SUMMER READING - THE OBAMA-SCHWARZENEGGER JIG (UPDATING CLIMATE CHANGE ECONOMICS) (from April 22)

Today’s Summer Reading is both uniquely relevant and uniquely out-of-date. It is out of date because it references the President’s no longer tenable position on offshore oil drilling before the BP eco-apocalypse. It is relevant because it emphasizes all the economic benefits of AB 32, Governor Schwarzenegger’s legacy. AB 32 is now under fire, the target of Proposition 23 (the Dirty Energy proposition). The description of the jobs and revenues AB 32 will spawn makes vividly clear how wrong the oil company-sponsored Dirty Energy proposition really is for California.

Updated Economic Analysis of California’s Climate Change Scoping Plan
Staff, March 24, 2010 (California Environmental Protection Agency Air Resources Board)

THE POINT
What it appears President Obama is trying to do by approving limited offshore oil drilling and limited loan guarantees for new nuclear power plants is recreate the approach California Governor Arnold Schwarzenegger used to get that state’s landmark Global Warming Solutions Act (AB 32) made law in 2006.

Part of the Governator’s success rested on his Nixon-to-China approach. Schwarzenegger had room to maneuver because he was a Republican standing up for the environment. Earlier moves by President Obama’s Environmental Protection Agency Director Lisa Jackson, like aggressive preparations to regulate U.S. greenhouse gas emissions (GhGs) if Congress does not act, were oriented toward the left end of the political spectrum. The President’s more recent Old Energy-friendly moves have taken his environmental policy back toward the center of the spectrum.

With endorsements of “safe” nuclear energy and “environmentally benign” offshore drilling, the President is obviously laying the groundwork for the bipartisan effort it will take to pass a climate and energy bill and get the U.S. into the world’s fight against global climate change. There may be one flaw in the President’s strategy: As events at this moment transpiring in California demonstrate, it’s not 2006 anymore.

AB 32 is the most important piece of Governor Schwarzenegger’s legacy. Without it, he leaves only a state politically divided and financially stuck; with it, he leaves a state at the forefront of the fight against climate change, a demonstration of perhaps the grandest and most courageous leadership of any Governor in the last half century. But the Governor’s would-be Republican successors are “recovered” from the bipartisanship Schwarzenegger forged to pass AB 32. They see in his climate law a chance to run against California’s liberal Democratic establishment and gather to themselves California's disafffected and overburdened taxpayers.

Backing a proposed ballot measure that would roll back AB 32 until California’s current 12% unemployment rate falls to 5%, Republican Gubernatorial hopefuls Meg Whitman and Steve Poizner expect to capture a public sentiment more interested in jobs than climate change.

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The fact is, however, that the fight against climate change is one of California’s biggest economic strengths. The energy/environment sector is one of the state’s economically strongest, having held its job and revenue capacities significantly better than the overall economy. (See GREEN JOBS BEAT OTHER JOBS )

Or, as the Updated Economic Analysis of California’s Climate Change Scoping Plan, from the California Environmental Protection Agency Air Resources Board (CARB), puts it: “This analysis
confirms that successful implementation of these measures will mean that we can achieve the goals of AB 32 without adversely affecting the growth of California’s economy over the next decade, especially as the state recovers from the current economic downturn…” and “…these policies can shift the driver of economic growth from polluting energy sources to clean energy and efficient technologies, with little or no economic penalty.”

These conclusions are made with a fully calculated recognition of the impacts of the 2008-09 recession. Furthermore, as the CARB report says, the conclusions are the same as those in most other analyses of AB 32 and of analyses of similar policies in the national energy and climate change legislation proposed by the Obama administration.

The inside word is that Big Oil money from Texas will soon have bought the necessary signatures to get the measure that would roll back AB 32 onto California’s November ballot. (See The Fight for Renewables in California)

The Governor and California’s environmental community are ready to go to work in a massive campaign to defend the climate change law. The battle over the ballot measure will likely be epic, on the proportions of that over 2008’s Proposition 8, which the gay community believes it could have won if its organizing had been better. With the Schwarzenegger legacy on the line, more inside reports say the Governor and his forces are likely to be as well-organized as they have ever been.

Much more than a political legacy will be decided. This is a moment when the case for climate change will have to face its deniers in the public arena. Advocates for a New Energy economy will meet well-funded voices of Big Oil and Big Coal and the old ways.

Because the ability of the Obama administration to make the case for fighting climate change and building a New Energy economy could be decided by the outcome, the fate of the world’s fight against global climate change could be decided in the struggle.

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THE DETAILS
AB 32, the Global Warming Solutions Act of 2006, is the set of laws, requirements and guidelines by which California intends to cut its emissions to 1990 levels by 2020 and to cut emissions to 80% below 1990 levels by 2050. In the broadest sense, it would cut greenhouse gas emissions (GhGs) through improved Energy Efficiency for all of the state’s energy consumption and by moving the state away from dependence on fossil fuels.

