California HSR Should Not Have Been Funded This Way

Last month, California made a budget deal for the formula that would be used to distribute its cap-and-trade revenues. The state’s cap-and-trade bill does not deed the money to the general budget but to a separate account, to be distributed based on a variety of goals including subsidies to programs that reduce greenhouse gas emissions. The recent deal is to give most of the money to transportation (including transit-oriented development): this year the budget gives $600 out of $850 million to transportation (see PDF-p. 6 here), of which $250 million will go to high-speed rail, and according to an informational hearing the long-term deal gives 80% of revenues to transportation, including 15% to high-speed rail. Transit bloggers who are not in the process of moving across oceans covered the issue last month as the deal was made: Streetsblog wrote about the plan, Robert Cruickshank wrote multiple times in support of the decision, and Bruce McFarling explained how HSR’s projected emissions reductions should entitle it to a share of the cap-and-trade proceeds.

In reality, although it’s a good thing that California HSR is getting funded, it’s a bad way of funding it, betraying both environmental incompetence and political mistrust. The basic problem is that the HSR project is not going to reduce emissions enough to justify 15% of the pot, nor is transportation such a big share of California’s emissions inventory to deserve 80%: it accounts for only 37% of statewide emissions. Electricity, and related sources of emissions such as building heating and industrial emissions, get far less than their share of emissions.

Bruce’s post runs the numbers on HSR, notes that the projections are currently $250-400 in construction costs per ton of CO2 reduction, and proposes that if cap-and-trade results in a carbon cost of $75 per ton then this justifies using the revenues for 20-35% of the cost of HSR. The projected revenue from cap-and-trade is a range whose top end is $5 billion statewide, corresponding to about $11 per metric ton; at this level, assuming HSR saves $250/t-CO2 means it should get 4.4% of its funding from emissions reduction, or (at the current cost of $53 billion in constant dollars) about $2.3 billion over the lifetime of the program. If the revenue is indeed $5 billion a year, this spending level is projected to be reached in 3 years.

For some evidence of what the state is really doing, consider how the deal comments on each share of the funding. The informational hearing details the investment strategy as follows:

25% for a permanent source of funding for transit operations, distributed based on greenhouse gas criteria.
20% for affordable housing and miscellaneous urban planning goals (including TOD), of which at least half must be for affordable housing (including TOD, again); the money is to be distributed based on “competitive GHG performance.”
15% low-carbon transportation, based on both long-term clean air and GHG goals.
13% energy, including electricity and building efficiency.
7% natural resources, waste diversion, and water projects.
15% HSR.
5% “new or existing” intercity rail, based on GHG criteria.

Note that internally to four categories, comprising 65% of the total funds, the hearing mentions greenhouse gas criteria. In three out of the four, comprising half of the funds, the hearing implies that the decision of how to distribute the funds will be based on competitive grants according to which project reduces emissions the most.

The key point here is that the state has effectively said what the best way is to ensure the spending side of cap-and-trade will reduce emissions optimally: projects will compete for scarce funding based on greenhouse gas criteria. Once it has made the political decision to distribute funds by a formula that disproportionately goes to transportation, it has no objection to using greenhouse gas criteria internally to each category. The problem is that the transportation projects in general and HSR in particular would never make it out of a grant process based on such criteria if they were not shielded from competition with non-transportation priorities.

There are two legitimate ways to distribute funds coming out of an externality tax, which is what cap-and-trade really is. One is to let the tax side do the work of reducing impact, and put the money into the general budget. This is common practice for most developed countries’ fuel taxes (though not the US’s). In this approach, HSR would compete with all of the state’s other budget priorities. If the state wanted to reduce other taxes against the cap-and-trade funds rather than raise spending, it could. If it wanted to spend the money on unrelated things, such as education, it could as well. There already is a more or less open and democratic budget process for this.

The other way is to reduce all political discretion, and distribute the funds based entirely on greenhouse gas criteria, without breaking the money into categories. The state seems to prefer this way, judging by its use of this process within each category. With other externality taxes there is another option, of giving the money directly to victims of the externality, e.g. spending cigarette taxes on lung cancer treatment; however, the bulk of damage caused by climate change is to developing countries, and spending cap-and-trade revenues on targeted aid to vulnerable developing countries is politically unacceptable.

