State Senator's Proposal Moves from Cap & Trade to Fee & Rebate

Plans for the use of revenue thus far haven't been pretty. Governor Jerry Brown borrowed from the Cap & Trade funds to plug a budget deficit, and then pledged millions toward the foundering high-speed rail project.
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On February 20, 2014, California Senate President pro Tempore Darrell Steinberg (D - Sacramento) proposed removing transportation fuels from the state's Cap & Trade program under AB32, the Global Warming Solutions Act of 2006. Steinberg said the State should instead add a 15 cent per gallon gasoline tax that would increase over time, return two-thirds of the revenues to low and middle-income families through an Earned Income Tax Credit, and spend the rest on mass transit and similar projects.

AB32 has plenty of opponents, but Steinberg is not one of them. His speech introducing his proposal at the California Press Club revolves around the relationship between climate change and poverty. Since 2014 is Steinberg's last before his term in office expires, and the transportation sector is scheduled to enter the Cap & Trade program in 2015, he believes now is the time to link the two issues. His proposal shows a recognition of the impact of fuel price increases on low-income households, and valid concerns about potential market manipulation in the year-old Cap & Trade system. He is attempting to head off the politically risky moment when transportation fuel prices become linked to a poorly understood Cap & Trade program by setting up a separate simpler carbon "fee and rebate" for transportation fuels.

Steinberg and others are struggling to find a simpler approach without appearing to undermine a landmark program. In fact, worry about messing with AB32 at all may lead many to oppose Steinberg's proposal. The desire for an inclusive carbon price with the few or no sectoral exemptions is understandable. AB32 proponents have been in defensive mode for years as the law's enemies try to repeal it or delay its implementation. Meanwhile, other states and Congress are paying close attention to what California does, and if the State appears to lose its support for a carbon price, any national effort will be postponed by that much longer.

On the other hand, there is a case for treating the transportation sector differently than the electricity sector. Transportation fuels have a lower carbon content per ton than coal, and consumers have greater difficulty in switching away from petroleum (what economists call "price elasticity of demand"). By some calculations, a carbon price smaller than $100/ton will mostly just raise revenue rather than change behavior in the transportation sector (which is fine, as long as the money is well spent).

But plans for the use of revenue thus far haven't been pretty. Governor Jerry Brown borrowed from the Cap & Trade funds to plug a budget deficit, and then pledged millions toward the foundering high-speed rail project. This has raised the political stakes by potentially unifying the opponents of each program. Several newspapers have come out against "Cap & Rail", and high-speed rail is now losing support among high-ranking Democrats, including Lieutenant Governor Gavin Newsom. In this context, Steinberg's idea to rebate the funds to consumers, and increase transparency to voters makes a lot of sense.

Pragmatically, Steinberg needs a two-thirds vote in the Legislature for new tax, and support from a Governor who favors Cap & Rail over Fee & Rebate. Conventional wisdom is to not even try for a carbon tax. But this past year has seen conventional wisdom upended on same-sex marriage and marijuana. A win in California for a new fuel tax could shift the national conversation, encourage other states to try it, and give major boost to the "fee and dividend" position at the national level. A loss on this new proposal is not a huge risk since AB32 is already in place.

By returning two-thirds of the proposed revenues to California families earning up to $75,000 per year, Steinberg's proposal would certainly gain some support from those who otherwise might wonder what happened to all that money flowing to Sacramento. He could reach even more people by returning the revenues as a universal dividend that would reach all Californians equally. (A true climate dividend would be more like Social Security, and be kept separate from the tax system.)

As former Secretary of Energy and Nobel laureate Stephen Chu recently said:

"You have to keep it simple. Cap-and-trade philosophically does work, but you have to keep it brutally simple." Chu's recommendation for the tax revenue is to "Give it back to the American people...Mail them a check each month. It's a progressive way of giving back the money ... you can spend it on whatever you want. The big bad government's not going to tell you what to do. So if you want to buy a 15 mile-per-gallon car, that's OK. Here's the money, you decide. No government program. Revenue neutral."

Steinberg's tax rebate would complement the climate dividend from electric utilities that many ratepayers will see on their utility bills this coming April. The connections Sen. Steinberg draws between solving climate change and poverty together are the right ones and part of the long term vision for the solutions of both problems.

Some environmental groups invested in the current AB32 plan may see Sen. Steinberg's move toward Fee & Rebate as diminishing the Cap & Trade program. Another viewpoint is that while the short-term success of California's Cap & Trade program is a top priority, the long-term issues of equity are even more important. Consumers are very sensitive to daily swings in the price of gas, and it is advertised on major street corners all over the state. Only a strong climate dividend can counteract the tendency toward backlash. Steinberg is wise to revisit the use of revenues from the transportation sector, and contemplate reorienting the program in order to direct those revenues back to people and away from boondoggles.

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