It’s Time to Refocus California’s Climate Strategy

You know this already, but let’s review:

  • Climate change is a global emissions problem.
  • California produces about 1% of the world’s greenhouse gas emissions.
  • Over the next few decades, the majority of emissions will come from developing countries.
  • If we don’t solve the problem in the developing world, we don’t solve the problem.

And lastly,

  • The world is making negative progress on climate change.  Evidence of the potential for drastic climate change is growing, but worldwide GHG emissions and concentrations of GHGs in the atmosphere are still rising. Exxon’s just-released Energy Outlook, predicts world oil consumption will rise 19% over the next 25 years, while natural gas will rise 66%, and coal will be flat, no decline.

Nearly all of this was known back in 2006, when California passed the Global Warming Solutions Act, though the massive growth in China’s coal consumption was just getting momentum.  Back then, the argument for California emissions targets was “leadership” and that is still the word one hears most often from defenders of the state’s current package of GHG markets and mandates.

CoalConsumpRegion

I’ve heard many different meanings of leadership in the context of California emissions targets:

  1. Showing that the regulations and cap & trade market are logistically feasible, and developing implementation models that could be adopted at national and international levels
  2. Showing that people are willing to sacrifice or change their way of life to fight climate change
  3. Showing that people won’t have to sacrifice because reducing GHGs will improve the economy
  4. Recognizing that someone has to move first to start a worldwide movement to reduce GHGs

There is something to each of these arguments (well, maybe not #3. Most economists think addressing climate change will be a small drag on the economy—if you don’t count the worldwide economic value of averting climate change).

But it’s 2014 now.  The U.S. is further from adopting a price on GHG emissions than it was in 2006.  Fewer members of Congress than 8 years ago even believe climate change is a problem.  The three largest market mechanisms for reducing GHGs (California’s cap-and-trade, the EU-ETS, and the eastern U.S. RGGI program for utility emissions) all have very low prices that are doing little to change the course of emissions.

For these reasons, I think it’s time to have a frank review of California’s climate policy.  We need to refocus on how California can realistically contribute to solving the problem of global climate change.  Reaching emissions targets for California may be part of that strategy, but that should not be the singular or even the primary goal.

The primary goal of California climate policy should be to invent and develop the technologies that can replace fossil fuels, allowing the poorer nations of the world – where most of the world’s population lives – to achieve low-carbon economic growth.  If we can do that, we can avert the fundamental risk of climate change.  If we don’t do that, reducing California’s carbon footprint won’t matter.

Focusing on solving global climate change would mean that a major test of any policy proposal would be whether it is exportable to the developing world.  It’s always hard to predict what will work, but “working” in California isn’t particularly valuable if the approach doesn’t work where most of the planet’s emissions will be coming from in the 21st century.  GHG-reduction strategies that are very expensive – but bearable for a rich country – only make sense if they have a plausible path for getting to near cost competitiveness in poor countries.

That means less emphasis on numerical measures of California emissions and more emphasis on learning.    What more are we likely to know at the end of a program and will that knowledge be applicable in other parts of the world?

Implications of a learning-driven strategy to tackle global climate change include:

  • In procuring renewables, California’s current “least cost, best fit” approach should be augmented with “most learning.”  That means a new technology about which we (and the rest of the world) will learn a lot may get funded even if it is likely to be more expensive than replicating a mature technology.
  • We need greater emphasis on technology creation, both in the lab and downstream, where a lot of the learning goes on.  California should consider creating a Climate Change Solutions Institute akin to the California Institute for Regenerative Medicine.  The goal would be to research and develop approaches that could be applied by a large share of the world’s population.
  • Every California energy efficiency program needs rigorous evaluation of what worked and why, and what didn’t work and why not.  And we need to study where else in the world the same sort of efficiency policies would (or wouldn’t) be effective.  The greatest value from the state’s energy efficiency leadership is likely to be knowledge creation, not GHG reduction.

