California lawmaker scraps plan to replace carbon market with tax on fuels

By Rory Carroll

SACRAMENTO (Reuters) - A top Democratic lawmaker in California on Monday backed off an unpopular plan to tax gasoline and diesel fuels and instead proposed a less controversial plan to spend up to $5 billion a year from the state's fledgling carbon program on affordable housing and mass transit.

California Senate leader Darrell Steinberg proposed building affordable housing near transit hubs, repairing state roads and highways, and helping fund mass transit projects including Democratic Governor Jerry Brown's beleaguered high-speed rail project.

His plan also calls for returning a portion of the money collected by the state from the sale of carbon permits to California's drivers, who are expected to see gasoline prices jump by about 12 cents a gallon next year when the state's greenhouse gas reduction program expands to cover distributors of transport fuels.

"Cap-and-trade needs a long-term strategy that maximizes the efficiency of its revenues as we seek to curb greenhouse gases," Steinberg said.

California caps the amount of emissions allowed each year by refineries and manufacturers and requires those businesses to obtain emissions permits at state-run quarterly auctions or on the open market. The vast majority of the permits in the market were give to businesses free of charge at the start of the now 16-month-old program, although the share of free permits handed out will shrink in the coming years.

Under California state law, any revenue from the cap-and-trade program must be spent on efforts to further drive down the state's output of heat-trapping greenhouse gases.

Steinberg's tax on transportation fuels was with resistance from the environmental community and key lawmakers, who see the state's young carbon market as a success.

One key opponent of the carbon tax, Democratic Senator Fran Pavley, was more receptive of the spending proposal. Pavley is the author of the state's landmark law that forms the basis for the state's carbon market and other carbon cutting policies.

"I look forward to working with Senator Steinberg, our colleagues and other stakeholders as this bill moves forward," she said.

(Editing by Lisa Shumaker)

[Image: California Senate President Pro Tempore Darrell Steinberg (D-Sacramento) speaks to reporters after Governor Jerry Brown delivered his State of the State address at the Capitol in Sacramento, California, January 22, 2014. By Max Whittaker for Reuters.]