Concerns over the sustainability of California’s cap-and-trade revenues have been raised by companies vying to build trains for the state’s proposed 800-mile high-speed rail network.

German-headquartered multinational Siemens submitted an expression of interest last month over the $68 billion project to link San Francisco and Los Angeles by bullet train, but in it the company suggested that leveraging long-term financing using California’s carbon market could be difficult due to allowance auction proceeds being a relatively novel and somewhat untested concept.

“Especially in terms of the availability of funding, the financial market perceives the introduction of cap & trade as a great sign … That being said, we perceive the market as very cautious in lending long-term based on this new kind of revenue stream, especially due to its early stage and potential self-diminishing nature,” Siemens wrote in its submission to the California High-Speed Rail Authority (CHSRA).

“Considering that the first (permit) auctions have outperformed expectations, enthusiasm has been raised but the limited historical data points do not establish sufficient comfort in the market regarding certainty of repayment for long durations,” it added.

“The market feels uncertain on legislative/regulatory questions like duration and how to assess potential procedural inconsistency related to the auctions held. Especially in this early phase of such a promising program, we see it as beneficial to hold off on long-term monetization to avoid underselling (both in regard of volume and pricing) this great funding source for the project.”

Siemens’ concerns are echoed by other companies that could compete for the contract, including Kiewit, John Laing Group, OHL Group, Plenery Group and Cintra, according to Reuters.

California has forecast that carbon revenues will cover around a quarter of the project, but the state is counting on the private sector to stump up as much as $35.5 billion, more than half of the estimated cost of what could turn out to be the most expensive US public works project ever.

Siemens offered some possibly solutions to the issue, including:

– Setting a funding floor, securing minimum payment in case auction revenues fall short;

– Prioritising cap-and-trade revenues to the CHSRA versus other areas;

– Backing up the carbon proceeds with another stable revenue source with a deeper track record and sufficient stability and sustainability;

– Establishing a reserve that is fully funded in advance to allow appropriate coverage in case of an auction revenue shortfall, or funded with a lower amount but with an obligation to replenish in case funds are withdrawn – This fund could then be used as leverage against the permit sale proceeds.

“In the absence of a floor and given a certain level of dependency of the state’s ability to influence cap & trade revenue, we think the market would also be receptive to a … commitment from the state not to undermine the cap & trade program,” Siemens wrote.

“Apart from cap & trade and other existing funds available, we would strongly recommend CHSRA to review use of additional federal funding programs and attract such means to the project.”

California Governor Jerry Brown last year successfully convinced the state’s legislature to fund high-speed rail using carbon auction revenues.

California’s emissions trading scheme has raised $2.2 billion since 2012 and is expected to bring in $15 billion for the state by 2020, according to the market’s regulator the California Air Resources Board.

Critics of the project predict a large funding gap that could see the line fail to reach major urban centres before running out of money.

Siemens was one of 36 international engineering firms to respond to California’s call for expressions of interest in the bullet train project.

By Mike Szabo – mike@carbon-pulse.com