This does not mean California should abandon pricing GHG emissions.  Putting a price on emissions helps boost green technologies across the board.  In addition, substituting cap-and-trade revenues (or GHG taxes) for income or sales taxes is a clear move towards improving economic efficiency and welfare.

California’s current strategy may eventually allow us to say “we’ve done our share; now the rest of you need to step up.”   But that isn’t leadership when more than 80% of the “rest of you” are living at less than one-quarter of our standard of living.  It’s time to make our Global Warming Solutions Act about global solutions.

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27 Responses to It’s Time to Refocus California’s Climate Strategy

  1. Wow. Did someone have an epiphany?

  2. John Proctor says:

    Well put. Unfortunately the current utility program system does not put any real emphasis on technical innovation, particularly innovation that can be applied to less affluent parts of the world. Actually it doesn’t even address the grand middle of our population that does not have the disposable income to participate in any significant way. The cost effectiveness calculations as currently configured ensure that residential customers are not able to enjoy or contribute to reduced energy consumption.
    With respect to “rigorous evaluation” the evaluators, CPUC, and utilities do not recognize the difference between a “program evaluation” and a “energy efficiency measure” evaluation.
    They use program evaluations to condemn viable energy efficiency measures. Producing a downward spiral of program implementation. Innovation is not embraced. It is sidelined.

  3. Cold Air says:

    Reblogged this on Colder Air and commented:
    First time I heard the goal has to be energy that is cheap, clean and abundant it sounded bizarre.
    Now it seems bizarre so few smart people have arrived at the conclusion.

    One of the clues indicating the stupidity and false goals of Ontario’s Green Energy Act was that the price offer for wind and solar were escalated from the previous procurement program. Expensive and getting more so isn’t part of a solution lowering the planet’s emissions.
    It’s refreshing Severin Borenstein has written this, but … what should be done with those that say people pay too little for energy, and higher pricing is requisite to teach people the folly of consumption?

  4. I totally agree about accelerating learning rates. We also need to jettison technologies that don’t exhibit much learning, doing more of what works and less of what doesn’t. “All of the above” makes no sense in this context, but the Obama Administration still uses that abhorrent framing.

    My understanding is that California’s efficiency programs are already subject to rigorous evaluations (e.g. http://www.calmac.org and http://www.cpuc.ca.gov/PUC/energy/Energy+Efficiency/EM+and+V/). What am I missing?

    • Sam Borgeson says:

      Jon, because our EE programs are pay for performance, the evaluation process has become much more about the fight over who gets paid what fraction of our annual $1B expenditure of public money than any sort of good faith effort to learn about what aspects of programs lead to better outcomes or which innovations are promising. The vast majority of official savings come from “deemed savings” for equipment replacements, which means the results come from a rule book rather than the real world.

  5. Sam Borgeson says:

    I think there is too much room for solutions that don’t actually work in practice if CA backs away from it’s own goals in the name of innovating on behalf of others. At the same time, significant reductions in emissions are likely to require innovations in technology, policy, and culture, so it is hard to imagine CA (or any entity) achieving its goals without producing spill over impacts with enormous benefits throughout the world. My reading of past efficiency program results is that least cost procurement of EE has set incentives that run counter to innovation, undermining potential both here and abroad. Program rules that pay utilities based primarily on short term deemed savings penalize risk taking and leave no room for failure (aka learning). So even in CA, we are unlikely to achieve our goals unless we re-align program incentives to reward creative and innovative solutions, which require risk taking. If we succeed at re-aligning incentives, the progress we make scaling up the impacts of our EE programs and integrating renewable energy onto the grid supported by storage and more flexible demand will be unambiguous contributions to global mitigation.

    • John Proctor says:

      As one who has been in “boots on the ground” in energy efficiency for 35 years, I have to say Sam is correct that the current methodology penalizes risk taking and leaves no room for failure (aka learning). Innovation is a process of failing forward.

