A Climate Policy Betrayal in California
As policymakers grapple with the fallout from the war in Iran, California’s climate regulator approved carbon market regulations that undermine the state’s climate goals. Promoted as an affordability measure, the new rules won’t reduce gasoline prices—but they will transfer billions of dollars in public investments to private interests.
In late May, the California Air Resources Board approved new rules that upend the state’s signature climate policy—a carbon market that is supposed to cut climate pollution in line with state law and generate funds for public investment. Unfortunately, the new rules encourage pollution in excess of state limits, cut environmental program investments in half, and replace them with a multi-billion-dollar industry slush fund.
After fifteen years studying California’s climate strategy, I have come to expect political deals that pay off special interests. But although the oil industry has a long history of influencing state policy, I have never seen anything this brazen.
Nor have my colleagues in the research community. UC Berkeley economist Meredith Fowlie, who chairs the carbon market’s advisory committee (on which we both serve), has calculated that oil refineries could receive free pollution permits “well in excess” of actual emissions. So refiners would no longer pay for pollution but could still charge consumers. UC Santa Barbara researchers Kyle Meng and Jordan Wingenroth estimated that the proposed handouts could cut utility rebates and public investments by up to $4 billion.
Companies can even earn free permits for business-as-usual investments, without creating new environmental benefits. Worse still, these new permits would undermine the pollution limits Board staff said were necessary to achieve California’s climate laws.
If this sounds like a tough compromise that might be necessary to counter soaring gasoline prices, think again. New subsidies will not lower fuel prices. Oil companies are already required to tell the state how much they raise gasoline prices to account for state climate policies. Refiners already get most of their pollution permits for free, yet they pass program costs along to consumers anyway (as they do in a related program for transportation fuels).
Giving the oil industry billions more in free permits won’t lower gas prices. Nevertheless, the Board has cut a blank check to the oil industry at the expense of public investments.
Board leadership now says it’s not a problem to decimate public funding, as the program’s primary purpose is to cut emissions. But if emission reductions were the real priority, then the Board wouldn’t have authorized free permits that exceed state pollution limits.
In fact, program revenues have always been salient. Last summer, Governor Newsom even signed legislation rebranding the program as “cap-and-invest” to emphasize its role in raising revenue. Money matters now as local governments face a fiscal cliff for public transit—an imminent crisis where I live in the San Francisco Bay Area—alongside looming budget cuts to clean drinking water and air quality programs.
Following through on promised funding is also critical to state climate politics. Governor Jerry Brown rolled back the Board’s ability to impose new climate regulations on the oil industry as part of a political deal in 2017, leaving the carbon market as one of the few tools available to cut the industry’s climate pollution. Eviscerating program revenue further undermines support for the carbon market and delivers a political win for the oil industry, on top of the extra free handouts.
Some policymakers and stakeholders are organizing to oppose the Board’s move. The California Senate has even introduced budget language that would prevent the Board’s new handouts from taking effect, unless the Board can meet the emission-reduction and funding commitments made in last year’s negotiation to reauthorize the carbon market.
There was never any need to hand over billions to the oil industry in place of public investments. But California’s climate regulator decided that industry interests are more important than climate mitigation or public investments—never mind what state law requires.
Danny Cullenward
Shleifer Senior FellowDanny Cullenward is a Shleifer Senior Fellow at the Kleinman Center. He is an economist and lawyer focused on the scientific integrity of climate policy.
