September 6, 2016

A carbon tax for thee, but not for me



In 2006, the California Legislature enacted AB 32, which mandated that statewide greenhouse gas emissions be reduced to 1990 levels by 2020.  California’s cap & trade auction system followed. Last week the Legislature passed SB 32, which extends and deepens AB 32’s original mandate, requiring the state to further reduce emissions to 40% below the 1990 level by 2030. This is ambitious, to say the least, in a state where all of the “low hanging fruit” (cheap emissions reduction) has presumably been harvested.

None of this is news. Nor is it news that the legality of the entire cap & trade structure is on thin ice. A California appellate court will soon rule as to whether it violates Proposition 13 (yes, that Prop 13, for those of you who remember it) insofar as AB 32 did not pass both houses of the Legislature with the requisite 2/3 vote needed for tax increases. And even if AB 32 survives, few lawyers expect the new, post-2020 authorization to pass the forthcoming Prop 26 challenge. Enacted after AB 32 (and so not applicable to it), Prop 26 was explicitly designed to close the many loopholes the politicians exploited to get around Prop 13’s vote requirements.

The “good” news for California is that if its cap & trade system gets overturned, the Air Resources Board must still hit the 2020 and 2030 targets. The bad news is that it will have to achieve truly massive emissions reductions at a breakneck pace solely via pure command and control regulations.

What may be news to some people is that while it was enacting SB 32 and AB 197, the Legislature also passed Assembly Joint Resolution 43, which “hereby urges the United States Congress to enact, without delay, a tax on carbon-based fossil fuels” and “that all tax revenue should be returned to middle-and low-income Americans to protect them from the impact of rising prices due to the tax.”

Thus, while the California Legislature was extolling the virtues of a carbon tax to Congress (“a market-based solution that would minimally disrupt the economy while sending a clear and predictable price signal to businesses to develop and use non-carbon-based energy resources”), in its own bailiwick, it authorized further emissions reductions via either (1) a cap & trade system where the revenue is most certainly not returned to the “middle- and low-income” Californians who bear the costs of it (hello, High Speed Rail) or, (2), as is more likely, a new round of almost unimaginable regulatory requirements after the courts eliminate the cap & trade auction system.

We could dwell on the irony of all this, but instead we prefer to think of this as an opportunity for the Legislature to follow its own advice (so does our colleague Jerry Taylor). For Republicans, the choice is between, on the one hand, a deal for a tax where they get a say in how the money is spent or, on the other, a continued cap & trade system where they don’t have a say on how revenues are spent or a new regulatory monster. If they delay, they may get both the monster (the California regulatory machine is notoriously hard to stop once it gets going) AND the requested federal carbon tax.  For California Democrats, the choice is between the certainty of the tax—albeit one on which they’d have to swallow hard and work with the Republicans to pass—or what even they should recognize as the enormous economic risks of a regulatory system unparalleled in the world, and even in California.

Is anyone listening?

[Image Source: California Air Resources Board, 2016 Greenhouse Gas Emission Inventory]