Gov. Brown's cap-and-trade spending plan angers businesses

From: Los Angeles Times

Gov. Jerry Brown has found a new pot of money to help him fill a $9-billion hole in his proposed budget: $1 billion from auctioning credits to allow California companies to emit greenhouse gases.

But business groups are already denouncing Brown's plan as a back-door tax increase that they intend to challenge in court if the proposal is approved as part of the state budget for the fiscal year that begins July 1.

"At a time when the public is concerned about jobs and the economy, the budget proposes a new tax on California businesses for climate change activities," said Dorothy Rothrock, vice president of the California Manufacturers and Technology Assn. "The anticipated $1 billion is not windfall revenue. The funds will be paid by California employers suffering the worst recession since the Great Depression."

The so called cap-and-trade system is a critical piece of AB 32, California's landmark legislation aimed at cutting carbon dioxide emissions to 1990 levels by 2020. Modeled on a European program, it sets a cap on emissions of carbon dioxide, methane and other greenhouse gases for each industrial polluter or electric power plant. Facilities can exceed their cap only if they buy credits of other plants that have extra ones after reducing their own releases into the atmosphere.

The first auction, tentatively set for August, is projected to raise as much as $1 billion, which would be earmarked to "create jobs and deliver public health, economic and environmental benefits" as part of the state's effort to curb global warming, the governor's office said.

Brown's 2012-13 budget summary, released Thursday, dedicated three of its 173 pages to a bare-bones plan to use the auction proceeds to pay for a variety of environmental programs.

But business groups representing steel mills, cement plants, refineries and other heavy industries say such spending is not authorized by AB 32 and is probably unconstitutional.

At issue is whether the money paid by polluters to buy credits is a fee or a tax.

The difference is important because tax increases or changes require the approval of a two-thirds super-majority of members in both the California Senate and Assembly. But a simple majority of lawmakers can set fees on industries. Money collected from the firms can be spent only on activities that are closely related to regulation of a specific business, such as conducting a health inspection at a restaurant.

Reinforcing the principle of a tight linkage between a fee and how it is spent was enshrined in the state Constitution when voters approved Proposition 26, an industry-backed initiative, in 2010.

Such a connection clearly exists, the Brown administration said, noting that it plans to spend the auction proceeds in four broadly defined areas: clean and efficient energy, low-cost transportation, natural resource protection and sustainable infrastructure development.

"These are the types of programs spelled out in broad strokes in AB 32," said H.D. Palmer, a spokesman for the governor's Department of Finance.

What's more, some AB 32 supporters contend, the extra $1 billion in environmental fees — even if they are considered taxes — are not overly onerous since California's total corporate tax bite is on par with the U.S. average, according to a recent survey by the Council on State Taxation. Total corporate taxes are higher in Alaska, New York, Florida and even Texas, says the report by the business-friendly group.

Exactly how the proposed environmental auction money might be spent won't be clear until more than a year from now, although some of it could be used to pay for existing environmental programs, freeing up the money for other purposes, Palmer said.

Environmentalists generally support the governor's plan because it could lead to a net increase in spending on their favorite projects.

"Much as we hate to see it, some backfilling [for existing programs] is going to happen," said Jim Metropulos, a lobbyist for the Sierra Club, who called the governor's plan for spending auction receipts "a good thing."

For now, Brown's cap-and-trade spending proposal is too vague to draw any conclusions, said Tiffany Roberts, a specialist in environment and natural resource programs at the California Legislative Analyst's Office.

"Who knows if this can pass legal muster?" she said. "Until we see some kind of proposal, it's guesswork."