After seeing record revenue from the last quarter’s cap-and-trade auction, officials from the Legislative Analyst’s Office recommend California legislators use a portion of revenue from the state’s Greenhouse Gas Reduction Fund to support households and businesses.

California is slated to receive an estimated $1.3 billion in revenue from the latest quarterly cap-and-trade auction held in November, representing the highest amount from any quarterly auction in state history, according to a new report released this week from the LAO.

The cap-and-trade program, created to curb greenhouse gas emissions by limiting statewide emissions, allows entities to purchase “allowances” that permit companies to emit one metric ton of a carbon dioxide-equivalent greenhouse gas emission via an auction process. During the November auction, allowances were sold at $5-$10 higher than during the August auction, driving up revenue.

Based on last quarter’s auction, the LAO estimates the state will generate about $732 million more than the fiscal year 2021 budget initially assumed. State law dictates that about 65% of those funds be appropriated to high-speed rail projects, affordable housing and safe drinking water, but the remaining $293 million will be up to the state’s discretion, according to the LAO.

The LAO says that the Legislature has several options to consider regarding how the state spends these discretionary funds. For one, the Legislature will likely need to weigh several multi-year funding commitments outlined in the 2021-2022 budget, including a $200 million continuous appropriation from the Greenhouse Gas Reduction Fund for forest health and wildfire resilience.

“The Legislature will want to consider the degree to which its 2022‑23 cap‑and‑trade expenditure plan should supplement these efforts versus targeting other areas not already addressed in the packages,” the LAO wrote.

The state, however, is not necessarily limited to focusing on spending options when formulating its cap-and-trade expenditure plan, the LAO notes. In fact, the LAO recommends the Legislature use a portion of GGRF revenue to “provide direct financial support to households and/or businesses.”

“The Legislature could use GGRF to provide lump sum rebates to households, reduce other state taxes (such as sales tax rates), or use the funds to reduce retail electricity rates,” the report states.

The report also outlined several scenarios where the state could see continued revenue growth in the next two fiscal years depending on the price of allowances.

If allowance prices remain stable, the LAO estimates the state could see more than $4 billion in total GGRF revenue each year, while continued price growth could increase revenues higher than $5 billion per year. If allowances drop to the price floor, the state is likely to see GGRF revenues totaling $3.7 billion in 2021-2022 and $2.7 billion in 2022-2023, according to the LAO.