July 26, 2017 Categories: California Clean Energy

Here’s the Deal on California’s World-Leading Climate and Clean Air Legislation

NextGen Policy Center

by Milena Paez

Governor Jerry Brown signed crucial legislation this week that fortifies California’s world-leading climate policies and strengthens the state’s commitment to ensuring that all Californians can breathe air that doesn’t make them sick. While compromises were required to achieve the two-thirds vote needed in the legislature to litigation-proof California’s cap-and-trade system, the resulting legislative package nonetheless locks in California’s system to make polluters pay as we work towards the 40 percent reduction in global warming pollution by 2030 that has been required by law since 2016.  The bill package also establishes a new program to reduce local pollution hotspots and stiffens penalties for violators–measures that clean air advocates have sought for many years.

Extending the polluter accountability system we currently have in place required a two-thirds vote because the oil industry succeeded in enacting Proposition 26 in 2010. Prop 26 ties the hands of California’s legislature by requiring a supermajority to enact new fees that raise revenue to fund public services, and AB 32, the original Global Warming Solutions Act passed in 2006, included a 2020 sunset of its authorization to establish a cap-and-trade program. While the Brown Administration had argued that it has organic authority to continue the cap-and-trade program without explicit legislative authority, and a case could be made that revenue raised by selling emission permits does not constitute a new tax or fee under Proposition 26, the only way to avoid lengthy and uncertain litigation was to extend cap-and-trade authority with a two-thirds vote.

That was never going to be easy. Democrats currently have supermajorities, just barely, in both the Assembly and the Senate, but California Democrats run the political spectrum from progressive to conservative and, under California’s open top-two primary system, the oil industry has learned to exert influence by supporting more conservative  Democrats in districts where the chances of electing a Republican are slim. Earlier this year, the oil industry demonstrated its power by lobbying against and killing AB 378, a cap-and-trade extension bill not to its liking, denying it even a simple majority in the Assembly.

On the other hand, the oil industry also had something to fear if cap-and-trade was not extended: The California Air Resources Board (CARB) would still be required to meet the state’s 40% emission reduction target – and without cap-and-trade CARB would have to achieve this reduction using direct regulations that would force specific polluters to take steps to cut pollution that may be more expensive than participating in a Cap and Trade system. This Sword of Damocles created the opportunity for a deal.

Both the oil industry and the environment had something to gain from a negotiated agreement. The oil industry wanted cap-and-trade to continue as an alternative to more onerous direct regulations. Environmental advocates wanted greater certainty that California would actually meet its ambitious 2030 target and continue to fund vital clean energy programs with revenues that come from cap-and-trade. The final deal delivers on both of these core interests.

The package also includes a much stronger local air pollution reduction program.  Environmental Justice advocates distrust cap-and-trade, and wanted to ensure that air quality would improve in communities that have traditionally been dumping grounds for industrial and vehicular pollution as part of this deal.

Many other interests were also at stake. Republicans, who turned out to be crucial to putting together a two-thirds vote in the Assembly, wanted the revenue from cap-and-trade to be used for tax cuts. Utilities and oil companies wanted to continue getting some emission allowances for free, rather than see those allocations phased out as CARB had planned.

After weeks of intense negotiations between the Governor’s office (including the Governor personally), the Assembly, and the Senate, the deal that emerged does a remarkable job of balancing these interests. The key elements are:

  • AB 398 authorizes cap-and-trade through 2030, with a cap that will shrink by 40% during the next decade.
    • CARB is directed to establish a price ceiling, but any revenue collected from selling additional allowances at the ceiling must be used to make offsetting emission reductions.
  • AB 398 requires that utilities, oil companies, and other industries will continue to receive the same share of emission allowances within the cap for free as they do now (but remember that means that the absolute number of free allowances will shrink by 40% along with the cap).
    • These free allocations are worth billions of dollars. While electric and gas utilities are required to auction their allowances and use 100% of their proceeds to benefit their customers under supervision of the Public Utilities Commission, the oil company allocation has no such public purpose. Although the oil industry subsidy only covers emissions from refineries themselves, not from burning gasoline and diesel fuel, the allocation is far greater than what would be needed to discourage oil companies from moving refinery operations out of state. In theory, competition should force the oil companies to pass through some of their savings to customers, although in practice they managed to extract excessive profits from California drivers.
  • AB 617 requires CARB to implement a new community air quality monitoring and improvement program for criteria and toxic pollutants, targeting communities that have the largest cumulative health burden. Stationary sources in air quality nonattainment areas must apply Best Available Retrofit Control Technology by the end of 2023. Penalties for violating air pollution standards are increased for the first time since the 1970s, and they are, for the first time, indexed to keep pace with inflation.  
    • This bill provides a major upgrade to California’s local pollution control program that air quality advocates have sought for years, but have been unable to enact independently. Significant resources for monitoring and enforcement will be required to implement this program effectively, and Governor Brown has pledged to find those resources.
  • AB 398 prohibits CARB from directly regulating carbon dioxide emissions from refineries, although it is explicitly authorized to continue other direct regulations, including criteria pollutants, toxics, methane, and the Low Carbon Fuels Standard. Local Air Quality Management Districts are also prohibited from directly regulating carbon dioxide emissions.
    • The inclusion of this provision, in particular, led many environmental justice groups and the California Sierra Club to oppose the the cap-and-trade bill. Many had worked for years to promote direct regulation of greenhouse gas emissions from refineries. CARB had proposed requiring a 20% reduction in greenhouse gases from the refinery sector, and the Bay Area Air Quality Management District was working on local greenhouse gas regulations. These measures would have allowed agencies to require measures that would simultaneously lead to local reductions in criteria and toxic pollution. These pollutants will now be addressed directly through community pollution reduction plans mandated by the accompanying air quality bill, but many groups remain skeptical about how these provisions will be implemented.
  • AB 398 suspends the fire protection fee assessed on rural property owners who depend on CalFire to fight wildfires. It also extends and broadens a manufacturers’ investment tax credit.
    • These provisions are estimated to cost $340 million per year, which will be paid for by cap-and-trade revenue. This significantly reduces the resources available for discretionary global warming pollution reduction programs, although at least $1.4 billion per year should still be available for these programs (assuming all allowances are sold at the price floor).
  • ACA 1 would create a one-time two-thirds vote requirement to continue spending cap-and-trade revenue after the beginning of 2025. This constitutional amendment requires voter approval and will be on the June 2018 ballot.
    • ACA 1 was the deal closer to bring necessary Republican votes on board in the Assembly. While Republicans had initially sought to sunset the entire cap-and-trade program in 2025 to ensure that they would remain relevant by requiring a new two-thirds vote, ACA 1 leaves the cap-and-trade program in place. If the legislature fails to authorize additional appropriations of cap-and-trade revenue after 2025 the tax relief included in AB 398 is also suspended.


So that’s the deal in a nutshell, and it is an excellent one for California and the world under the circumstances.

This deal involves a lot of puts and takes. Some of the trade-offs are painful, but those tradeoffs are unavoidable as long as Prop 26 exists and Big Oil holds political sway in Sacramento. If we want a better deal next time, we will need to change the circumstances.  

Here’s how: Repeal Prop. 26. Elect an even more progressive legislature. And most importantly, eliminate the oil industry’s political influence by eliminating the need for their product.

These are all reasonable and achievable goals, but not within the timeframe that was available to extend California’s polluter accountability system. Taking the deal that was available lays the foundation for electrifying our transportation system, which is a key to progress on all these fronts.

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