The state’s hybrid approach is effectively a slush fund. High-level politicians, including Governor Jerry Brown, want to build a visible legacy, and HSR is far more visible than making household appliances consume less electricity. Emissions reductions are secondary to this concern. They’ll be happy to make their legacy a project that reduces greenhouse gas emissions, but they have no quantitative preference for projects that reduce emissions more than others. On the contrary, when they pull strings, they might even make decisions that make these projects less environmentally beneficial: the decision to connect Los Angeles to Bakersfield via Palmdale rather than directly has no technical merit, and judging by LA County’s support appears to be motivated by concerns for development in the Palmdale area. As the incremental cost of going through Palmdale is about $5 billion, nearly 10% of the HSR cost, the result is that the state is going to spend a substantial amount of cap-and-trade money on spurring more development in the High Desert exurbs.

Needless to say, when the cap-and-trade bill was passed, it did not state or even imply that the state could use the money to spur more development in the exurbs. The bill did not adopt a GHG-only approach, but listed several additional goals, none of which included transportation. Chapter 1, Part 2, paragraph h states,

It is the intent of the Legislature that the State Air Resources Board design emissions reduction measures to meet the state wide emissions limits for greenhouse gases established pursuant to this division in a manner that minimizes costs and maximizes benefits for California’s economy, improves and modernizes California’s energy infrastructure and maintains electric system reliability, maximizes additional environmental and economic co-benefits for California, and complements the state’s efforts to improve air quality.

There is an explicit mention of air quality, and explicit mentions of energy and electricity, which are only getting 13% of the funding despite accounting for 54% of emissions. Elsewhere the list of legislative intents includes vague terms such as technological leadership, but the only explicit mention of transportation in the bill is in paragraph c, which says that historically California provided leadership on several environmental issues, including emissions limits on cars as well as energy efficiency and renewable energy.

However, the cap-and-trade bill is older than the current administration, and the political priorities have changed. Since a regular budget process giving HSR the money it needs would run into opposition from competing priorities, it’s best to raid a new source of revenue, one without legislative inertia or established supporters directing the money to more useful purposes.

Hence, a slush fund.

37 comments

  1. letsgola

    To be honest, I’m not sure how I feel about this funding mechanism. On the one hand, HSR is clearly not the best way to reduce GHG emissions. The fastest way to do that would be to replace out-of-state coal generation with renewables. On the other hand, sausage-making. It’s mildly impressive that HSR in the US is going anywhere given the intransigence of the House GOP and the incompetence of the Obama Administration.

    Also, you do have to love that Central Valley cities sued to keep the project away but Palmdale threatened to sue to get it.

    Anyway, who wants to go in on buying some property in Palmdale?😉

  2. anonymouse

    And the fun thing about building things in the High Desert is that it is a desert, and it is also high up. So not only do you need to supply the new developments with lots of water from somewhere far away, but you also need to use quite a lot of power to bring that water up to the high elevation. And given that electricity is a significant contributor to California’s carbon emissions and something like 20% of all of California’s electricity use is for pumping water, that’s not a trivial concern either.

    • Richard Mlynarik

      The amount of energy used in California to pump water against gravity is absolutely jaw-dropping and appalling.

      http://www.cpuc.ca.gov/PUC/energy/Energy+Efficiency/EM+and+V/Embedded+Energy+in+Water+Studies1_and_2.htm

      It’s suspected that the numbers in these and other studies are a significant under-estimate, as agricultural water pumping energy consumption is (deliberately?) obfuscated.

      A cubic metre of water has a mass of one tonne. Only bicyclists seem to have even the remotest idea of how expensive it is to haul a sack of fluid up a hill.

      And yes, CHSR (the concrete lobby welfare program) needs to be terminated with extreme prejudice, for the most pure and pressing environmental reasons if nothing else (good government, transparency, accountability, corruption, etc.)

