California cap-and-trade money should be spent carefully, analyst says

California's experiment in combating global warming by creating a cap-and-trade program could generate more than $12 billion a year in revenue, but officials can't rely on that windfall to fix the state's fiscal problems, according to a new report.

The nonpartisan Legislative Analyst's Office said the amount of money generated by auctions of credits allowing polluters to release greenhouse gases would vary wildly, from less than $1 billion to $14 billion in some years. The market-based system is intended to drive down the amount of greenhouse gases discharged in California by making it increasingly expensive to pollute.

Gov. Jerry Brown has his eyes on the first batch of cash, though his plans are still vague. He's suggested spending $1 billion of the money generated by the first auction, scheduled for August, on renewable energy development and infrastructure. He also wants to put about $500 million toward the state's general fund and has spoken about using future revenues to help finance a controversial high-speed rail line linking Los Angeles and the Bay Area.

Business groups contend that the money should be returned to companies who have to pay higher fees to meet California's new emissions requirements. The Air Resources Board, which designed the cap-and-trade program, has proposed returning the money to consumers to compensate them for possibly higher energy prices.

The legislative analyst's report raises red flags for Brown. It warns that the amount of money generated by the program will fluctuate wildly from year to year. "This means that they may be more appropriately used for one-time or short-term, purposes rather than for the support of ongoing programs or tax reductions," it states.

The report also cautioned that the state can only legally spend the money on easing the impact of greenhouse gases -- or muster a two-thirds vote of legislators to spend it elsewhere.
"Appropriate uses of the revenues for mitigation purposes could potentially include expenditures on energy and water-use efficiency programs, alternative fuel programs and investments in renewable energy projects," the report states.