State environmental leaders this week hailed California's first auction of carbon emissions credits a huge success.
But budget writers are hardly thrilled.
A low price for credits and minimal demand for future offsets suggest California will see a mere fraction of the $1 billion that Gov. Jerry Brown and lawmakers estimated the state would receive this fiscal year.
If demand remains similar in two forthcoming auctions, the state would generate only about $140 million, the nonpartisan Legislative Analyst's Office estimated Wednesday.
That would strain the $91 billion state budget and disappoint environmentalists who wanted to spend the money on efforts to reduce pollution and improve energy efficiency.
"The likelihood of there being a hole in the budget has increased," said Tiffany Roberts, an LAO analyst who focuses on climate change issues.
The state this month held its first carbon auction, selling emissions credits to California's biggest manufacturers and energy producers. Purchasers can use credits to emit greenhouse gases above a certain cap rather than cut production. The cap will fall each subsequent year as California tries to reduce carbon emissions dramatically by 2020.
As California sells credits, it stands to benefit financially. Brown and lawmakers assumed California would take in $1 billion total this year, spending $500 million on state budget relief and $500 million on curbing greenhouse gas emissions.
The California Air Resources Board sold $289 million in credits this month, but most of the money is dedicated for utilities and their ratepayers. That leaves $55.8 million for the state.
Had ARB sold all of its 2015 credits rather than just 14 percent of them, it would have raised nearly $400 million for the state this month.
Lawmakers used their predicted environmental windfall to help plug the budget. They also passed two bills this year describing how additional money should be spent. They outlined seven goals, ranging from job creation to public health, and required that at least 25 percent of funds benefit "disadvantaged" communities.
At one point, Brown suggested the money be tapped for high-speed rail construction, but lawmakers tabled that idea for two years.
"We definitely see opportunities to do energy efficiency and renewable energy programs in disadvantaged communities," said Jim Metropulos, senior advocate with Sierra Club California. "We want to see money for expanded transit options in different areas of the state to reduce air emissions from cars."
But now it's unclear how much money will be available this year for any of these purposes.
If cap-and-trade revenue falls well short, Brown and lawmakers could try to use all of the auction proceeds to pay for existing environmental programs. It would be a backdoor way to free up funds for education, health care or other state needs.
Environmentalists oppose that idea, saying cap-and-trade money should go toward new efforts that curb pollution rather than programs that already exist.
The auction proceeds already face a legal challenge. The California Chamber of Commerce filed suit this month alleging that ARB has no authority to sell emissions credits to raise state revenue. The business group contends the money is either an invalid tax or unconstitutional fee.
State leaders erred on another market prediction when they assumed Facebook shares would trade at $35 this fall. The stock has traded below $25 since August, and the analyst estimates that California will see $626 million less than expected as a result.
The LAO said last week the state faces a lingering $1.9 billion deficit, partly because of less Facebook and cap-and-trade money.
Brown will propose his 2013-14 budget in January. Department of Finance spokesman H.D. Palmer downplayed concerns.
"We've got two more auctions to go," Palmer said. "If there's any change to those projections, we will reflect it in January."
The Air Resources Board, which runs the cap-and-trade program, defended the auction as successful and stressed that its chief goal was not to raise money for the state.
"The central focus of the auction and cap-and-trade program is to reduce greenhouse gases," said ARB spokesman Stanley Young. "It's important not to lose sight of that."
Young said ARB achieved several goals by selling carbon allowances to California industries, launching an auction platform that worked as planned and finding no indication of market collusion. He said the air board considers money generated from the auction as a "secondary benefit."
Erica Morehouse, staff attorney with the Environmental Defense Fund, said simply placing a price on carbon was an achievement.
"That will get things started in terms of innovation and other benefits we can expect from this market on carbon," she said. "That includes health, green jobs and benefits for schools."