The current report’s updated economic and energy forecast is based on the California Energy Commission’s 2009 California Integrated Energy Policy Report and considers the 2008-09 recession in its calculations of growth and impacts. It assumes a slower rate of growth for the state because of the ongoing slow recovery.

The new assessment of AB 32 impacts on the California economy is considered conservative because it does not calculate effects of innovation likely to come from the price placed on emissions by the Cap&Trade system, an incentive specifically designed to drive innovation and lead to economic opportunity.

Specific cost effective approaches designated by AB 32:
(1) Expand and strengthen existing Energy Efficiency programs and building and appliance standards;
(2) Meet a Renewable Electricity Standard (RES) requiring the state’s regulated utilities to obtain 33% of their power from New Energy sources by 2020;
(3) Develop a California Cap&Trade system that caps present GhGs and progressively ratchets down to 1990 levels by 2020 and integrate the California emissions allowance trading market into the one being developed throughout the Western U.S. and Canada by the Western Climate Initiative to create a regional emissions trading market;
(4) Set transportation-related GhG reduction targets for regions throughout California and develop and implement policies and incentives to achieve the targets; and
(5) Adopt and implement other emissions-reduction measures already on the state’s agenda (clean-car standards, goods-movement measures, and the Low Carbon Fuel Standard).

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The Cap&Trade system and complimentary measures developed by the California Air Resources Board (CARB) of the state’s Environmental Protection Agency (EPA) are specifically designed to be cost effective in the short-term and medium-term and still accelerate the transition to a New Energy economy so as to meet the 2050 emissions reduction goal.

The plan considers California’s program and elements of the proposed national policy and a variety of combinations.

Key complementary measures:
(1) More Energy Efficiency programs,
(2) Increased New Energy for electricity,
(3) More use in buildings and power plants of Combined Heat and Power,
(4) A new, stronger vehicle emissions standard,
(5) Implementation of the Low Carbon Fuel Standard, and
(6) Improved land-use planning.

If California were to proceed with business as usual (BAU), its economy would grow an average of 2.4% per year from 2006 to 2020. Its fuel expenditures would increase an average of 1.7% per year.

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With the Cap&Trade and copmplimentary measures in AB 32, economic growth would still be 2.4% per year, fuel expenditures would fall to 4.9% overall and GhGs would be reduced 15% below BAU. Because of the drop in GhGs from the complementary measures, the Cap&Trade allowance price would be lower, ~$21 per metric ton, and there would be further savings in investment and fuel expenditures.

According to CARB calculations, even if the electricity, natural gas, and transportation sectors do not provide the level of GhG reductions anticipated, the Cap&Trade system alone will only cause a small decrease from BAU in the California 2020 economy.

The CARB report mentions without quantifying 2 potential costs of inaction.
(1) The potential effects of climate change on California are described as “severe economic impacts.” California’s Climate Adaptation Strategy was designed to deal with the impacts but there is a real risk of potentially high and unavoidable costs.
(2) Dependence on fossil fuels makes the California economy subject to volatile world oil markets which the price spike in the summer of 2008 demonstrated is very potentially costly.

The CARB report shifted some assumptions to BAU about initiatives that were previously only in California and therefore part of the AB 32 impacts but have now been adopted at the federal level, most significantly the:
(1) Higher vehicle emissions standards, previously a California initiative from state legislator Fran Pavley but adopted by the Obama EPA; and the
(2) Energy Efficiency standards pioneered by California and adopted in the 2007 Federal Energy Independence and Security Act (EISA).

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The report also shifted an RES of 20% by 2020 and new criteria pollutant requirements into BAU assumptions because they will happen with or without AB 32.

California’s projected 2020 GhGs with AB 32 are estimated at 525 million metric tons (MMT). The BAU estimate is 600 MMT.

CARB’s report applied 2 primary economic modeling tools which, used together, provide the most comprehensive analysis of AB 32’s impacts that has ever been done.
(1) The Energy 2020 model, a multi-region energy model with complete and detailed simulations of demand and supply for all fuels, shows the GhG impacts and opportunities on varying fuels, subsidies and standards.
(2) The Environmental Dynamic Revenue Assessment Model (E-DRAM), a computable general equilibrium (CGE) model of the California economy, is used to analyze impacts of policy that ripple through multiple markets.

CARB also investigated the potential effects of AB 32 on small business and on job creation and the economic value of criteria pollutant reduction likely to come with GhG reductions.

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The analysis of AB 32 was performed in conjunction with the Economic and Allocation Advisory Committee (EAAC) appointed in the summer of 2009 by Cal\EPA Secretary Adams and CARB Chairman Nichols to advise CARB on the updated economic analysis.

Impact on the Economy
The overall rate of California’s economic growth will be virtually unchanged through 2020. There will be shifts within the economy toward “a cleaner and more efficient future…” Gross State Product, income and labor demand would essentially remain the same.