      • Andre Lot

        It is disingenuous to present the amount of energy taken to pump water up, while not compensating for electricity generated on the tunnels that bring water down to LA basin and Bay Area.

        • BenW

          What on earth is disingenuous about it? Water flowing downhill is a generally recognized phenomenon, and in the absence of water consumers on the coast, the water would still flow in that direction and be useable for hydroelectric power. Are you asserting that there is an equity argument that all the energy generated by water that flows downhill should be used to pump water uphill somewhere else in the state? Because I do not think that’s an argument that will persuade very many people.

  3. Adirondacker12800

    California is dysfunctional. The old rich white guys managed to skew the system to their advantage before they stopped being the majority. To get things done in California there has to be a lot of horse trading. Tis a pity that you find all the horse trading unpleasant but that’s the way the Californians have decided to do it.

    • Alon Levy

      But it’s not the way Californians decided to do it! They didn’t go to ballot or anything like that; they passed a cap-and-trade bill 8 years ago, whose list of goals at no point talks about public transportation, and now they decided to reinterpret the bill to divert money to HSR.

      If you really want to stick it to the hippie-punchers, just get the emissions down as fast as you can. It doesn’t matter how; it’ll piss them off the same. A blogger I know who lived in Casa Grande for a while complained that his HOA rules forbade hanging clothes out to dry, so even though Arizona’s weather is the same as that on the inside of a dryer most of the time, everyone owned dryers at home anyway.

      • Adirondacker12800

        You want to hang your clothes to dry don’t buy a house with a deed restriction that bans hanging clothes out to dry. Hanging clothes out to dry when it’s below freezing is not very effective. One can hang them in the basement or if the weather is warm enough but may be rainy, in the garage. I suspect they wouldn’t have any objection to him hanging his clothes out to dry in the garage. He just likes to whine.

        If they don’t like what their legislators are up to the solution is to elect different legislators. Since they aren’t out collecting recall signatures they must me moderately pleased with what has been done.

        • Miles Bader

          Is below freezing weather really a significant issue In Arizona…? I often hang my clothes to dry in my living room, which works ok, but the relatively windy balcony is much more effective. It seems pretty unlikely that they actually have a good reason to disallow the practice of hanging outside, so it’s understandable that the guy is annoyed.

          [One of the best systems I’ve encountered is in Scotland, where many flats have a clothes-drying rack that can be raised via a pulley system so that the clothes hang near the (typically very high) ceiling in the living room or such. Surprisingly, that extra height makes a huge difference, and clothes dry very quickly from room heat alone, regardless of the season.]

          • Adirondacker12800

            Having the clothes freeze to the line and not dry out until spring is an issue other places. They manage to get dry clothes before spring. You don’t have to hang the clothes in the yard.

          • snogglethorpe

            Maybe it is an issue in some places, but I’ve actually hung out clothes in the winter when its below freezing and there’s deep snow on the ground—and they dry out fine … [And anyway, weren’t we talking about Arizona…?]

            I’m guessing that it’s not just the practical issue of where to hang his clothes—though hanging clothes outside generally does yield superior results, so it’s fair thing to complain about—but also his annoyance at being forced to being forced to follow silly and intrusive rules which have no real basis other than 1950s wonder-bread mores…

          • Adirondacker12800

            And the neighbor who doesn’t want to paint his house an approved color has an issue. And the neighbor who wants to put a swing set in the backyard has an issue. And the one who wants a garden shed. Or collects cars and wants an RV. The deed restrictions were revealed before the closing. If he wants to hang clothes he should have bought someplace without that restriction. There’s plenty of them. Where you can paint the house any color you want, put up a swing set and a garden shed and string a clothesline between the two and hang your clothes out to dry. He probably has a swamp cooler to save on air conditioning. If he hangs the clothes in the house the swamp cooler is going to run less. He wants to show off to the neighbors how green he is. He should bought someplace where he can do that.

          • Novacek

            But Billions of public money isn’t being spent to buy that guy an RV, or pay him to repaint his house a different color. Billions is being spent to reduce emissions, and then a tangible way to reduce emissions (line-drying instead of using a dryer) is prevented.

