Sunday, February 5, 2023

Governor Signs Cap-and-Trade Extension

Governor Edmund G. Brown Jr. this week signed legislation extending the cap-and-trade program and providing the least costly path to achieving the state’s ambitious climate goals.

The California Chamber of Commerce and business community supported AB 398 (E. Garcia; D-Coachella) because it will make cap-and-trade the primary tool to meet the state’s goal of reducing carbon emissions by 40% below 1990 levels by 2030.

Joining the Governor for the July 25 signing ceremony on Treasure Island were former Governor Arnold Schwarzenegger, Senate President pro Tempore Kevin de León (D-Los Angeles), Assemblymember Eduardo Garcia and dozens of local, environmental and business leaders.

AB 398 was signed at the same location on Treasure Island where Governor Schwarzenegger signed AB 32 (the California Global Warming Solutions Act of 2006), which authorized the state’s cap-and-trade program more than a decade ago.

Market Approach

The market-based approach of cap-and-trade provides the largest greenhouse gas (GHG) emission sources with more flexibility and is less expensive to consumers than a command-and-control scheme. Cap-and-trade is designed to reduce emissions to meet the 2030 goal; regulatory mandates cannot guarantee that outcome.

AB 398 includes cost containment measures that will help mitigate some of the impacts on consumers and the economy, including a price ceiling, audited offsets that reduce costs and spur innovation, industry assistance to mitigate loss of jobs and emissions to other states, and reduced direct command-and-control measures by state and local regulators.

Tax Reductions

Approved on bipartisan votes of 28-12 in the Senate and 55-22 in the Assembly on July 17, AB 398 also includes tax cuts that will help mitigate cost increases on rural Californians and partially offset some costs for California manufacturers and energy producers.

Sales Tax Exemption. Manufacturers gained a partial, temporary exemption from state sales taxes, beginning in 2014, through 2022.

The exemption applied to purchases of equipment used in manufacturing and research and development (R&D), but did not apply to businesses in the financial services, resource extraction or farming sectors. The exemption is limited to $200 million per taxpayer per year.

The cap-and-trade bill extends this sales tax exemption for an additional eight years, through 2030, and expands its coverage to include equipment used in renewable energy production, storage and distribution. In addition, if any of these manufacturing/R&D/renewable energy activities occurs in an agricultural setting, the equipment now would qualify for an exemption.

The legislation also directs that proceeds from the cap-and-trade auctions reimburse the General Fund for the $200 million to $250 million value of the sales tax exemption, beginning now.

State Fire Fee Repeal. Since 2011, the state has charged a fee on parcels with habitable structures on lands within the “State Responsibility Area,” which are lands protected by the California Department of Forestry and Fire Protection (CDFFP)—that is, not served by municipal fire departments or federal agencies. The fee was $150 per parcel, adjusted annually for inflation, and is used to help pay for fire prevention and protection services by CDFFP.

The cap-and-trade measure suspends assessment of the fee immediately and repeals it in 2031.

AB 398 also declares the intent of the Legislature that cap-and-trade auction revenues replace the approximately $85 million foregone revenues from suspending the fire fee.

Legislative Oversight

An important element of the cap-and-trade package to ensure accountability over the spending of revenues from the cap-and-trade auction is CalChamber-supported ACA 1 (Mayes; R-Yucca Valley). The constitutional amendment also passed July 17 on bipartisan votes of 27-13 in the Senate and 59-11 in the Assembly. It was signed by the Governor the same day (Chapter 105).

ACA 1 establishes a legislative “check-up” of the cap-and-trade program in 2024, providing an opportunity to review 1) expenditures from the fund since 2020; 2) the commitment to regulatory and tax reforms enacted in AB 398; and 3) the effectiveness of the overall state program in reducing GHGs and minimizing the effect on the California economy.

The Legislature will enforce this check-up by requiring that any appropriations in 2024 be approved by a two-thirds supermajority of the Legislature.

As a constitutional amendment, ACA 1 will be voted on by the people in June 2018.

Staff Contact: Amy Mmagu

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