Cap-and-Trade Revenue Update

LAO January Revenue Estimates Were Substantially Higher Than Governor’s Budget. In our January analysis, The 2022-23 Budget: Cap-and-Trade Expenditure Plan, we identified different cap-and-trade auction revenue scenarios, including a “base” revenue scenario where allowance prices remain relatively stable and a low revenue scenario where allowances prices drop to the floor. Under those two revenue scenarios, we estimated that total revenue would exceed the Governor’s budget assumptions by $600 million (low scenario) to $2.8 billion (base scenario) over the 2021-22 and 2022-23 fiscal years. Based on these revenue assumptions, we suggested that the Legislature could spend roughly $1.4 billion to $1.9 billion from the Greenhouse Gas Reduction Fund (GGRF) in discretionary expenditures, depending on which revenue assumptions it adopts and how much of a reserve it would like to leave in the fund. (These funds do not count toward the state appropriations limit.) By comparison, the administration’s January cap-and-trade expenditure plan included nearly $1 billion in discretionary expenditures.

February Auction Revenue Similar to LAO Base Forecast. The February 2022 auction generated $975 million in revenue. This amount is similar to our base forecast and about $400 million higher than the Governor’s budget had assumed. The final quarterly auction in 2021-22 will occur on May 18 and results will be released on May 26. If current prices for allowances on the secondary market remain steady over the coming weeks, we expect revenue from the May auction will continue to track closely to our base forecast—which would result in an additional $400 million above the Governor’s budget assumptions. Future auction revenues that will be collected in 2022-23 are still subject to significant uncertainty.

At Least $1.6 Billion in Discretionary Revenue Will Likely Be Available. Overall, our revenue projections are roughly the same as our January analysis, although recent auction results and relatively stable prices over the last few months have reduced some of the downside risk. We think auction revenues could support a GGRF discretionary expenditure plan ranging from about $1.6 billion to $1.8 billion (or $600 million to $800 million above the Governor’s January spending proposal). The amount that the Legislature ultimately allocates in the 2022-23 budget should depend on its tolerance for downside revenue risk and how much it desires to leave as a reserve in the fund. Given significant GGRF revenue uncertainty, we recommend the Legislature focus its budget deliberations over the next several weeks on a package that is closer to $1.6 billion.