California’s cap-and-trade auction revenues are down considerably, which produced only $25 million in May for the state’s climate programs. That’s well below typical, quarterly auction results, which range between $600 million to $800 million.The trouble for California is two-fold: the state’s innovative climate change investment programs, like the Healthy Soils Program, depend on cap-and-trade revenue, putting those programs at risk of no funding for the upcoming budget year if the auctions continue to underperform. The poor auction results may also point to a larger problem with the cap-and-trade program, which some suggest is an oversupply of allowances (aka permits to emit greenhouse gas emissions).

The oversupply of allowances is a larger structural problem for the program that, if it persists, could result in a significant setback in the state’s efforts to drive down greenhouse gas emissions and meet the state’s climate goals. Early indications suggest that the state may be well off track of meeting 2030 reduction targets.

In the immediate, the poor auction results will impact funding for key climate smart agriculture programs. And in the long-term, these challenges suggest there may be a need for new funding sources for the state’s climate change programs and a reimagining of how the state achieves its climate change goals.

Sustainable Agricultural Lands Conservation Program Funding Likely Reduced

The Sustainable Agricultural Lands Conservation Program (SALCP), which protects at-risk agricultural lands from sprawl development, is the only climate smart agriculture program that receives a continuous appropriation of cap-and-trade auction revenues. SALCP was created in 2014 by an act of the legislature and it is part of the Strategic Growth Council’s climate programs focused on reducing greenhouse gas emissions associated with land use and related vehicle miles traveled.  The program has protected over 100,00 acres of at-risk agricultural lands in a relatively short period of time.

While the final funding decision for SALCP will not be made until late summer, it seems likely that program funding will be down by roughly 25 percent this year compared to last year because of the poor May auction results. The results from the quarterly auctions, starting with the August 2019 auction to May this year, determine the funding levels for SALCP this year. The auctions prior to May performed well. As such, SALCP funding will be down this year but the program will not be as hard hit, potentially, as what may come next year if poor auction results persist.

Healthy Soils, AMMP and SWEEP Funding is Uncertain

The remaining climate smart agriculture programs are funded annually through the budget process, based on projected cap-and-trade revenue. The total funding available for Healthy Soils and the Alternative Manure Management Program (AMMP) will be determined by the final expenditure plan for climate programs, to be decided by the legislature and the Governor by August. Disappointingly, the State Water Efficiency and Enhancement Program (SWEEP) will not have funding in the next year, as we discussed in our recent budget blog.

Because of concerns of potential ongoing underperformance of the cap-and-trade auctions, the Governor has proposed a “pay as you go” method for determining funding for the annually appropriated climate programs. Moreover, the Governor wants to fund a few priority programs first, which do not include Healthy Soils or AMMP.

If that method of funding wins out in the final deliberations of the expenditure plan, and the auctions continue to perform poorly, then not only will Healthy Soils and AMMP go unfunded in the next fiscal year but there may be very few dollars available for the state’s suite of climate programs – from electric cars rebates to climate research and more.

Meanwhile, the calls for deeper reforms of the cap-and-trade program to address the oversupply issue have not yet been heeded by the California Air Resources Board. Others continue to blame the poor auction results on the pandemic and related reduce greenhouse gas emissions.  Time will tell but we don’t have much time to come up with alternative funding sources for the state’s climate programs.

Where do we go from here?

Beginning in January 2021, the legislature and the Governor no longer have to maintain the climate focus of cap-and-trade auction revenues and instead can use those funds for any state funding priority.  Given the likely persistence of the pandemic induced recession, we may see the remaining cap-and-trade dollars go towards non-climate expenditures.  This trend has already started and will likely get worse, should the auctions rebound.

State leaders, including those on Governor’s newly formed Economic Recovery Taskforce, will be considering how to fill the significant budget gaps created by the coronavirus pandemic.

We urge the Task Force to also consider how the state can bring together economic recovery with climate resilience. On that front, some are considering a bond measure that could include economic recovery with a focus on resilience.

Should a bond come to pass, CalCAN will advocate for the inclusion of climate investments that also provide economic stimulus while reaching farmers most in need of resources.  But longer-term solutions are needed to both fund innovative climate programs and meet the state’s ambitious, but necessary, climate goals.