monitoring approach. Some one-time effort? questions for the Legislature to consider about the As the Legislature considers this proposal, and proposal include: weighs it against other spending priorities, it might • Why is the administration proposing to want to direct the administration to report at budget establish a new monitoring approach instead hearings on the questions above. This would help of expanding existing monitoring efforts the Legislature evaluate the overall merits of the through AB 617? proposal. Without additional detail about why • What is the advantage to using mobile this new monitoring effort is the most effective monitoring compared to other technologies, approach to monitoring, the Legislature might such as stationary monitors that can measure consider redirecting this funding to other existing pollution in a specific location? programs that are high legislative priorities. • Why should the state invest in a one-time snapshot of air pollution, rather than a system 2022-23 Budget Series 5 2022-23 Budget Series 6 2022-23 Budget Series 7 LAO PUBLICATIONS This post was prepared by Ross Brown, and reviewed by Anthony Simbol. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. 2022-23 Budget Series 8