Cap-and-trade passage is about raising taxes, divvying up the spoils
What were Gov. Jerry Brown, legislative Democrats and eight Republicans thinking Monday, as they voted to extend the state’s cap-and-trade system for another decade, something that will impose higher gas taxes on Californians who already face a recent gas-tax hike? Are officials ignoring public rumblings, or was Brown’s doomsday rhetoric about global warming really so persuasive?
Public-opinion polls suggest that Californians aren’t simply against that recently passed gas-tax increase (plus significant hikes in the vehicle-license fee) – they are spitting mad about it. A survey from UC Berkeley’s Institute of Governmental Studies last month found 39 percent of Californians strongly opposed to the law and another 19 percent opposed. Only 14 percent of Californians “strongly favor” raising taxes to fund road repairs.
California already has among the highest gas prices in the nation, in part due to the special formula that is required under state law for all gasoline produced and sold here. The new tax adds 12 cents to the price of each gallon. The highly respected Legislative Analyst’s Office concluded in March, following a question from Assembly member Vince Fong, R-Bakersfield, that the cap-and-trade system will increase gas prices by as much as 63 cents a gallon by 2021, and 73 cents by 2031.
Even in the most favorable scenario, by which cap-and-trade credits are sold for a low price, California consumers can expect their gas prices to go up an additional 15 cents a gallon by 2021 and 24 cents by 2031. The governor wouldn’t say how the new revenues would be used, but he agreed to a variety of provisions – the repeal of a rural fire-prevention fee, the extension of a manufacturers’ tax credit to utility companies – to secure some votes.
Such horse trading – as well as the governor’s insistence on using cap-and-trade revenues to fund his $68 billion-plus high-speed-rail boondoggle – highlights what’s fundamentally wrong with the current cap-and-trade system. Rather than combat climate change, it’s basically a tax on business used to fund myriad unrelated items, ranging from low-income housing programs to ones that promote “environmental justice.”
As the Los Angeles Times reported, the governor sent out an all-caps email to legislators urging them to vote for the deal: “THIS ISN’T FOR ME, I’M GOING TO BE DEAD. IT’S FOR YOU AND IT’S DAMN REAL!” But it’s hard to see how dramatically raising gas prices on Californians – thus increasing not only our driving costs, but the costs of transporting and manufacturing every manner of food and consumer good – is going to save the planet.
California’s cap-and-trade system went into effect in 2012, after the California Air Resources Board (CARB) implemented the necessary regulations. The concept evolved out of passage of Assembly Bill 32, the California Global Warming Solutions Act of 2006, under the Arnold Schwarzenegger administration.
The stated goal was to provide a market-oriented mechanism to reduce greenhouse-gas emissions to 1990 levels by 2020. Then Brown signed Senate Bill 32 in 2016, which upped the ante by requiring greenhouse gases be reduced to 40 percent below those 1990 levels by 2030. The state is on track to meet the first goal, but the newer goal is a stretch.
Cap and trade sets a cap on emissions that is reduced approximately 3 percent every year, thus forcing businesses to become increasingly creative to meet those climate goals. Manufacturers are required to purchase permits for emissions that exceed the cap, driving up costs. As CARB explains, “trading creates incentives to reduce (greenhouse-gas emissions) below allowable levels through investments in clean technologies.”
Of course, there are all sorts of carve-outs and free permits, which makes the whole deal more about crony capitalism than a free marketplace. Furthermore, the system is so costly to businesses that it depresses consumer spending and economic growth, which are the things manufacturers would need to afford those cleaner technologies. It puts California at a competitive disadvantage with every other state and almost every country.
The program creates a flood of new government revenue that legislators and special-interest groups fight over. For instance, one sticking point in the current bill was the agricultural community, which demanded that 19 percent of the revenue go to help farmers afford to pay for the new harvesting equipment and trucks they’ll have to buy to conform to the new rules, per the Times report. Other groups also had their own demands.
Senate Republicans objected to the process by which the bill was passed. “Given the magnitude of its effect on the price of food, fuel, electricity, manufactured goods, and numerous statewide businesses that are sensitive to price increases in the price of fuel and power, it is astounding that a bill of this import would be rushed through the Legislature so quickly without time for meaningful public discussion and debate,” they wrote in a letter of opposition. The GOP senators also objected to the amount of power the bill grants to CARB – and to the lack of “binding guarantees” on how revenues from the program will be spent.
The governor late last week told legislators that if they don’t back this program, he will embrace an alternative and more onerous approach: top-down regulation from CARB to mandate cutbacks in greenhouse-gas emissions. No wonder the debate has led to some unusual alliances. Some business groups have backed the bill, as have a number of mainstream environmental groups. They argue that it’s the least-onerous way to deal with the problem.
Social-justice groups have opposed cap and trade as too business-friendly and want more attention paid to fighting pollution in low-income communities. They are joined by conservative and taxpayer groups, who view cap and trade as overly costly to businesses and consumers.
The California Chamber of Commerce had filed a lawsuit, which ultimately failed, that challenged the original cap-and-trade vote as an illegal tax because it wasn’t passed by a two-thirds majority, as is required for tax increases. But the chamber issued a statement supporting Assembly Bill 398 as “the least costly path to achieving our climate goals.” The chamber’s main issue was not cap and trade, but the supermajority vote requirement.
The measure this week was passed with a supermajority, thanks to 2010’s Proposition 26, “which more stringently defined what is a tax,” explained the California Foundation for Commerce and Education’s Loren Kaye, in a recent Fox & Hounds column. Kaye told me the bill legislators approved Monday was vastly improved with a series of cost controls and regulatory limitations – something he says was the result of the two-thirds vote process required under Prop. 26.
It’s understandable why many business leaders embrace cap and trade as preferable to the heavier hand of state regulation that the governor threatened, but the legislation will still dramatically increase consumer and business costs and harm the state’s economic competitiveness moving forward. Indeed, Brown’s two choices are entirely of his own making. There are other possible choices besides a costly system that increases gas costs by an additional 63 cents a gallon and something that might be even worse.
For instance, some free-market advocates argue for a revenue-neutral carbon tax. In other words, a tax would be imposed on greenhouse-gas emissions, but other business taxes would be reduced to offset the increases. If the goal is to reduce climate change — rather than, say, find a way to fund social programs — then a tax on the type of pollution that causes climate change would depress carbon emissions without harming the economy. There are other ideas, too, but the point is legislators needn’t embrace Brown’s false dichotomy.
Some Republicans were just happy to be perceived as relevant. One Senate Republican voted in favor of the bill (Sen. Tom Berryhill of Modesto), as did seven GOP Assembly members. The Legislature also voted for a companion bill to beef up pollution-monitoring efforts. So legislation that will drive up gas prices to stratospheric levels passed on a bipartisan basis, making it that much harder for angry consumers to focus their coming wrath.
Steven Greenhut is Western region director for the R Street Institute. Write to him at firstname.lastname@example.org.