California’s Cap and Trade Slush Fund

It didn’t take long for California’s “cap and trade” program under AB 32 (the “Global Warming Solutions Act”) to deteriorate into just another slush fund for political officials to spend on their favorite projects. Of course, the purpose of cap and trade funds is to reduce greenhouse gas emissions. The state of California has adopted aggressive goals for such reductions, which will not be accomplished easily. Indeed, virtually all of the economic analysis of greenhouse gas emissions indicates that the most cost-effective strategies must be employed or the consequences likely to be serious economic harm – read higher poverty rates, fewer jobs and less discretionary income for households.

Governor Brown has already indicated an interest in using cap and trade funds to help build the first phase of the California high speed rail system, which has experienced the cost blowout of 200% compared to early 2000 projections, after adjustment for inflation. Further, California Air Resources Board Chair Mary Nichols told Business Week that high-speed rail would be a “legitimate” use of AB 32 cap and trade revenues.

The problem is that high-speed rail is not a cost-effective strategy for reducing greenhouse gas emissions. In 2008, Joseph Vranich and I authored a study for the Reason Foundation, The California High Speed Rail Proposal: A Due Diligence Report, which found that the minimum cost per ton of greenhouse gas reductions from the project would be nearly $2000, between 40 and 100 times the maximum range identified by the United Nations Intergovernmental Panel.

This estimate was based upon the cost and revenue projections of the California High Speed Rail Authority, which virtually every objective outside analyst found to be overly optimistic. History was to show the same. Today the project is much more costly than it was in 2008. Automobile fuel efficiency is projected to improve far more, which means much less will be saved in greenhouse gas emissions should a driver transfer from the car to the train. Finally, newer revenue projections are more modest, though still overestimated.

This may just be the beginning. The legislature and the Governor have approved legislation to commit 25 percent of the cap and trade revenues to “disadvantaged communities.” It is surprising that they have designated this and high speed rail as higher priorities than the purposes of AB32.

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This is adapted from a commentary by the author in The Orange County Register (“Global Warming Bill Could Become Big Pork Barrel“)

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