Cap and Trade
Since the passage of Assembly Bill 32 (AB 32), the California Global Warming Solutions Act of 2006, the California Transit Association (Association) has been advocating for a new, dedicated source of state funding for transit using revenues generated from California’s Cap and Trade program. California’s Fiscal Year 2014-15 Budget Act provided the first expenditure program for auction revenues generated from the Cap and Trade program. The Association has worked with other stakeholder groups, the Legislature, and Governor Brown’s Administration to ensure funding from Cap and Trade was made available for transit and intercity rail capital projects, as well as operational improvements that reduce greenhouse gas (GHG) emissions, and was successful in securing a dedicated portion of Cap and Trade revenues for these purposes.
What did AB 32 do?
Assembly Bill 32 (AB 32), the California Global Warming Solutions Act of 2006, declares that global warming poses a serious threat to the economic wellbeing, public health, natural resources, and environment of California and charges the California Air Resources Board (CARB) with “monitoring and regulating sources of emissions of greenhouse gases that cause global warming in order to reduce emissions of greenhouse gases.” AB 32 calls for the state to reduce California’s GHG emissions to1990 levels by 2020. In order to achieve this goal, California must remove approximately 80 million metric tons of GHG emissions. The Cap and Trade program accounts for about 18 million metric tons of the 80 needed to get down to 1990 levels. The remaining reductions will be achieved through a combination of other regulatory actions, including increasing the state’s renewable energy portfolio and implementation of the state’s low-carbon fuel standard.
Subsequent legislation was passed (AB 1532 (Perez) and SB 535 (de Leon)) requiring the California Department of Finance and CARB to develop an initial three-year investment plan (to be updated every three-years thereafter) and compelling the state to spend 25 percent of Cap and Trade revenues to benefit disadvantaged communities.
How Cap and Trade works
Under the state's Cap and Trade program, an overall limit (or cap) on GHG emissions is set each year. In 2012, the first year in which emitters were authorized to purchase allowances, the Cap was determined from previous surveys of greenhouse gas emissions from covered sectors. The Cap was initially set in 2013 at two percent below the emissions-level forecast for 2012 (approximately 162 million tons) and will decrease between two and three percent each year thereafter (it should be noted that it increased significantly at the start of 2015 when fuels were covered). An emitter of GHG emissions subject to the Cap must surrender one compliance instrument, either an allowance or an offset, for each metric ton of carbon it will emit during the year. They can either purchase allowances from State-run auctions or other entities in the program, or they can purchase offset credits generated by offset projects that reduce GHG emissions from sectors outside of the cap. Regulated entities can use offset credits to meet up to 8% of their carbon emissions.
As mentioned above, the number of allowances available is equal to the Cap and over time, the Cap decreases along with the number of available allowances, thus reducing GHG emissions. Between 2012 and 2015, the emitters subject to the Cap included electrical utilities and large industrial facilities, including oil refineries, food and drug plants, dairies, cement manufacturers, mining operations, iron & steel processing plants, and breweries. Additionally, emissions from the combustion of fuels, including transportation fuels, came under the cap and fuel suppliers must begin purchasing allowances in 2015, although they have had the option beginning in 2012 to purchase future vintage allowances that are valid for 2015, 2016, and 2017 in advance. The addition of fuels increases the number of available allowances (and the Cap) by approximately 230 million. In total, covered emitters are responsible for approximately 85 percent of GHG emissions statewide.
The state auctions allowances on behalf of electrical and natural gas utilities and the proceeds from the sale of those allowances are returned to the utilities, who are required to spend them on programs that benefit ratepayers. The remaining State-owned allowances, minus those directly allocated to industry for transition assistance or to prevent emissions leakage are sold at auction and the State receives the proceeds.
For detailed program information, see "Cap and Trade Program Information."
The Association has been actively engaged in the development of the Cap and Trade program. This includes our initial efforts as part of the Transportation Coalition for Livable Communities, the development of the “Steinberg Plan,” and the eventual enactment of the FY 2014-15 Budget Act. Throughout the program’s development, the Association has remained committed to the principal that transit investments, combined with smart land-use decisions, significantly reduce GHG emissions. Emissions from the transportation sector are responsible for almost 40 percent of the state’s overall GHG emissions. Reducing the number of vehicle miles traveled is critical to decreasing the amount of GHG emissions stemming from transportation.
Where we begin
The California Transit Association participates in a coalition of transportation and local government stakeholders advocating for the allocation of a significant portion of Cap and Trade funds to be earmarked for transportation and transit. Members of the coalition – called the Transportation Coalition for Livable Communities – include the Association, California Alliance for Jobs, Transportation California, League of California Cities, California State Association of Counties, Self-Help Counties Coalition and the California Association of Councils of Government.
