When you listen closely to debates over California climate change policy, it becomes clear that the disagreements are along two dimensions: what is the best approach to meeting the state’s goals and what exactly are those goals. I think the differences are increasingly about different goals, rather than about different methods of achieving those goals.
Setting aside those who think climate change isn’t happening, isn’t man-made, or just isn’t a problem, participants in California’s climate policy debate often speak of four intertwined goals:
A. Reducing California’s GHG emissions to a specific target
B. Demonstrating to the world that a state (or country) can significantly reduce GHG emissions without significant economic cost
C. Creating new knowledge and technologies that lower the cost of reducing GHGs globally
D. Reducing local pollutants, particularly in disadvantaged communities
I wrote about local pollutants in my January blog. I still believe that it is important for both ethical and political reasons to address local pollution at the same time, though not with the same policies, as GHGs. So, I will focus here on A, B and C.
Most of the discussion in Sacramento is around goal A, hitting California’s GHG emissions target, but that is undoubtedly the least important for three reasons:
First, as I’ve talked about before California is just over 1% of global GHG emissions, and global emissions are all that matter for climate change. Climate science does not dictate any one numerical reduction goal that California “must” meet. For the foreseeable future, more reduction is always better, so long as it doesn’t cost too much.
Second, the difficulty of meeting California’s emissions target will depend greatly on a host of unpredictable factors that are unrelated to the state’s emissions reduction policies, such as the growth rate of the state economy and the price of oil, as co-authors and I showed in a study released last August. Advances in low-GHG technologies will also reduce the cost of meeting a numerical goal, and advances in extracting fossil fuels, such as fracking, will increase the difficulty of lowering GHGs.
Third, reducing California’s contribution to climate change requires more than reducing GHG emissions from inside California. We buy all sorts of goods from out of state whose production generates GHGs. With the exception of a very imperfect attempt to account for out-of-state electricity (and, to some extent, transportation fuels), the GHG impact of imported goods are not counted in the state’s reduction goals. Just as with carbon offsets, real change depends on “additionality”, or in this case what might be called “subtractionality”: is a reduction of GHG emissions from one source actually reducing worldwide GHG or is it moving emissions to another location?
Developing and Demonstrating Credible, Scalable Solutions
Subtractionality is also central to goal B, credibly demonstrating that reducing GHGs needn’t significantly harm an economy. It’s clear that outsourcing our GHG emissions to other states or countries isn’t a model that can be scaled up to reduce global GHGs. So, honestly measuring leakage and reshuffling – even in cases where California may not be able to control it or penalize it — will be critical to convincing other governments of California’s success. The demonstration goal also weighs against expensive or non-replicable approaches to GHG reduction, even if they help reach a numerical target.
Demonstrating that other economies can grow on a low-GHG path is also the basis for goal C: innovating to lower the cost of reducing GHGs. Knowledge creation of this sort necessarily means experimentation which, by its very nature, means some disappointments. But knowledge creation is where California has the most to contribute. The state is known for its innovative and risk-taking knowledge economy.
Knowledge creation and innovation means much more than extending the science of renewable energy and storage technologies, though those are big pieces of the puzzle. It also means figuring out how to operate a reliable grid with a high share of intermittent resources, such as wind and solar. And developing technologies and programs that lower the cost of efficient demand-side participation in electricity markets. And it means creating business models for electric vehicle charging that maximize the value of having EVs on the grid.A Plan of Attack for California Climate Policies
All of that seems like a lot to ask from California’s climate policies, and it would be if we could only deploy one policy. But, California has multiple climate policies, which suggests a plan of attack that could make progress on all three goals.
First, recognize the reality that the state’s emissions goal is a goal, not a line in the sand. Commit to aggressive policies that are expected to meet targeted emissions levels under the most likely scenarios, but recognize that actual emissions will be higher or lower depending on unpredictable factors. This gives the state’s cap-and-trade program the flexibility to maintain a minimum price when emissions are on track to come in below the cap and enforce a credible ceiling price when emissions are not going to get down to the cap. This would make the cap and trade program both more effective and more politically credible.
Second, create a full-economy consumption-based accounting of California’s GHG emissions. This would include sectors that are not part of the cap and trade program, such as agriculture, as well as out-of-state production in sectors that are under cap and trade, such as oil refining. This measure would include all imports, and would exclude all exports. It would not be intended to be a device for enforcing policy, but rather a scorecard for honestly assessing how well the state is reducing its overall contribution to climate change. Ideally, such a scorecard would be calculated by an entity that is not politically invested in the answer, the equivalent of a Congressional Budget Office for California’s climate policy. If California is going to demonstrate the ability to reduce emissions without harming the economy, it needs this sort of all-encompassing and independent accounting.
Third, focus complementary policies on the areas where the market mechanism — cap and trade — is least effective, where specific market failures are identified. Probably the most important such case is in developing new knowledge and technologies. “Complementary policies” should include support for basic science to develop new technologies, as well as mandates for using specific technologies, such as the state’s electric vehicle mandate. But, importantly, every dollar spent or mandate enacted should be clearly tied to a need for policy intervention beyond the price in the cap and trade market. By the way, I would include in this knowledge creation policy the experiment that we are now running as the state ramps up the use of intermittent renewables. Complementary policies may also be justified where market prices are shown not to be effective, such as with some energy efficiency programs where buyers of appliances, houses, or other goods do not accurately incorporate energy prices.
As the California legislature discusses how to extend the state’s climate programs beyond 2020, we have an opportunity to learn from the experience so far and adjust policies in order to improve their impact in California and, more importantly, in the rest of the world. Now is the time to make the big changes we need, before we lock in for another decade or more.
I’m still tweeting interesting energy news, research and stats @BorensteinS
Severin Borenstein is E.T. Grether Professor of Business Administration and Public Policy at the Haas School of Business. He has published extensively on the oil and gasoline industries, electricity markets and pricing greenhouse gases. His current research projects include the economics of renewable energy, economic policies for reducing greenhouse gases, and alternative models of retail electricity pricing. In 2012-13, he served on the Emissions Market Assessment Committee that advised the California Air Resources Board on the operation of California’s Cap and Trade market for greenhouse gases. Currently, he chairs the California Energy Commission's Petroleum Market Advisory Committee and is a member of the Bay Area Air Quality Management District's Advisory Council.