      • MR

        Californians did effectively decide to do it this way, when they passed Proposition 13 in 1978. Without a 2/3 majority vote of both houses of the legislature, California can’t increase statewide property or income taxes, add new special taxes, or do anything about the fact that much of the commercial property in the state is still subject to the equivalent of 1980s tax rates. Getting a 2/3 majority vote is still nearly impossible (despite the Democrats having a 2/3 majority for brief moments), it took a major expenditure of political capital last year to get one small upper income tax increase.

        This is why cap-and-trade is not legally a “tax” (even though it is). This is why when they do manage to come up with some new source of revenue, there will be efforts to siphon some of it off to pay for vaguely related things that could not otherwise pass the legislature. As a state resident, I don’t much like it, but neither do I want my state to end up being the Mississippi of the west.

        • Alon Levy

          It’s not really about Prop 13 – they could treat cap-and-trade revenue as part of the general budget. Spending the money on health care is as appropriate as on transportation given the declaration of intent to mitigate air pollution, and from then the money is fungible.

          • MR

            You may be right. I’ve been living here for 25 years, and have a slightly different way of looking at things. Prop 13 (and other anti-tax initiatives and bills) effectively places a cap on general revenue, and makes it nearly impossible to add new statewide taxes to fund specific projects. Adding cap-and-trade to general funds simply raises the cap a bit, large chunks will continue to be allocated to prisons, highways, pet projects, education, etc. Some smaller amount will get doled out to non-road transportation infrastructure projects, but not enough to keep them from being chronically underfunded.

            Hence, repurposed environmental slush funds and misleadingly (or over optimistically) worded ballot initiatives as a means of pushing some of these projects forward with dedicated funding and without new taxes.

        • John Kopp

          MR nailed it! California voters pass lots of initiatives requiring how money is spent, but rarely anything about where it comes from. Anything hinting at a tax is rebuffed. And Prop 13 effectively made government in California dysfunctional. We want and support a lot of things, just don’t want to pay for it. Hence creative financing for CHSR. I am for the CHSR project and this was a political compromise to keep the project alive. As I see it, HSR will be critical in about 10 years because petroleum will be too costly as a transportation fuel. Then CHSR will pay for itself in just the petroleum it will save in a decade.

          • Adirondacker12800

            How expensive does dinosaur juice have to become before it’s cheaper to synthesize something from another source? Or change to a different motive source?

          • John Kopp

            Re: Adirondacker12800
            Newscientist reported a few months back that wind turbines can generate electricity for about $.08 a kilowatt hour. Photovoltaics are about the same. Taking into account energy conversion efficiencies, then petroleum should beat a disadvantage at about $40 per barrel. It’s over $100 and not coming down anytime soon. I looked at oil prices over the past 40 years and came to the conclusion that we hit peak oil at the turn of the century. Oil was about $15 to $20 per barrel just before and costs started climbing about 15% per year after 2000. It continues to do so, but has been moderated somewhat by the economic recession. This would indicate that we should be investing in renewables now instead of petroleum.

          • Adirondacker12800

            Putting a windmill on the top of the plane, train or car isn’t particularly effective even when the wind is blowing hard.

      • johndmuller

        Indeed the proposed spending formulae seem to be rather at odds with the supposed overall goal of the program itself. By rights, we should be looking forward to investing in Low Speed transportation initiatives, such as the Great California Coastal Sail-Ferry Fleet or the Bakersfield to Sacramento Blimpway, if we really want to lower GHGs.

        On the other hand, as government abuses of power go, I find that for me, this is one of the least objectionable around, much less so than the kind of thing Gov. Cuomo has been doing with the MTA’s supposed dedicated sources of funding and things like the Tappan Zee Bridge.