An increase in energy prices would be offset by decreases in fuel consumption due to increased Energy Efficiency throughout the economy.

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4 variations on the basic scenario were used:
(1) An alternative Cap&Trade design scenario measured the impact of a system in which the use of offsets is not allowed. (Offsets are defined as credits for GhG reductions earned through investments in outside sources.) The model shows that offsets help contain emissions allowance prices, prevent higher energy prices and thereby sustain economic growth.

(2) A reduced transportation scenario measured the impact of less effective transportation-sector measures.

(3) A reduced electricity/natural gas scenario measured the impact of less successful electricity- and natural gas-sector measures.

4) A combined scenario measured the impact of both less effective transportation-sector measures and less successful electricity- and natural gas-sector measures.

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The conclusions drawn from comparing the varying scenarios is that (1) the more effective the complementary measures are, the less stringent the Cap&Trade system needs to be and (2) the less effective they are, the higher the Cap&Trade system allowance prices will go, driving energy costs and all associated costs up. It is clear from these conclusions that it is vital to design and implement emissions market mechanisms that stabilize the Cap&Trade system and contain allowance prices.

But even with a least effective scenario in which both less effective transportation-sector measures and less successful electricity- and natural gas-sector measures resulted, the Gross State Product would likely still only be 1.4% lower than BAU.

For all the foregoing reasons, AB 32 is unlikely to do significant harm to most California small businesses. Impacts are likely to be less than on the economy as a whole. Most small businesses will only see indirect costs from AB 32.

Some small businesses will have increased employment and output. Though the report does not calculate it, many will benefit more from improved and more accessible Energy Efficiency than they will be hurt by higher energy costs.

Other economic analyses validate the findings of the CARB study: The overall impact of AB 32’s provisions on GSP can reliably be expected to be small and retard growth little.

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References
(1) Costs of AB 32 on California Small Businesses
(The most widely disseminated anti-AB 32 study)
(2) AB32: Analysis of Two Studies by Varshney and Associates
(California Legislative Analyst assessment of the most widely disseminated anti-AB 32 studies)
(3) Experts Discredit Small Business Studies
(A green business case)
(4) Climate Policy and Economic Growth in California: A Comparative Analysis of Different Economic Impact Projections
(5) The Economic Impact of AB 32 on California Small Businesses
(6) Energy Prices & California’s Economic Security
(U.C. Berkeley)

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QUOTES
- From the CARB report on AB 32: “…The reference case in this analysis shows that if the Scoping Plan were not implemented, California’s economy would grow at an annual average rate of 2.4 percent between 2006 and 2020, with fuel expenditures increasing at an annual rate of 1.7 percent. By contrast, when the Scoping Plan measures are in place, increased investment in efficient buildings and technologies and in advanced fuels pays off: the economic growth rate remains 2.4 percent per year but fuel expenditures are reduced 4.9 percent and GHG emissions reduced by 15 percent relative to the reference case. The emissions reductions achieved through the complementary measures also help limit the allowance price in the cap-and-trade program to $21 per metric ton. Moreover, the analysis shows that success in reducing GHG emissions from the passenger transportation sector can translate into savings both in investment and fuel expenditures…”

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- From the CARB report on AB 32: “The potential effects of climate change on California that are expected to occur could cause severe economic impacts. While California has developed a Climate Adaptation Strategy to help alleviate these potential costs, the risk of potentially high economic costs from climate change in California remains real. While California acting alone cannot reduce emissions sufficiently to change the course of climate change worldwide, our leadership has played and continues to play a critical role in moving federal and international climate policy forward. Successful implementation of the AB 32 Scoping Plan, in particular, has the potential to help move federal climate policy in a positive direction during the coming years. The magnitude of the impacts that California could face from climate change provide a useful context for understanding the significance of the relatively modest economic costs associated with taking the actions described…”

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- From the CARB report on AB 32: “In the current analysis, [Energy 2020 and E-DRAM] are used in tandem. The combination provides a more complete picture of the economic effects of AB 32 implementation than could be achieved using either model alone. These two models help answer different key questions relating to the economic effects of implementing AB 32. Energy 2020 provides insights into GHG emissions reductions, changes in fuel expenditures, changes in investment by year and by sector, and shifts in the allowance price for the cap-and-trade program. E-DRAM complements these results by providing insights into changes in statewide output and in income and employment across different socioeconomic groups…One of the key reasons to adopt a policy like the cap-and-trade program, which puts a price on GHG emissions, is to provide incentives throughout the economy for companies and inventors to seek out new technologies that increase efficiency or enable lower-polluting fuels to be used. While Energy 2020 captures the potential for increased investment in more efficient technologies or alternative fuels, it cannot fully account for the technological innovation that a long-term price on GHG emissions is intended to spur.”