California’s cap-and-trade program, which requires companies to purchase permits in order to emit greenhouse gases, was officially extended to 2030 when Gov. Jerry Brown signed Assembly Bill 398 on July 26. The program was first put in place in 2006 by Assembly Bill 32, which also set requirements for overall greenhouse gas emissions reductions statewide. It was originally slated to sunset in 2020.


The cap-and-trade program was created as a means for the state to achieve its greenhouse gas reduction goals, which were made more aggressive last year by an update to Assembly Bill 32 passed via a senate bill.


Assembly Bill 398 was lauded as a good compromise between many business and environmental interests such as the California Chamber of Commerce and the Natural Resources Defense Council. But support for the bill was not unanimous. The National Federation of Independent Businesses, which has 22,000 members in California, was against it, and so was the California Environmental Justice Alliance, among others.


Assemblymember Patrick O’Donnell, who represents Long Beach and was critical of how cap-and-trade dollars were being managed in an interview with the Business Journal last year, found the legislation to be a solid compromise.


“Understand that we lost people on the far left and on the far right, which is an interesting dynamic,” O’Donnell said. “You don’t see that too much in Sacramento, so that tells me we have probably got a good, workable piece of legislation. There was lots of input from the environmental and the business community. I think we have landed in the right spot.”


The bill extended a sales tax cut for manufacturing businesses and provided for some tax breaks for the agriculture industry, provisions that helped get more Republicans and more of the business community on board with the legislation.


“One of the key pieces of this bill also was the fact that we were getting an extension of the sales tax exemption on manufacturing equipment that basically was going to sunset in 2024,” Gino DiCaro, vice president of communications for the California Manufacturers & Technology Association (CMTA), told the Business Journal. “But this bill pushes it to 2030. Without that sales tax exemption, California is one of the few states that would actually tax those purchases,” he explained.


“We were in support of AB 398 because, basically, California had already established a goal of carbon reductions that was going to be very difficult to attain,” DiCaro said. Senate Bill 32, passed last year, requires the reduction of greenhouse gas air emissions to at least 40% below 1990 levels by 2030.


“A market-based cap-and-trade program was simply the least expensive way for the economy, especially a manufacturing-based economy, to reach its goals,” DiCaro said. “We actually had a study done that showed that under a cap-and-trade system, reaching our 2030 goals would be about $2,500 less on an annual household than it would be if California had gone [with] command and control measures without a market-based cap-and-trade.”


NFIB’s California branch, however, opposed the legislation. “Why we are opposed, and the problem that we have with the legislation, is that it extends a program which is going to have a devastating impact on costs to small business owners and costs to consumers in the form of increased fuel prices and gasoline prices . . . which go into all the goods and services we consume,” Shawn Lewis, state communications director for the organization, said.


Lewis said that fiscally conservative, nonpartisan estimates have shown that the cost of gasoline could increase 45 cents to $1 due to the cap-and-trade program. “California emits less than 1% of all greenhouse gas emissions in the world. Yet we are the only state in the country or any state in the world that has a system like cap-and-trade,” Lewis said.


“So, had the program expired, the argument was you’re going to get a much more expensive command and control [system] from the government,” Lewis continued. “That is just a false argument, because the legislature has the power to change the law. And so, if we can’t meet these greenhouse gas emission levels without hurting working families and small business owners, I would argue and NFIB would argue. . . maybe we should take a step back and ask if this is the right policy.”


While other major business organizations supported the legislation, Lewis pointed out that NFIB is different in that all its members are small, independent businesses. “There is no question that business – our members, our 22,000 small business owners – have a self-interest in protecting the environment. Many of our business owners rely on clean air or clean water to run their business,” he noted.


What Lewis takes issue with is the cost of the cap-and-trade program to those businesses and how the funds from the program are being put to use. He pointed out that significant funding goes to the state’s high-speed rail project and for subsidies for state residents to purchase Teslas.


AB 398 included provisions to create more oversight of how the California Air Resources Board (CARB), a state body, allocates funds generated by the cap-and-trade program, which it oversees. The legislation establishes the Compliance Offsets Protocol Task Force, which would provide guidance to CARB in creating new protocols that would increase greenhouse gas emissions offset projects with environmental benefits. It also creates the Independent Emissions Market Advisory Committee, which would hold an annual public meeting and report annually on the “environmental and economic performance” of the cap-and-trade program.


When interviewed by the Business Journal last fall, O’Donnell was also critical of how cap-and-trade funds were being allocated. He noted the bullet train was one such project.

“What I am hearing [is] a lot of the legislators are advocating that the greenhouse gas dollars, the cap-and-trade dollars, be directed toward disadvantaged communities,” O’Donnell said. “I am not necessarily opposed to that. But there has to be a nexus between how the dollars are collected and how they are spent. . . .


“The money needs to go to reduce greenhouse gases. Take the ports. They are not in a disadvantaged community. Arguably they impact disadvantaged communities,” O’Donnell pointed out. “So, when we can’t give money to the ports to clean the equipment because we have got to give it to a disadvantaged community next door simply because it’s labeled ‘disadvantaged,’ that doesn’t necessarily reduce greenhouse gas emissions. So I’m really watching closely where the spending is going to land on this.”


O’Donnell said he has spoken with the governor, who took his notes about directing cap-and-trade funds to the San Pedro Bay ports. “Let’s treat the cause, not the result,” he said. “And understand, there are people in Sacramento who are fine with just spending money in their communities. That’s pork. I am not interested in pork. I am interested in cleaning up the air and supporting the business community at the same time.”


The legislature also passed legislation that would, if approved by voters in 2018, require a two-thirds vote for allocation of cap-and-trade generated dollars beginning in 2024. That is a higher threshold than currently required, as O’Donnell noted. “The idea being, between now and then, if this program goes off the rails and starts spending money in areas where there is no nexus to clean air, that it will again require a two-thirds vote,” he explained. “And that was mainly pushed by the Republicans, but it is something I am supportive of. Again, we need to maybe take a look at this program every several years and see what direction it’s taking.”