In 2013, the Association co-sponsored legislation, as part of the Transportation Coalition for Livable Communities, to set up the allocation processes for state funds dedicated to local, regional and state transit investments to reduce GHG emissions. That bill, AB 574 (Lowenthal), was held in the Assembly Appropriations Committee, as the Governor ultimately called for a loan of Cap and Trade funds to the General Fund for 2013-14 in the amount of $500 million.
In early 2014, the Association’s Executive Committee adopted a set of overarching advocacy principles relative to the allocation of state Cap and Trade funds to transit and sustainable communities. The Association sought to obtain the long-term dedication of no less than one-third of all Cap and Trade revenues to three core transit programs:
- The sustainable communities implementation program proposed by the Transportation Coalition for Livable Communities;
- A dedicated rail connectivity, integration and capital improvement program;
- Establishment of a dedicated, predictable source of funding for transit operations and/or capital improvements developed through the framework of the State Transit Assistance (STA) program.
The Executive Committee’s action provided the direction the Association needed as it worked through the FY 2014-15 budget process, which is the first year in which the Governor proposed to spend Cap and Trade revenues.
Governor Brown sets the stage
As part of his annual January budget proposal, Governor Brown laid out his vision for expending Cap and Trade funding in FY 2014-15. The Governor proposed a robust new, multi-faceted expenditure plan to be spent in three program areas, the most substantial of which was clean transportation and transit which would have received $600 million in one-time funding for implementing regional Sustainable Community Strategies ($100 million), low-carbon transportation ($200 million), and rail modernization ($300 million). The latter would have provided $250 million to begin construction of high-speed rail and an $50 million for the rail projects through a competitive grant program for existing rail operators for capital improvements to integrate rail systems, including those located in disadvantaged communities, and provide connectivity to the high-speed rail system.
Senator Steinberg makes waves
In May 2014, then President Pro Tem Darrell Steinberg released a Cap and Trade expenditure plan which would dedicate 100 percent of Cap and Trade funding to various programs on an on-going basis. Part and parcel to his plan was a continuous appropriation of 25 percent to transit agencies through the State Transit Assistance formula. As negotiations between the Pro Tem, the Assembly Speaker, and the Governor moved forward, the percentage of funding dedicated to transit via the STA was significantly reduced. This was in large-part due to the Legislature’s desire to spread the funding around to several different programs. By the time the budget was enacted, the transit formula program, now called the Low-Carbon Transit Operations Program (LCTOP), had been reduced to 5 percent of all Cap and Trade funds continuously appropriated.
The Budget Act lays the foundation
The FY 2014-15 Budget Act contains two key elements related to Cap and Trade: a one-time budget year appropriation of $872 million in Cap and Trade revenues and a long-term funding plan dedicating 60 percent of future revenues to specific transportation-related programs. For a detailed description of the transit-related programs, please see the Association’s Overview of 2014 Cap and Trade Legislation and Opportunities for Public Transit.
In 2014-15, $630 million is appropriated for transportation-related programs, including:
- $25 million for low-carbon transit operations
- $25 million for transit and intercity rail capital projects
- $130 million for affordable housing and sustainable communities projects
- $200 million for low-carbon transportation
- $250 million for high-speed rail
In addition to the one-time appropriation of Cap and Trade revenues, a long-term funding plan was put in place through SB 862 (Committee on Budget), a budget trailer bill. Beginning in 2015-16, 60 percent of Cap and Trade revenues will be dedicated as follows:
- 5 percent for the LCTOP
- 10 percent for the Transit and Intercity Rail Capital Program (TIRCP)
- 20 percent for the Affordable Housing and Sustainable Communities Program (AHSCP)
- 25 percent for high-speed rail
The remaining 40 percent will be available for appropriation by the Legislature and the Administration in each fiscal year. In FY 2014-15, approximately $25 million of this discretionary funding is dedicated to zero- and near-zero emission truck and bus programs, referred to in the budget as Low-Carbon Transportation.
As part of the long-term expenditure plan, state law tasks several state agencies – the Strategic Growth Council (SGC), the California State Transportation Agency (CalSTA), the California Department of Transportation (Caltrans), CARB, and the California Environmental Protection Agency – with developing guidelines for each of the aforementioned programs, as well as specific elements governing all programs, such as defining disadvantaged communities and methods for measuring GHG reductions.
