Last month, California made a budget deal for the formula that would be used to distribute its cap-and-trade revenues. The state’s cap-and-trade bill does not deed the money to the general budget but to a separate account, to be distributed based on a variety of goals including subsidies to programs that reduce greenhouse gas emissions. The recent deal is to give most of the money to transportation (including transit-oriented development): this year the budget gives $600 out of $850 million to transportation (see PDF-p. 6 here), of which $250 million will go to high-speed rail, and according to an informational hearing the long-term deal gives 80% of revenues to transportation, including 15% to high-speed rail. Transit bloggers who are not in the process of moving across oceans covered the issue last month as the deal was made: Streetsblog wrote about the plan, Robert Cruickshank wrote multiple times in support of the decision, and Bruce McFarling explained how HSR’s projected emissions reductions should entitle it to a share of the cap-and-trade proceeds.

In reality, although it’s a good thing that California HSR is getting funded, it’s a bad way of funding it, betraying both environmental incompetence and political mistrust. The basic problem is that the HSR project is not going to reduce emissions enough to justify 15% of the pot, nor is transportation such a big share of California’s emissions inventory to deserve 80%: it accounts for only 37% of statewide emissions. Electricity, and related sources of emissions such as building heating and industrial emissions, get far less than their share of emissions.

Bruce’s post runs the numbers on HSR, notes that the projections are currently $250-400 in construction costs per ton of CO2 reduction, and proposes that if cap-and-trade results in a carbon cost of $75 per ton then this justifies using the revenues for 20-35% of the cost of HSR. The projected revenue from cap-and-trade is a range whose top end is $5 billion statewide, corresponding to about $11 per metric ton; at this level, assuming HSR saves $250/t-CO2 means it should get 4.4% of its funding from emissions reduction, or (at the current cost of $53 billion in constant dollars) about $2.3 billion over the lifetime of the program. If the revenue is indeed $5 billion a year, this spending level is projected to be reached in 3 years.

For some evidence of what the state is really doing, consider how the deal comments on each share of the funding. The informational hearing details the investment strategy as follows:

25% for a permanent source of funding for transit operations, distributed based on greenhouse gas criteria.

20% for affordable housing and miscellaneous urban planning goals (including TOD), of which at least half must be for affordable housing (including TOD, again); the money is to be distributed based on “competitive GHG performance.”

15% low-carbon transportation, based on both long-term clean air and GHG goals.

13% energy, including electricity and building efficiency.

7% natural resources, waste diversion, and water projects.

15% HSR.

5% “new or existing” intercity rail, based on GHG criteria.

Note that internally to four categories, comprising 65% of the total funds, the hearing mentions greenhouse gas criteria. In three out of the four, comprising half of the funds, the hearing implies that the decision of how to distribute the funds will be based on competitive grants according to which project reduces emissions the most.

The key point here is that the state has effectively said what the best way is to ensure the spending side of cap-and-trade will reduce emissions optimally: projects will compete for scarce funding based on greenhouse gas criteria. Once it has made the political decision to distribute funds by a formula that disproportionately goes to transportation, it has no objection to using greenhouse gas criteria internally to each category. The problem is that the transportation projects in general and HSR in particular would never make it out of a grant process based on such criteria if they were not shielded from competition with non-transportation priorities.

There are two legitimate ways to distribute funds coming out of an externality tax, which is what cap-and-trade really is. One is to let the tax side do the work of reducing impact, and put the money into the general budget. This is common practice for most developed countries’ fuel taxes (though not the US’s). In this approach, HSR would compete with all of the state’s other budget priorities. If the state wanted to reduce other taxes against the cap-and-trade funds rather than raise spending, it could. If it wanted to spend the money on unrelated things, such as education, it could as well. There already is a more or less open and democratic budget process for this.

The other way is to reduce all political discretion, and distribute the funds based entirely on greenhouse gas criteria, without breaking the money into categories. The state seems to prefer this way, judging by its use of this process within each category. With other externality taxes there is another option, of giving the money directly to victims of the externality, e.g. spending cigarette taxes on lung cancer treatment; however, the bulk of damage caused by climate change is to developing countries, and spending cap-and-trade revenues on targeted aid to vulnerable developing countries is politically unacceptable.

The state’s hybrid approach is effectively a slush fund. High-level politicians, including Governor Jerry Brown, want to build a visible legacy, and HSR is far more visible than making household appliances consume less electricity. Emissions reductions are secondary to this concern. They’ll be happy to make their legacy a project that reduces greenhouse gas emissions, but they have no quantitative preference for projects that reduce emissions more than others. On the contrary, when they pull strings, they might even make decisions that make these projects less environmentally beneficial: the decision to connect Los Angeles to Bakersfield via Palmdale rather than directly has no technical merit, and judging by LA County’s support appears to be motivated by concerns for development in the Palmdale area. As the incremental cost of going through Palmdale is about $5 billion, nearly 10% of the HSR cost, the result is that the state is going to spend a substantial amount of cap-and-trade money on spurring more development in the High Desert exurbs.

Needless to say, when the cap-and-trade bill was passed, it did not state or even imply that the state could use the money to spur more development in the exurbs. The bill did not adopt a GHG-only approach, but listed several additional goals, none of which included transportation. Chapter 1, Part 2, paragraph h states,

It is the intent of the Legislature that the State Air Resources Board design emissions reduction measures to meet the state wide emissions limits for greenhouse gases established pursuant to this division in a manner that minimizes costs and maximizes benefits for California’s economy, improves and modernizes California’s energy infrastructure and maintains electric system reliability, maximizes additional environmental and economic co-benefits for California, and complements the state’s efforts to improve air quality.

There is an explicit mention of air quality, and explicit mentions of energy and electricity, which are only getting 13% of the funding despite accounting for 54% of emissions. Elsewhere the list of legislative intents includes vague terms such as technological leadership, but the only explicit mention of transportation in the bill is in paragraph c, which says that historically California provided leadership on several environmental issues, including emissions limits on cars as well as energy efficiency and renewable energy.

However, the cap-and-trade bill is older than the current administration, and the political priorities have changed. Since a regular budget process giving HSR the money it needs would run into opposition from competing priorities, it’s best to raid a new source of revenue, one without legislative inertia or established supporters directing the money to more useful purposes.

Hence, a slush fund.