Wednesday, January 27, 2010

Carbon Cap and Trade in California and Rethinking Local Public Finance

I missed this announcement 2 weeks ago that the Air Resources Board will take the revenue collected from California's Carbon Cap and Trade and give the $20 billion dollar a year flow back "to the people".

A couple of points:

1. California has a $20 billion dollar deficit.

2. As "the people" enjoy this windfall of 20 bill/35 mill = $600 each, if we share fairly, why can't the state reinstate the Car Registration Tax? Why is the state tagging only those polluters who fall under the cap and trade with paying for carbon. I know that car drivers will face the Pavley standards but that doesn't raise any revenue.

So , my big point is that a rational public finance team would bundle several policies here and not simply enact "cap and trade". As California seeks budget sanity, this is a good opportunity to make a couple of changes as a package to ensure political support for the bundled package. In english, let's have the car tax fee and cap and trade and recycle the revenue to the public. Take this package or leave it.

3. How will industry respond to this pricing incentive? Who can cheaply substitute away from carbon production and who can't? Of course, if all polluters under the cap and substitute then the government will collect no revenue from this new market.

Who owns the older capital (whose emissions are likely to be higher and due to expected depreciation is less likely to be retrofitted)? This group will bear the incidence of this regulation.

Will "leakage" take place? I can't see how this effect can be large. I can't foresee a situation in which the state's unemployment rate goes up because of this regulation.

The PUC will face a decision on whether it allows the electric utilities to raise electricity prices to consumers as their natural gas power plants will have a higher cost structure of producing power.