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Last Updated: 5/20/2011
Budget Issue: Recommendations from our review of AB 32 zero-based budget submitted by Administration on May 4
Program: AB 32 Implementation
Finding or Recommendation: Reduce cap-and-trade-related expenditures budgeted for 2011-12 by $8 million (Air Pollution Control Fund) and direct remaining $961,000 budgeted for cap-and-trade to be used only to complete an alternatives analysis required by the courts. Direct Air Resources Board to cease all work on the cap-and-trade program until it has completed the required alternatives analysis and presented the results to the Legislature.
Further Detail

 AB 32-Related Work Cuts Across State Government.The Global Warming Solutions Act of 2006 (Chapter 488, Statutes of 2006 [AB 32, Nunez)]) established the goal of reducing greenhouse gas emissions (GHGs) statewide to 1990 levels by 2020. While the act charged the Air Resources Board with monitoring and regulating the state's sources of GHGs, AB 32-related work is currently being conducted by 180 positions in nine departments throughout state government at a cost of $37 million. 

Legislature Required Administration to Submit Justification of All AB 32- Related Work in a Zero-Based Budget (ZBB).  In a 2010 report to the Legislature, we highlighted the fact that the implementation of AB 32 will soon be at a crossroads. The program focus has now begun to shift from regulatory development to implementation and enforcement. As such, the Legislature included language in the 2010-11 Resources trailer bill (SB 855) requiring a zero-based budget be submitted by April 1, 2011 for all AB 32 expenditures across state government in order to reevaluate the base funding requirements of AB 32 program implementation. Additionally, this was intended to help ensure that the AB 32 Implementation Fee (which is assessed on larger carbon-intensive industries in order to support AB 32 implementation) is set at an appropriate level. The trailer bill language in effect assumes that all AB 32 work in the budget year is to be unfunded unless justified in the ZBB report.

Administration's ZBB Lacks Adequate Workload Justification. On May 4, 2011, more than one month after it was due, the Administration submitted the AB 32 ZBB to the Legislature. Upon review, we found that the report generally lacked adequate workload analysis to justify the level of staffing and contract resources requested for the various AB 32-related activities across state government. In other words, while the report specifies at a high level the nature of the work to be conducted using the requested resources, it fails to provide an analysis to support the amount of resources requested based on workload requirements. Accordingly, the report is not responsive to the Legislature's requirement that the report include "an itemized justification for the amount requested to perform [each] activity." This makes it difficult, if not impossible, for the Legislature to make appropriate adjustments to the AB 32 budget using the ZBB as the basis for its evaluation. 

Despite Lawsuit, Administration Moving Forward With Development of Cap-and-Trade Program. In December of 2010, a lawsuit was filed against ARB alleging that the board failed to follow statutory requirements of AB 32 and the California Environmental Quality Act (CEQA) in its development of measures to implement AB 32, including its proposed cap-and-trade regulation. In its statement of decision, the lower court found that because ARB failed to adequately describe and analyze alternatives [to cap-and-trade] sufficient for informed decision-making and public review, it failed to proceed in the manner prescribed by law. In its final ruling, the court enjoined ARB from engaging in any cap-and-trade related project activity until ARB has come into complete compliance with CEQA. The ARB has stated that it is currently conducting further analysis which the courts have required. The ARB has expressed that it will file an appeal, and during the appeals process, it intends to proceed with the development of its cap-and-trade program. It appears to us, however, to be premature to continue development of the program before the analysis is complete, as the analysis, if done comprehensively and meaningfully, should usefully inform what role, if any, a cap-and-trade program should play in meeting AB 32's goals. Regardless of the court order, we think that it is important for ARB to conduct such analysis to ensure that the mix of measures to address AB 32's goals maximizing cost-effectiveness as required by AB 32.   

ZBB Shows Substantial Expenditures for Cap-and-Trade Development and Implementation in Budget Year.  In the current year, ARB has a total of 32 positions which support the development and implementation of the cap-and-trade program at a cost close to $5 million. The ZBB shows an additional $4 million in contract costs related to cap-and-trade implementation in 2011-12, bringing the total cost of cap-and-trade development and implementation to about $9 million in the budget year.

LAO Recommendation.The cap-and-trade program is a significant part of the AB 32 Scoping Plan. There are numerous policy considerations associated with its implementation, and, as such, proceeding with its implementation before completing the analysis discussed above is premature. Therefore, we recommend that the Legislature direct the ARB to cease all work on the cap-and-trade program until it has completed the required analysis of potential alternatives and presented the results to the Legislature. This would provide the Legislature with the opportunity to evaluate the analysis and to provide further policy direction to the ARB. Accordingly, we also recommend that the Legislature reduce funding included in the budget for cap-and-trade development and implementation by $8 million (from the Air Pollution Control Fund), which would leave $961,000 of the monies budgeted for cap-and-trade. The ARB should be directed to spend up to the amount of these remaining monies solely for the completion of the alternatives analysis. Once the analysis has been completed and evaluated by the Legislature, the Administration could then submit a revised budget proposal for cap-and-trade development and implementation that reflects the findings from its alternative analysis and that is consistent with any policy direction that the Legislature has provided.