Could California’s Climate Law Send You a Check in the Mail?

Could California’s Climate Law Send You a Check in the Mail?

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What if California could tap into billions of dollars yearly to reduce state deficits and pump money into education and social services? Imagine if every resident of the state were to get a check in the mail every year for hundreds of dollars. At a time of economic hardship, such ideas sound like fantasies. But they aren’t. Scenarios like these are being considered by state policy makers who must decide what to do with the billions of dollars projected to be generated by California’s landmark climate change law, AB 32.

AB 32 could be the goose laying the golden revenue eggs for years to come, because of the cap-and-trade program that lies at its core. The climate law mandates that greenhouse gases to be rolled back to 1990 levels by 2020. The state Air Resources Board, which is responsible for implementing AB 32, has proposed a program that caps greenhouse gas emissions and offers emitters allowances that can then be traded. Companies that cannot reduce their emissions can buy credits from those that can.

California stands to gain considerably from the sale of those allowances, a sum estimated to be $7 billion to $22 billion annually by 2020. The size of the windfall hinges on how the state decides it wants to distribute those allowances: The state can auction them, give them away for free, or some hybrid of the two. There’s also the question of how the proceeds should be spent, whether the funds should go to benefit the public or ease the pain of industry. The air board is crafting the policy now and seeking public input, although most Californians are probably unaware of it.

Texas oil companies Valero and Tesoro have bankrolled an initiative that would suspend AB 32 until the state’s jobless rate drops to 5.5 percent for four quarters. The initiative’s supporters have submitted more than 800,000 signatures. If it qualifies for the ballot in November, voters can decide if they want to halt the climate law until the state’s economy rebounds. The initiative’s supporters say AB 32 will cost the state jobs and increase prices for energy and food. But some of the state’s top economists say rather than hurt the state’s recovery, the climate law could jumpstart the economy.

The battle over AB 32 could determine California’s fiscal future, says Steve Levy, director of the Center for Continuing Study of the California Economy (CCSCE) in Palo Alto. The state has an $18.9 billion budget hole, and has slashed funding for education and social services.

Revenues generated from the climate law could go to balance the budget and restore funding for education, health and social services, Levy says.

“There’s going to be strong pressure to increase taxes to maintain education and other services critical to economy,” Levy says. “Here we have a source of revenue to maintain services without a tax increase.”

Levy sat on a 16-member advisory committee that made recommendations on how to distribute allowances and what to do with the revenues. The main message of the report that the committee delivered to the Air Resources Board in March was twofold: allowances should primarily be auctioned, not given away for free, and the proceeds should be returned to individuals, communities or businesses to offset higher energy costs or environmental impacts, spur clean tech development and job training.

The committee suggested two methods to return money to citizens – either through a reduction in income or sales tax or through dividends. The idea of a dividend is not so far-fetched. Alaskans receive a yearly check, averaging between $600 and $1500, to compensate for oil extraction in the state.

In the case of California, says Dan Kammen, a professor in the Goldman School of Public Policy and Department of Nuclear Engineering at UC Berkeley, the size of the dividend would vary depending on where an individual lives and the carbon intensity of the electricity mix in that region.

“Places that have the most carbon in their electricity mix, get the most chunk back, because their expenses will go up the most,” said Kammen, who is also a member of the advisory committee to the air board. A special fund would be set aside to assist low-income households, who will bear a bigger burden for higher energy costs because they spend a larger portion of their income on energy and fuel.

Perhaps the single most important decision that the Air Board will make, sometime this year, will be how to distribute allowances. If allowances are given away for free, says Levy, the state will “give up the chance to use the money for public good…. An auction system is the first step so the money can be used for public purposes.”

Air Resources Board member Sandy Berg says she favors a hybrid approach – which combines auctioned and free allowances to business – to minimize the impact on the economy and consumers.

“When business has to pay, it has to cover the cost, and so its customers have to cover the costs,” says Berg, who is president of the Ellis Paint Company in Los Angeles.

Under the climate law, families will pay more for food, fuel and energy, in the short run, says Dallas Burtraw, a senior fellow with Resources for the Future, who was also a member of the advisory committee to the Air Board.

“But, there’s also going to be a lot of revenue. How a family is affected will be determined by what government decides to do with the revenues,” he said. “So if the money is used to reduce electricity prices, it’s not available to reduce taxes. If the money is used to reduce taxes, it is not available to give back to households on a per capita basis [as dividends]. So households have a big stake in the outcome.”

Whether residents see the benefits through a dividend check in the mail or reduced income and sales tax, or it’s used to restore funding to public services, the economic advisors to the air board agree on one thing: All of the money should be returned to the public.