  6. Michael Sullivan says:

    Severin,

    It has been abundantly clear for several years (and for some more than a decade) that carbon emissions from industrialization of the developing world are more than offsetting efforts to reduce carbon emissions by the developing world. It is time to shift from efforts to prevent climate change to efforts to modify our infrastructure to compensate for it.

    MS

    • Michael Sullivan says:

      oops. I meant to say emissions by the developed world.

    • Michael,

      There’s no way we’ll be able to “modify our infrastructure to compensate” for the business as usual path, where we’re likely to see 5 C warming compared to preindustrial times (http://globalchange.mit.edu/gamble/more/nopolicy). We’ll need to do some adaptation even if we’re clever enough to keep warming below 2 C beyond preindustrial times, but 5 C is a disaster that will without a doubt interfere with the orderly development of human civilization.

      Your first point (that we need to help the developing world reduce emission) is valid, but remember that technology benefits from learning by doing, and so if one country pushes technology and institutions down the learning curve, other countries will benefit from it. These spillover effects (as Sam Borgeson points out below) are very powerful and must be considered when considering what we do on climate. And of course, the US is still the #2 emitter, and the #1 contributor to historical emissions, so our responsibility for making changes extends beyond just our near term emission reductions.

  7. Gregory Hamm says:

    Great post. It is frustrating and sad when sincere people get so focused on local and transitory issues that they lose sight of the goal of long-term global sustainability.

  8. Robert Borlick says:

    Severin has said what needed to be said years ago. Unless we can rein in the growing emissions of China and India it doesn’t matter what California, or for that matter the US and Europe do to reduce their emissions. Unfortunately, I don’t think innovation will be enough. We need to apply economic pressure to these out to control underdeveloped countries to make the investments needed in clean technology and energy efficiency even if it reduces their rates of GDP growth.

    For example, the US (and California companies, like Apple) has off-shored much of its manufacturing to China and India. We could start by imposing a environmental tariff on any goods produced in these countries and brought back to the US. Generally I’m against tariff protection but the GHG irresponsibility of these countries have made me think twice.

    California’s GHG policy is just more quixotic jousting with windmills.

    • Robert,

      I agree with much of your comment, but the last line (about “quixotic jousting with windmills”) isn’t true. It ignores the importance of increasing returns to scale, network externalities, spillovers, and learning effects, both for technologies and institutional changes. Society has to learn how to substantially reduce emissions over many decades, and the more large economies trying it the better. Learning by doing only happens if we DO, so there’s nothing wrong about California reducing emissions, and the world will benefit from our experience (and we’ll be first out of the gate to sell those innovations to other countries and regions).

  9. Gilbert Adjoyi says:

    When conventional economic theories do not achieve the predicted outcomes, then there is the need to explore new ways to get the answers. I think this is what Severin is asking for

    If Apple, a USA company who should understand the need to combat global warming, sends its manufacturing to a country that is polluting more to either take advantage non existing or lower GHG taxes, labor costs or other, then the developing countries that accommodated Apple are not likely to yield to the economic pressure that easily, especially if global enforcement is not very committed and is weak.

    As an experiment, let us ban the use of gas stoves in California homes in attempt to reduce CO2 emissions from individual homes, provide electric stoves with power prices beyond what the minimum wage earners can afford, have coal and kerosene available and see if the minimum wage group will buy the electric stoves. They may resort to kerosene stoves or coal pots because they have to heat and yet they cannot afford power costs for the electric stoves available.

    In many of these developing countries, potentials exist for the development of cleaner energy at community levels in the form of smaller hydro, lands large enough for solar farms at community levels etc. Private capital would not move to develop these potentials because the energy prices are to low to guarantee return on their investment. Conventional economics in a free market economy is unlikely to succeed in reducing GHG gases.

