California cap-and-trade auction falls far short, delivering blow to state revenue and bullet train financing

The L.A. Times reports:

The latest auction in California’s cap-and-trade market for greenhouse gases fell sharply below expectations, as buyers purchased just 2% of the carbon credits whose sale funds a variety of state programs -- notably, the proposed high-speed rail project.

The quarterly auction, conducted May 18 and announced Wednesday, will provide just $10 million for state programs, including $2.5 million for the bullet train. The rail authority had been expecting about $150 million.

The reason is unclear, but state officials and outside experts pointed to several possible causes: less need for the credits, pending litigation that may overturn the entire system and volatility spawned by speculators in a secondary trading market.

Whatever prompted the lack of buyers, the auction is a stark example of the uncertainty and risk of relying on actively-traded carbon credits to build the bullet train, a problem highlighted in recent legislative testimony by the Legislative Analyst's Office and a peer-review panel for the $64-billion high-speed rail.

The state rail authority is counting on the greenhouse gas fees to fulfill its legal obligation of matching about $3.5 billion in federal grants. The Federal Railroad Administration just last week modified one of its two grants to allow the state to spend all the federal money by next year but not match it with state funds until 2022.

The grant modification also allows the federal agency to extend a cash advance, needed by the rail authority to cover a cash-flow problem it has experienced. It is unclear whether the auction shortfall will exacerbate that cash-flow problem or worse, undermine the state's already-stretched financial plan.

Imagine that.