More funding projected moving forward
The Governor’s 2015-16 Proposed Budget includes $1.002 billion in anticipated Cap and Trade revenue, from four allowance auctions during the fiscal year. The growth in anticipated revenues from 2014-15 is due in large part to the addition of transportation fuels to the Cap and Trade program. As noted above, 60 percent is committed through statute to four specific programs as a result of last year’s budget. In 2015-16, the Governor has proposed to use the non-committed, “discretionary” auction proceeds for low carbon transportation, energy efficiency & clean energy, and natural resources & waste diversion.
Of the funding proposed to be appropriated for transportation and sustainable communities, $50 million is for the LCTOP, $100 million is for the TIRCP, $200 million is for the AHSCP, and $250 million for high-speed rail. These figures are based on the exact same formulae as built into the long-term legislation enacted as part of the FY 14-15 Budget.
For detailed program information, see "Cap and Trade Program Information."
Cap and Trade Program Implementation
As previously mentioned, three dedicated programs support the Cap and Trade opportunities for transit: the LCTOP, the TIRCP, and the AHSCP. Since the enactment of the Budget Act, the Association has been working to influence the rollout of each of these programs. To focus our efforts, In July 2014, the Association’s Executive Committee established the Subcommittee on Cap and Trade (Subcommittee), created to participate in, and respond to, the development of guidelines by state agencies as required by SB 862. The Association’s Subcommittee consists of representatives from 14 transit agencies throughout the state, including: San Francisco Municipal Transportation Agency; Southern California Regional Rail Authority (Metrolink); Solano Transportation Authority; San Mateo County Transit District; Santa Cruz Metropolitan Transit District; Monterey-Salinas Transit; Santa Clara Valley Transportation Authority; Bay Area Rapid Transit; Orange County Transportation Authority; Sacramento Regional Transit District; Capitol Corridor Joint Powers Board (Capitol Corridor); Los Angeles County Metropolitan Transportation Authority; Antelope Valley Transit Authority; and San Diego Metropolitan Transit System.
As part of its efforts to influence the outcome of the Cap and Trade programs, the Association’s Subcommittee on Cap and Trade engaged ICF International to develop three Memos related to Cap and Trade, specifically the way in which transit agencies identify good GHG-reducing projects and proposed methodologies for quantifying the emissions reductions.
- Task 1 Memo – Identification of Public Transit Projects Eligible for State Cap and Trade Funds
- Task 2 Memo – Document Justification for and Revisions Needed to APTA’s 2009 Methodology
- Task 3 Memo – Develop and Document Possible Centralized GHG Evaluation Methodology
Each of the above Memos is designed to assist the Association as it continues to engage with CARB on how best to quantify GHG reductions from transit projects. CARB is still developing its methodologies for both the LCTOP and the TIRCP. While the AHSCP has selected a tool for measuring reductions, we feel there are refinements that could be made.
On January 14, the Association hosted a webinar with ICF for members of the Association to provide a status update on each of the programs and to give ICF an opportunity to present the three Memos.
Where do we go from here?
On February 6, the last of the guidelines for the three programs was finalized for the coming year. Throughout the guideline develop process, the administering agencies (CARB, CalSTA, Caltrans, SGC) have stated that these initial guidelines will be subject to much revision as the programs move forward. Essentially, FY 2014-15 will be a year of learning. This is why it is important that the Association stay engaged. Our members need to document their experiences with each of the programs as they apply for funding. This will provide Association staff with the information they need to advocate for changes to the guidelines when the revision process begins.
Additionally, the Association must continue to make the case for more funding from Cap and Trade for transit. As we all would agree, 5 percent on a formula program is insufficient as transit agencies work to implement Sustainable Communities Strategies. The Association and its members need to work grow the LCTOP as the Cap and Trade program grows. Finally, the Association may need to run cleanup legislation to address the exclusion of bus operators as applicants in the TIRCP under SB 862, as well as issues related to the expenditure of funds (e.g. Letters of No Prejudice).
For detailed program information, see "Cap and Trade Program Information."
Cap and Trade Program Information
Cap and Trade Program Status
Low-Carbon Transit Operations Program
Transit and Intercity Rail Capital Program
Affordable Housing and Sustainable Communities Program
Air Resources Board Materials
Cap-and-Trade Auction Proceeds Funding Guidelines
for Agencies that Administer California Climate Investments (Draft)
FY 2014-15 Appropriations Summary Table
Detailed Program Descriptions and Funding
First Three-Year Investment Plan
Disadvantaged Communities Comment Letter
Disadvantaged Communities Interactive Map
Other Information on Disadvantaged Communities
Identification of Public Transit Projects Eligible for State Cap and Trade Funds (Memo 1)
Document Justification for and Revisions Needed to APTA’s 2009 Methodology (Memo 2)
Develop and Document Possible Centralized GHG Evaluation Methodology (Memo 3)