        It was not clearly stated in the sources I accessed exactly how the funds would be managed or how easy if might become for a would be Cuomo type to “adjust” the spending formulae for temporary political convenience. As presented, it seemed to be wrapped into the state budget resolution, which may or may not have any degree of real enforceability, I wouldn’t know. We’ll see in future years if the politicians plan to revisit the allocation with each budget year or dip into it for special pork. Perhaps one should view these proportions as the initial guidelines that may be “refined” by future governments. In any case, there will most likely be some sort of bureaucratic entity charged with dispensing the funds and won’t that be a gigantic political plum pudding full of high quality patronage positions – and who doesn’t want a job giving away Other Peoples’ Money? It doesn’t really look like an ideal recipe for success administratively.

        I don’t know much about the whole cap and trade thing more than the obvious mechanism and the general theory. As far as the specifics went, I found this link to be a simple enough explanation of the program, compared to some which were just too legalese for me to follow. Overall, though, it remains to be seen whether or not the program will actually work, or whether some hitherto unexpected surprises or side effects will intervene to minimize or negate the results or to make it implode or become politically unfeasible. I can’t help thinking about all the various utility deregulation initiatives and how they have (so far) nearly always failed to lower consumer costs, even though that was the usual long range justification for the actions.

  4. Shane Phillips (@shanedphillips)

    I’ll agree that it’s not optimal that things had to be done this way, but if it’s a matter of getting HSR going or not, I’m 100% for this decision, and I think that’s ultimately what we were looking at.

    More specifically, I think you also have to take into account the fact that money spent on HSR will be recouped to a great degree — possibly even for a profit (including capital costs) over a very long time horizon of 60-80 years. Money spent on things like local transit, electric vehicle or PV tax rebates, and affordable housing are persistent money losers. Once the money is spent, it’s gone, and you get what you’ve got. With HSR you get what you’ve got, plus a persistent revenue stream that can be turned around to pay for additional GHG-reducing projects. Whether that’s where the money will go or not is of course up for debate, but at least with HSR it’s a possibility.

    • Alon Levy

      Why is money spent on energy gone forever? There’s a payback time for energy efficiency retrofits, too, in lower energy bills even without externality taxes; brief Googling shows that the less intensive retrofits have a payback time of a few years, while net zero has a payback time of a few decades. Rooftop solar panels are in between – about 15-30 years, as I recall.

      But more to the point, all of this could be argued in a competitive grant process. The HSRA would apply for money, noting that because HSR is profitable it could partly pay for itself, so the net cost of construction per unit of GHG reduction is lower. Companies doing energy efficiency retrofits or building solar facilities would argue the same. The grant committee would evaluate competing proposals on marginal-dollar-per-marginal-unit-of-GHG criteria, reserving judgment for matters like project risk and short- vs. long-term GHG reduction.

      • Adirondacker12800

        Insulation, with the ordinary care you give the rest of the house, is forever. Solar panels whether PV or thermal, wear out.

      • Shane Phillips

        Sorry, I meant from the perspective of the government, since it’s generally not the one paying the cost of operating buildings other than the relatively small number of government buildings. For gov buildings that aren’t already retrofitted that’d be a great use of funds. I’d love to see some of the money spent on renewable energy retrofits and power generation, but the financial benefits accrue to very different parties, and if you’re looking for a sustainable source of revenue to the government those kinds of investments won’t provide it.

        I’m not even going to say that you’re wrong about there being lots of benefits to a competitive grant process, but the problem with grants is that they’re rarely consistent. The biggest benefit to the dedicated HSR funds, in my view, is that it’s a consistent revenue stream that can be leveraged to finance construction sooner rather than later. If you had to compete for grant funds every year, or even every 5 or 10 years, you probably couldn’t do that, and in that case I’m not sure how much closer we’d be to building HSR.

  5. abeboparebop

    Here’s a hypothesis: the tax side of the bill (well, effectively a tax) is “doing work” primarily against carbon generated by electricity generation and industry. Maybe that means that it’s fair for the spending side to preferentially focus on other carbon sources, like transportation and housing.

    This is somewhat complicated by the fact that some of the caps apparently hit fuel production. I’m not at all sure what proportion of the tax is hitting transportation as opposed to power plants + industry (nor do I know how to figure this out), but it’s probably less than 37%.

