University of Southern California

Easy Come, Easy Go: A Guide to California Cap-and-Trade Spending

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Note by Jonathan Kintzele
From Volume 90, Number 3 (March, 2017)

At the time of this writing, over $1.4 billion of unallocated polluter regulatory fees collect dust in a special government bank account as California agencies labor to figure out how to spend it, or more accurately, how to spend it fast enough. While state agency pockets smolder with anticipation, one inconvenience stands in their way: the cash must be used for programs or developments that reduce greenhouse gas (“GHG”) emissions. Thus, as lawmakers toil through the night to engineer new and creative spending proposals—ink dripping from the gold-embroidered parchment—the words “emission reductions” continue to get lost between nouns, verbs, exclamations points, and dollar signs.

Simply put, putting a price on carbon emissions has never been more lucrative for the State of California. Polluter fees not only fund the State’s climate change agenda, but also serve as the fiscal linchpin of the Governor’s statewide budgetary plan, from affordable housing development subsidies to the State’s herculean $64 billion bullet-train project. California has never been a state fearful of taking controversial positions on private property rights and protecting the public welfare, but with cap-and-trade, the entire world is watching.

California is the twelfth largest GHG producer in the world and the original American cap-and-trade pioneer. On January 1, 2013, the state implemented the most complex market-driven environmental regulatory scheme of its kind ever put into action. California’s cap-and-trade program was designed to be a model which not only other states in the western United States could follow, but one that could eventually be replicated in developed economies across the world in the global movement to reverse centuries of unrestrained GHG pollution. As a bona fide experimental prototype, the importance of getting the system right cannot be overstated. However, as a concept-in-progress that regulates the sixth largest economy in the world—greater than the likes of Italy, Russia, and India—understanding its contours and evolving mandates could not be more important to the businesses and industry practitioners that are subject to its control. As such, this Note will analyze the practical components of the cap-and-trade program, assess the potential legal risks of current spending trends, and ultimately recommend additional, apt, and effective appropriation vehicles for cap-and-trade revenue.

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