    There are development aids to the developing countries. Many of these countries have energy supply problems their governments cannot afford to solve. If the aids are provided to solve these energy insufficiency problems not in the form of cash but a build and handover form and yet the loans for providing the mini hydro or solar farms are made soft so that these countries are not under pressure to pay back quickly, may be these countries will appreciate the solution because it does not price them out of consumption.

    To fully understand the problems of developing countries, researchers may have to go and leave like one of their low income workers and try to solve their problems in the same situation they are in. This may make the researchers more informed and exposed to the real problems. It would be easier to predict economic behavior in these countries better than assume they will behave like those in the developed countries free market economy.

  10. CG Dong says:

    I guess most policy-makers would think the California’s experiences on either renewables or EE technologies won’t have a big impact on their technical costs, or none.

  11. Goutam Mahapatra says:

    Prof. Borenstein, what are your views on a company (start-up) like http://simpanetworks.com/ that is trying to address a huge energy market in emerging economies http://www.wri.org/publication/power-people. How can “California” support such programs vis-a-vis a more direct program like cap and trade that might resonate more with voters?

  12. Paul Brady says:

    I agree that it is urgent that we assist the global development of non-carbon energy sources, and look to mitigate the effects of warming which have been moderate and in the view of many – like my fellow Canucks – have seen more positives than negatives! The latest IPCC report moderates predictions of a climate crisis to near the end of this century. It still shows a lot of confusion between weather and climate as it attempts to justify dire consequences which its and other numbers do not support.

    The Exxon report on the energy future: 2014 – 2040 which you reference, the similar BP report, and that from the energywatchgroup.org are in rough agreement that a carbon crisis is very unlikely:

    Energy Outlook 2014-2040 – XOM summary

    By 2040 Exxon-Mobil [XOM] expects to see:

    - 2 billion more people on the planet.

    - 130 percent larger global economy.

    - About 35 percent greater demand for energy – which could have more than doubled without gains in efficiency.

    - Non-OECD countries like China and India lead the growth in

    - About 60 percent of demand supplied by oil and natural gas.

    - Natural gas surpass coal as the second-largest fuel source.

    - 90 percent growth in demand for electricity.

    -Renewables will play an increasing role.

    - Energy-related CO2 emissions plateau and gradually decline.

    This last is very significant and due to energy efficiencies, the replacement of coal by Nat Gas,
    the increasing use of renewables, nuclear, hydropower, etc. There may also come a point where the production of fossil fuels is less competitive. I spent 5 years in the oil exploration business, mostly overseas. I see the decline of the old big fields, and the cost of secondary recovery, such as fracking, and have to agree that supply is not unlimited, and will become more costly to obtain!

    XOM goes on to argue:

    The need for energy will continue to grow as economies expand, living standards rise and the world’s population grows by more than 25 percent through 2040. Global demand for energy is projected to rise by about 35 percent from 2010 to 2040.

    To meet this demand in the most effective and economic way, none of our energy options should be arbitrarily denied, dismissed, penalized or promoted. And free trade opportunities should be facilitated – not curtailed.
    The

    Ensuring reliable energy trading:

    Modern technology and infrastructure — from transmission lines to LNG tankers — have overcome many of the natural obstacles to energy trading. However, trading can still be hindered by less-recognized artificial barriers such as excessive regulations and government restrictions. By impeding trade, such barriers also impede the ability of people around the world to jointly create and share the value from new economic opportunities.
    Because energy is so integral to the global marketplace and to every modern economic activity, what impacts energy trade also impacts trade of any other commodity, good or service. As people have learned over time, limiting trade leads to scarcities, fewer choices and lower overall value for the entire global economy. On the other hand, more opportunities to trade mean more value, wealth and jobs for everyone.
    All regions benefit from access to the global market and expanded trade opportunities. These benefits can be enhanced by trade rules and policies that facilitate open markets, support infrastructure development and promote international cooperation.

