The Global Warming Sting: California Balances its Budget and Saves the World

The sting was revealed but the hook is not yet set by the January 11th exposure[1] of a “dispute” among the 16 member California Economic Allocation Advisory Committee (EAAC) whose purpose is to figure out how to spend the money from carbon taxes envisioned by AB32, the California Global Warming Solutions Act.

The Set Up

On January 11th the EAAC presented final allocation recommendations to the State. So this is a trial balloon to see how much angst this approach stirs among the politicians, special interest groups, and seeks to avoid enraging voters before the next election.  By framing this “dispute” among members, the EAAC is setting up the potential for a sting of California consumers depending upon how the rest of the process plays out.

The timeline for the rest of this process is that a final public conference call will be held in February 2010 to adopt its economic impacts report. EAAC Chair Goulder will present both reports to the California Air Resources Board February 25th. In Fall of 2010 along with the final proposed cap and trade rules, the CARB staff is expected to recommend a final allocation approach which will purport to balance EAAC recommendations and public input. This is when the hook will be set if the political will exists to do so.  There is the minor problem of the November 2010 election looming and voters in California as elsewhere are growing surly.

The committee imported a Harvard environmental economics professor, Robert Stavins, director of Harvard’s Environmental Economics program, to testify that the California approach complies with the AB 32 intent and that the proposed carbon taxes should not fall heaviest on poorer people. He opined that a cap-and-dividend approach produced fewer benefits than cutting taxes on labor and capital.

The much maligned Waxman-Markey Bill passed by the US House uses most of the proceeds from sales of emissions allowances to reduce power company costs of compliance by essentially awarding them free permits to reduce the expected spike in utility rates.  This approach sidelined a number of major utilities who fatalistically decided to get the best deal they could rather than be painted as obstructionists.  There is a Senate bill by Senators Boxer and Kerry which is closer to the approach being used in California, but it has gone nowhere as yet on Capitol Hill.

Placing the Hook

At its January 11th meeting, the CEAAC members endorsed a “cap-and-dividend” approach which would set prices for CO2 emission allowances as a tax on producers and then use the money raised as a “dividend” to consumers to help reduce their burden of paying all those higher prices for everything that uses energy.  The discussion by staff presenting ideas to the committee suggested an annual energy “dividend” for a family of four might be about $1,000.

Sounds good, right?

Not so fast, the committee was divided on whether the best way to use this pot of gold at the end of the global warming rainbow was to give it back directly to consumers or instead use it to create “tax cuts” in state income taxes or sales taxes that will have to be raised to balance the state budget!

The timing was subtle but perfect.  Waxman-Markey has stalled in Congress and COP15 turned into a food fight between developed and developing countries and resulted in egg on all their faces.  So California with AB32 safely adopted has the opportunity to recapture the leadership flag and show the world how things are done in the Golden State.

Meanwhile, the State is facing another $22 billion deficit because of the recession thus the convenient convergence of the need to develop an implementation plan for AB32 and address the growing California budget deficit  sets up the “the sting” that should earn the State an Oscar for best supporting actor in a political drama.  Nothing tops the Federal Governments hubris for spending, taxation and income redistribution for Best Actor nominees this year.

Perfect Sting or Fatal Error?

So will California use Carbon Taxes to fill the hole in its state budget?  The perfect cure it seems to state politicians.  Will they save the world and save their behinds at the same time all while calling these new carbon allowance revenues “dividends” or using them to “reduce taxes” that they must raise rather than reduce spending to close the budget gap?  Or will this fatal attraction and sleight of hand turn into a fatal error in the November 2010 elections.  High stakes!

But I saved the best part for last, his vast income redistribution scheme would not require the Legislature to actually vote for any nasty tax increases since the California Air Resources Board would administratively each year set “carbon allowance fees” sufficient to raise the revenue needed to meet the Legislature’s spending desires and balance the budget and then the Legislature would declare a “dividend” to give a modest portion of the revenue back to consumers while taking credit for being fiscally responsible balancing the budget  by keeping the lion’s share for budget spending.  This has the added political benefit of reducing the hostage taking behavior over the need for a 2/3 vote to raise revenue or reduce expenditures each year in passing the state budget.  The debate among the 16 members of the California Economic Allocation Advisory Committee is not really what to do but how little of the revenue must be given back to consumers.