High-speed rail takes hit as cap-and-trade cash falls short



less Gov. Jerry Brown, center, and his wife Anne Gust, third from right, start signing a portion of the rail at the California High Speed Rail Authority ground breaking event Tuesday, Jan. 6, 2015, in Fresno, Calif. California's high-speed rail project has become the first in the nation to break ground. Tuesday's groundbreaking was attended by several hundred people who gathered near old rail lines in an industrial section of downtown Fresno. Gov. Jerry Brown, center, and his wife Anne Gust, third from right, start signing a portion of the rail at the California High Speed Rail Authority ground breaking event Tuesday, Jan. 6, 2015, in Fresno, Calif. ... more Photo: Gary Kazanjian, Associated Press Photo: Gary Kazanjian, Associated Press Image 1 of / 40 Caption Close High-speed rail takes hit as cap-and-trade cash falls short 1 / 40 Back to Gallery

SACRAMENTO — A critical source of funding for the state’s high-speed rail project came in substantially short this week when demand fell sharply for pollution permits sold in the state’s cap-and-trade program.

The rail authority was expecting to receive $150 million Wednesday from the auction, but will instead receive $2.5 million after the state took in 2 percent of what it had anticipated netting from the final quarter of this fiscal year’s cap-and-trade auctions.

The cap-and-trade program was created as part of the landmark greenhouse gas reduction law, AB32, which was passed in 2006. The program forces large carbon dioxide emitters in the state to reduce their output of greenhouse gases by putting a cap on carbon emissions and requiring that they buy permits for any additional greenhouse gases they let off.

H.D. Palmer, spokesman for the Department of Finance, said the state projected that four auctions held by the Air Resources Board this fiscal year would bring in $2.4 billion. The first three auctions netted a little over $1.8 billion, but the fourth one, held this month, came in at just $10 million.

The state had anticipated that the May auction would raise $600 million, a quarter of which was promised to high-speed rail. The lower revenue means the rail project — which is expected to cost $64 billion — will receive $457 million this year instead of the projected $600 million.

Palmer said Gov. Jerry Brown “insisted on setting aside $500 million in cap-and-trade revenue” for a reserve in last year’s budget.

That reserve is part of budget discussions going on at the Capitol now for the 2016-17 budget, Palmer said.

“One auction is a snapshot in time,” said David Clegern, spokesman for the Air Resources Board. “It doesn’t point to a trend. ... There are many numbers of things that could have entered into this, and we don’t speculate on that.”

Clegern said that the cap-and-trade program is intended to reduce greenhouse gas emissions and that if companies don’t need as many allowances above the cap on what they are permitted to pollute, the program is “working as designed.”

Ross Brown, principal fiscal and policy analyst for the Legislative Analyst’s Office, said the volatility in this month’s auction could be from skeptical buyers watching a lawsuit filed by the California Chamber of Commerce that contends the cap-and-trade program amounts to a tax that was never authorized through a required two-thirds vote in the Legislature. The cap-and-trade program is also authorized only until 2020, leaving some statutory uncertainty in the program, Brown said.

“I think the big picture is that it’s difficult to say if this is a short-run issue or a one-time issue,” Brown said. “One of the issues people have raised is there may be more allowances available than compliance agencies need to cover their emissions in the near term, which is leading to lower prices in the secondary market.”

How all this affects high-speed rail’s budget is uncertain.

Jessica Peters, principal fiscal and policy analyst for the Legislative Analyst’s Office, said the rail authority is mostly relying on federal money now, but plans to use cap-and-trade revenue once it begins building its planned line to San Jose.

Peters said the analyst’s office found it problematic that the rail authority’s business plan relies heavily on the cap-and-trade revenue in future years, particularly given that the program is authorized only through 2020.

Last week, the High-Speed Rail Authority and Federal Railroad Administration amended a federal grant to extend the date when the authority expects a Central Valley track to be completed from 2018 to 2022.

The authority announced in February that the line would head to the Bay Area first, instead of Los Angeles first, with plans to reach San Jose by 2025.

Melody Gutierrez is a San Francisco Chronicle staff writer. Email: mgutierrez@sfchronicle.com Twitter: MelodyGutierrez