Supporters of expanding a state's role in various areas of the economy, at some point in time, come face to face with the disappointingly political nature of government spending and budgeting practices. The debate about how to use new revenues from California's cap-and-trade law provides an apt example.

Assembly Bill 32, signed into law by Governor Arnold Schwarzenegger in 2006, aims to reduce carbon emissions to 1990 levels by 2020 through the pricing and selling of carbon permits. California regulators recently finalized approval of the cap-and-trade plan. According to the Legislative Analyst's Office (LAO), the program will bring in anywhere from $660 million to a whopping $3 billion in the first year alone. According to the state's Legislative Counsel, the revenues qualify as "mitigation fees," and therefore "must be used only to mitigate GHG emissions or the harms caused by GHG emissions." The bill's author even wrote in a letter of legislative intent that the plan was not to be considered a revenue raiser, and that the collection of fees should only "pay for the direct costs of administering" the bill's programs. Politicians flush with ideas of how to spend non-existent cash, though, have their own plans. Several options on the table demonstrate lawmakers' propensity to fund pet projects and their use of budget gimmicks to cover up systemic state budget problems.

Governor Jerry Brown's administration has recently discussed diverting cap-and-trade revenues to the funding of a long sought after high speed rail system. Recent estimates peg the cost of the high-speed rail system at $68 billion. With $8.2 billion in voter-approved bonds and $3.3 billion in federal stimulus dollars, the state is $55 billion short. There are multiple problems with this idea.

The first problem is one of legality. According to another report from the LAO, cap-and-trade revenues must be used to mitigate carbon emissions. Yet the rail project's first phase would be incomplete until at least 2021, while the primary goal of cap-and-trade is to reduce emissions by 2020. The LAO also cited a report claiming that construction of the rail would emit more green house gasses then it would reduce in its first 30 years of operation. 

Effectiveness also comes into play. Even when up and running, high-speed rail is hardly a cost effective way of reducing carbon emissions. According to the Washington Post, emissions would be cut at a cost of $250 per ton of carbon dioxide over the first 50 years, excluding construction. Construction itself would offset the first 30 years of the train's operation. By comparison, even the idea of planting 100 million acres of trees would reduce emissions at a cost between $21 and $91 per ton. These backwards priorities are a result of the political system's attempt at accomplishing what could more effectively be driven by an economic understanding of costs and benefits. 

Governor Brown is not the only California politician with an idea of how to spend this new money. AB 1532, which currently sits before the Committee on Natural Resources, would create the "Greenhouse Gas Reduction Account" within the Air Pollution Control Fund. The new account would serve as a source from which a state board could dole out special favors and fund its own pet projects dedicated to "low-carbon transportation through the development of state-of-the-art systems to move goods and freight," "natural resource protection," "sustainable infrastructure development," and more. 

AB 2404, also referred to the Committee on Natural Resources, would create the "Local Emission Reduction Fund." This fund would hand out dollars to local governments attempting to achieve greenhouse gas emissions reductions through more creative means, like increasing adaptability to extreme weather events, increasing the reliability of local water supplies, reducing costs to state and local governments, and of course, "ways that create local job training and job creation benefits." 

A recent State Budget Solutions report examined the effectiveness of "green" spending across the fifty states, and found that while "environmental protection is an important goal for local governments... the idea that protection goes hand in hand with economic growth is a policy-maker's fantasy." In other words, the other solutions being put forward by California's politicians are nothing more than another source for political handouts and special interest favoritism.

Another, only slightly more responsible, idea on the table involves allocating the funding to existing state carbon reduction programs in order to offset state budget deficits. The LAO supported this plan, but it is far from perfect as political reality could turn the idea into just another budget gimmick. If the money does indeed flow to existing state reduction programs, any progress towards reducing the state's $10 billion annual deficit could be offset by avoiding other possibly vital cuts. Either way, these existing carbon reduction programs would grow dependent on a funding source with the possibility of wild fluctuations. The first year's revenue estimates alone range from $660 million to $3 billion. Effective, gimmick free budgeting based on such wide projections is nearly impossible. 

California's cap-and-trade revenue boondoggle highlights one important point often missed when placing too much faith in the effectiveness of the political system to solve economic problems. Environmental activists sincerely want the state to solve the problem of climate change through forced reductions in carbon emissions. Many free market thinkers even applaud a straight cap-and-trade system's use of market mechanisms. Yet politicians have a Midas-like ability to turn any project into a new revenue raiser. When they get their hands on the money coming in as a result, they are motivated by their own set of priorities which often place pet projects like the building of a shiny new high speed rail system above actual emissions reductions. Others will come up with schemes to direct the funds so they might protect entirely unrelated bits of spending in a state facing a $10 billion deficit. Politicians, it turns out, care an awful lot about politics.