If the Governors of a few key states pick up their phones in a hurry they could shrink their gaping budget shortfalls and help climate change legislation pass the Senate with one call. On Wednesday, Adriel Bettelheim at CQPolitics explained:

The climate change bill (HR 2454) the House passed on June 26 would distribute allowances from 2012 to 2025 to each state to protect consumers from energy price hikes, help utilities and other industries transition to clean energy and to spur conservation efforts and new technologies.

The states would establish State Energy and Environmental Development, or SEED, accounts — essentially repositories to manage emission allowances. Analysts say if the funding mechanism is incorporated into a House-Senate compromise, it could deliver between $120 billion and $330 billion worth of assistance to the states, which would have substantial leeway to distribute the money as they see fit.

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According to the Center on Budget and Policy Priorities, state governments are facing big shortfalls that are likely to worsen to the tune of $111 billion this year, $166 billion next year, and $180 billion in 2011. States are not permitted to borrow money as freely as the federal government, so once reserves are gone, they either have to increase taxes or cut services. These actions usually end up deepening the recession and piling further woes on Americans at the bottom of the economic spectrum.

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For cash-strapped states, a federal climate change law could provide some relief. In reality, not only will states have freedom to use the allowances to juice local energy efficiency projects, they can also use it to plug budget holes. They can get energy efficiency projects off the ground by writing IOUs to be paid back in better times, and use the allowances to pay for bread-and-butter state programs. This kind of shell-game is not exactly a budgeting best practice, but it creates a mechanism for states to borrow a bit more money during the recession so they do not have to shrink the economy to balance the budget.

Even more attractive to state budget offices would be an attempt to get a larger piece of the pie without strings attached. Industry subsidies-like research dollars into carbon capture (to help coal) and electric cars (for automakers) or cash for “trade-exposed energy intensive industry” — might have to take a back seat in the face of skyrocketing Medicaid and unemployment costs caused by the economic downturn. It would make sense for Governors to try to influence the bill during the Senate mark-up process to get some of the funds now slated for industry freebies diverted to recession-fighting budget relief for the states. When the economy turns around the money could be re-routed to other projects.

With ACES now before the Senate, it is not hyperbole to say that the future of climate change legislation will depend on the votes of a handful of legislators. Many of these Senators represent states with small populations and big budget problems. If climate change legislation doubles as a plan to avoid a fiscal crisis back home, there will be a new powerful constituency behind a yes vote — an unusual marriage of convenience between state budget offices and environmentalists that may be the key to getting ACES over the hump.

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