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Cap-and-trade and the high-speed rail project

From a report by the Legislative Analyst's office:

"An additional $21 billion will need to be identified
to complete the IOS[initial operating segment]
which is about two-thirds of the total cost." 

Figure 4

Estimated Annual Capital Costs of Initial Operating Segment

(In Millions)

Year	Amount
2013	$212
2014	751
2015	4,003
2016	4,008
2017	4,229
2018	5,481
2019	5,049
2020	4,732
2021	2,708
Total	$31,173

...In reviewing the Governor’s proposals to support the high-speed rail project, we find that the proposals raise several issues that merit legislative consideration. Specifically, we find that (1) using cap-and-trade auction revenues for high-speed rail may not maximize GHG[greenhouse gas] reductions, (2) there currently is not a funding plan to complete the IOS[initial operating segment], (3) it is unclear how much cap-and-trade revenue will actually be available for high-speed rail in the future, and (4) the HSRA[High-Speed Rail Authority] is expending federal funds while matching Proposition 1A funds face legal risks...

Using Cap-and-Trade Auction Revenues for High-Speed Rail May Not Maximize GHG Reductions 

As we discussed in our recent report, The 2014-15 Budget: Cap-and-Trade Auction Revenue Expenditure Plan, in order to minimize the negative economic impact of cap-and-trade, it is important that auction revenues be invested in a way that maximizes GHG emission reductions for a given level of spending. It is unclear the extent to which using such revenues to support high-speed rail will maximize GHG emission reductions. First, the high-speed rail project would not contribute significant GHG reductions before 2020, which is the statutory target for reaching 1990 emissions levels as required by Chapter 488, Statutes of 2006 (AB 32, Núñez/Pavley). 

This is because, as mentioned above, plans for the high-speed rail system indicate that the first phase of the project will not be operational until 2022. Second, the construction of the project would actually generate GHG emissions of 30,000 metric tons over the next several years. (The HSRA plans to offset these emissions with an urban forestry program that proposes to plant thousands of trees in the Central Valley.) 

We also note that HSRA’s GHG emission estimates for construction do not include emissions associated with the production of construction materials, which suggests that the amount of emission requiring mitigation could be much higher than currently planned. 

No Complete Funding Plan for IOS 

As mentioned above, the HSRA indicates that the IOS[initial operating segment: Merced to San Fernando Valley] will cost about $31 billion to complete. In its recent 2014 draft business plan, the authority identified a total of $10 billion in funding available to support the construction of the IOS. This level of funding consists of (1) $3.3 billion in federal funds already received and (2) $6.8 billion in Proposition 1A bond funds. The plan states that an additional $21 billion will need to be identified in order to complete the IOS, which is about two-thirds of the total cost. 

An infusion of funds from the private sector to address the current IOS funding shortfall is unlikely, given that the HSRA stated in its 2012 business plan that private sector funds will only become available after the IOS is completed and demonstrated to have a net positive operating cash flow. 

Additionally, given the federal government’s current financial situation, the current focus in Washington on reducing federal spending, and the lack of a federal budget appropriation to support the state’s high-speed rail system since 2009-10, it is uncertain at this time that any additional federal funding for the state’s high-speed rail project will become available. Thus, the state will likely be the only source of additional funding to address the $21 billion shortfall identified by HSRA. 

Unclear How Much Cap-and-Trade Funding Will Support High-Speed Rail in Future

Although the administration proposes to use revenue from the state’s cap-and-trade program to help address the $21 billion shortfall, it is unclear how much cap-trade auction revenue will actually be allocated to high-speed rail in 2015-16 and beyond to complete the IOS under the Governor’s plan. As indicated above, the Governor is proposing that beginning in 2015-16, 33 percent of all state auction revenues be continuously appropriated to HSRA. 

At this time, however, the administration has not provided an estimate of projected cap-and-trade auction revenues. Moreover, it is unclear for how long the administration expects there to be cap-and-trade auctions and the availability of revenue resulting from such auctions. 

The absence of a detailed plan projecting the estimated amount of cap-and-trade auction revenue that would be appropriated to HSRA by year is problematic for two reasons. 

First, it makes it difficult for the Legislature to determine if such revenues, along with available federal funds and Proposition 1A bond funds, would be sufficient to fund the expected costs per year to complete the IOS. To the extent that there would not be sufficient revenues in a given year, the Legislature would need to identify alternative funding sources, likely from other state resources. 

Second, the absence of projected cap-and-trade auction revenues also makes it difficult for the Legislature to weigh the relative trade-offs of dedicating a fixed percentage of cap-and-trade auction revenues to high-speed rail each year (without further legislative action) versus allocating the funds on an annual basis to other programs intended to reduce GHG emissions, including programs that the Legislature deems to be of higher priority and could maximize GHG reductions in a more cost-effective manner. This is because it is uncertain whether there would be a sufficient amount of funding available under the Governor’s proposal to support such programs. 

HSRA Expending Federal Funds While Matching Proposition 1A Bond Funds Face Legal Risks. 

For the remainder of 2013-14 and 2014-15, the HSRA plans to spend about $1.6 billion in federal funds on the high-speed rail project, which require a match of state funds. 

Currently, the only state funding source available to provide matching expenditures are Proposition 1A bond funds. However, as we mentioned above, the availability of Proposition 1A bond funds has been the subject of litigation. If the federal funds are expended as planned, and the state does not provide matching expenditures, the Federal Railways Administration reserves the right to require that the state repay the federal government up to the entire amount of federal funds spent on the project. 

LAO Recommendations 

In light of the concerns expressed above, we make several recommendations intended to help the Legislature ensure that the high-speed rail project can be completed as planned, while balancing other priorities such as maximizing GHG emission reductions. 

Specifically, we recommend: 

• Requiring Administration to Provide Complete Funding Plan. Given the concerns described above, we recommend that the Legislature require the administration and HSRA to provide a funding plan that identifies all the funding sources (including cap-and-trade auction revenues) by amount and year that would be used to complete the IOS. As such, the plan should detail how the administration intends to address the $21 billion shortfall identified by HSRA. The requested funding plan would help the Legislature in its deliberations on the Governor’s funding proposals for high-speed rail. 

• Withholding Action on Various Proposals. Pending the receipt of the above funding plan, we recommend that the Legislature withhold action on the Governor’s high-speed rail proposals (including those proposed for CPUC and DOC). 

• Weighing Options for Use of Cap-And-Trade Auction Revenue. As we recommended in our recent report on the administration’s cap-and-trade auction revenue expenditure plan, we recommend that the Legislature consider a full array of options for the use of cap-and-trade auction revenue funds to help achieve the goals of AB 32 and meet legislative priorities...(emphasis added)

Citizens for California High-Speed Rail Accountability: A letter to the Air Resources Board on cap-and-trade and the high-speed rail project.

Kathy Hamilton's latest at CalWatchdog.com on the cap-and-trade issue.