    Unfortunately, we have a president who does not agree with any of the above. He slows and curtails energy exploration, the transport of oil and gas, and also its trade. It is not clear he will approve export of oil and more LNG. Coal exports are the next concern. Business in general is concerned about what his next economy-slowing or damping edict will be!

    I do not agree on a carbon tax. I believe it will slow our economy, encourage more businesses to leave the stste and be frittered away by our dysfunctional Legislature!

    But otherwise thank you for your wise comments on this and the topic of global needs re energy sources!

  13. John Proctor says:

    “On the other hand, more opportunities to trade mean more value, wealth and jobs for everyone.” Really wealth for everyone? I am not convinced this is an objectively true statement.

    • Paul Brady says:

      John – I do not think economists argue much about the value of free trade. Just our trade with Asia is an example, where we are able to buy many inexpensive goods such as clothing, TVs, electronics, etc. What a cost bonus for all citizens – effectively raising their living standards. In return, CAT and Deere, for example, send them construction, mining and Ag equipment. They love i-phones and American cars – many now being made in China.

      CAT’s revenue is about $470K per employee, which is paid in salaries to employees, suppliers and investors. Net income is about 30K per employee; about 1/2 goes to dividends to investors such as CalPERS and those with IRAs, etc. Corporate tax rate is near 35% which helps fund federal spending – about 1/3 of that budget goes to entitlement and other benefit programs for citizens.

      With BO approval LNG trade with EU and Asia will bring many jobs and wealth! And if oil, too, could be exported, not allowed now, more jobs and wealth in the form of well-paying jobs. The pipe to Canada, ND and Montana [Bakken] would provide good jobs at all terminals, as well as in its construction!

      Services are also a big export: refinery and chemical plant construction, oil and gas services around the world. Re the latter I have been there – “American pseudo- cities” in Saudi, and so on: drilling, logging, testing, cementing and producing wells, etc.

      I know less about Ag trade – tough competition from the highly subsidized EU. Mainly we provide crop support in the form of insurance, I understand, and spend ~ $80 billion in Food Stamps [SNAP?].

  14. Richard McCann says:

    I wrote in a report for EDF in 2008 that California was wasting its time and resources if it did not focus solely on making its institutions and technologies transferable to a global stage. Too often we’ve had stakeholders focusing on their little corner, trying to use AB 32 to achieve a specific unrelated goal. The ARB should have made an initial policy statement then that it would only accept rules that achieved the broad goal of transferability–regardless of whether a rule achieved “real” emission reductions. California can’t even make a perceptible dent in climate change risk on its own, so we need to “keep our eye on the prize” rather than getting distracted by extraneous purposes that only undermine the real objective.

    As Severin points out, in 2008 California was hoping to pave the way toward a nationwide policy. That meant that we should focus on the institutions that we thought would be most effective. The ARB created a maze of programs and strategies and left achieving the reductions that they couldn’t create through direct mandates to cap & trade. Now there’s no identified prospective path to a national climate change policy, so a focus on institutions seems much less important. And unfortunately California is now saddled with a plethora of programs that focus on end results and not enough on developing the means.

    The evolution of the LCFS is a case in point. It rewards currently conventional technologies that can’t possibly achieve the scale of reductions actually needed to truly impact worldwide GHG emissions. How is this program creating transferable technologies and institutions beyond the US EPA’s RFS? Instead California should focus on what value-added we can create beyond the RFS.

    Which brings me to saying what Severin has said, but from a different perspective. With national policy development stalling, California should put less emphasis on institutional design, and turn to technological innovation. California is well placed to be a test bed for adopting a wide range (emphasis on “wide”) of technologies that might work. Perhaps the single most important aspect of this is to recognize that most new technology innovations will fail–typically R&D projects have only a 10 percent success rate.

    But are California’s politicians and regulators ready for this shift, and embracing risk. Markets are about risk and opportunity while government is about guarantees and protection.

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