    • Alon Levy

      From what I’ve read, cap-and-trade is to be progressively extended to cover nearly all in-state GHG emissions. There are some excluded emissions it can’t target, like interstate and international transportation, but those are not part of the spending agenda, either.

      Also, the 80% of the budget that is spent on transportation doesn’t deal with housing much. The GHG-based affordable housing grants do have an impact, but even they are a combination of transportation and residential emissions, hence the explicit focus on TOD. Building efficiency and renewable energy for residential consumption aren’t mentioned in that category, but only in the 13% energy category.

      • Adirondacker12800

        Places where it’s warm in the winter and cool in the summer, residential improvements are somewhat muted. I know people who don’t have central heat and don’t even own a fan. It’s warm in the winter and cool in the summer. Their heating bills are nearly zero and they don’t do anything to cool. Most Californians aren’t that ,…. lucky.. but residential improvements do less where it’s warm in the winter and cool in the summer.

        • Shane Phillips

          Interesting point. I live in LA and all I have is a fan (though I’m considering getting AC) and for the most part it’s enough. The value of insulating retrofits would really only show up if I got AC, or maybe it’d keep my apt cooler in the summer passively. The benefits to installing solar, wind, etc power generating stations is just as high here as most places though, since CA still has a few coal-fired power plants a HUGE number of natural gas plants. (http://en.wikipedia.org/wiki/List_of_power_stations_in_California)

          • Adirondacker12800

            Keeping your apartment at 75 on the days when it goes up to 100 means you are maintaining a 25 degree temperature difference. Keeping my house at 65 when it’s 40 out means I’m maintaining a 25 degree temperature difference. It doesn’t get above 40 for months at a time in the Midwest and Northeast. Keeping your apartment at 75 when it’s 90 out mean you are maintaining a 15 degree difference. Places not on the coast are below 50, a 15 degree difference, for months at time. Housing built after the mid 70s has some insulation in it. That’s a lot of California. It may be “enough”. That the payback period on doing more is longer than the occupant’s life time or the life of the building . Insulating a house in Wisconsin has a much shorter payback period because the heating bills are much bigger and the cooling bills probably are.
            Los Angeles is relatively dry in summer. Go down to the big box store and see if they have swamp coolers. That may be enough on hot days. Lots cheaper to buy and lots cheaper to run. It’s a fan with some pads around it that are wet. The way to tell if it will work reasonably well is to check the dew point temperature in the weather reports. The lower it is the better it will work.,,,they don’t work in places where the humidity is 100 % and not very well when it’s 90%.

            http://en.wikipedia.org/wiki/Evaporative_cooler#Performance

  6. BruceMcF

    Regarding this: “The projected revenue from cap-and-trade is a range whose top end is $5 billion statewide, corresponding to about $11 per metric ton; at this level, assuming HSR saves $250/t-CO2 means it should get 4.4% of its funding from emissions reduction, or (at the current cost of $53 billion in constant dollars) about $2.3 billion over the lifetime of the program.”

    Charging a carbon price that is substantially less than the amount required to do the minimum necessary does not thereby somehow magically reduce the price required to do the minimum necessary. Even that inadequate carbon price is under renewed attack from Big Oil. And aiming for some apolitical process to optimally allocate a flow of resources which is a minor fraction of the total flow of funds required to achieve the required ends is just rearranging the deck chairs on the Titanic.

    The top GHG emitters are passenger vehicles at 25.8%, in-state electricity generation at 11%, oil and gas extraction and refining at 10.2%, and imported electricity generation at 10. Those four taken together represent a majority of emissions. If there is no substantial progress on those four, getting the rest of emissions down by 50% per sector, or 75% per sector, or 100% per sector, simply is not enough. Of those four, the ones that the state is making serious progress on already is electricity generation. Meanwhile, oil and gas extraction and refining will be impervious to progress so long as the transport sector depends upon its products. And transportation is the sector most impervious to being affected by the modest carbon price without substantial investment in alternative modes of transport that do not require carbon emission to provide their transport task. It would be strategically blind to insist on a mechanical allocation of funds, treating the economy as if it were some equilibrating process.

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