One Stone, No Birds
Facility-level GHG caps would undermine climate policies and hurt California’s economy
Capping greenhouse gas (GHG) emissions at individual facilities is a bad idea whose time, unfortunately, may have come in California. Unlike a statewide cap or tax on emitting GHGs, facility-specific caps have essentially zero support among environmental economists, as I discussed in a blog in January.
Capping GHGs at specific facilities would undermine California’s leadership in creating cost-effective mechanisms for fighting climate change. If the caps are binding, their primary effect will be to drive GHG-intensive industry out of the state, moving the emissions, not reducing them.
Nonetheless, recent changes to a bill in the California legislature (Assembly Bill 378) suggest that’s where we’re headed. AB 378 is one of (at least) two competing bills that would extend California’s GHG cap and trade program past 2020, which is when the current legislated program ends. Previously, AB 378 had stated that GHG reductions should be achieved in a way that also addresses public health issues from local air pollution, particularly in disadvantage communities. This is a great idea for which there are many possible policy options.
Unfortunately, AB 378 was amended in April to add specific requirements for facility-specific caps, which will directly conflict with cost-effective climate change mitigation:
(c) The state board [California Air Resources Board] shall not permit a facility to increase its annual emissions of greenhouse gases compared to the annual average of emissions of greenhouse gases reported from 2014 to 2016, inclusive.
(d) The state board may adopt no-trade zones or facility-specific declining greenhouse gas emissions limits where facilities’ emissions contribute to a cumulative pollution burden that creates a significant health impact.
Wait, if legislators are worried about local air pollution in disadvantaged areas (known as environmental justice or EJ communities), why would they cap GHGs instead of regulating the local air pollution? After all, it’s the local pollutants (NOx, microscopic particulates, and toxics like benzene and formaldehyde) that create health impacts in surrounding communities. The impact of greenhouse gases is the same regardless of where on earth they are released.
The answer goes back to a paper by Cushing, Wander, Morello-Frosch, Pastor, Zhu and Sadd that was released last September, which Meredith discussed last October. The paper shows (figure 3, reproduced here) a significant, though very imperfect, correlation between GHGs and one measure of local pollution released from industrial facilities.
The paper also shows that GHG emissions are higher on average in EJ communities than in those that are not considered disadvantaged. And, the paper suggests that total GHG emissions from industrial sources in California were higher in 2013-14 than in 2011-12, before California’s cap-and-trade program began. A longer time-series look at industrial GHG emissions confirms the claim of Cushing and co-authors. But it also shows that the largest change occurred between 2011 and 2012, before cap-and-trade started, so it is hard to know if cap-and-trade accelerated or slowed the trend.
A new paper by Kyle Meng of UC Santa Barbara sheds more light on the question of GHG emissions in EJ communities. Meng’s paper confirms that GHG emissions have been about 40% higher, on average, in EJ communities than other areas in California. But his analysis shows that GHG changes since the beginning of cap and trade have not differed on average between EJ and non-EJ communities. Meng looks at the changes in GHG emissions in 2013-2015 (data for 2016 have not yet been released) compared to 2012, the year before the program started. He finds no statistically significant difference between EJ and other communities over the three cap-and-trade years in aggregate, though if anything emissions have fallen slightly more in disadvantaged communities. He also finds substantial GHG drops in 2015 in both EJ and non-EJ communities.
Even if EJ communities have seen about the same GHG change as non-EJ areas, if GHGs at a facility generally move in tandem with local pollutants, isn’t restricting GHGs a tool that could kill two birds with one stone? Unfortunately, the answer almost certainly is no.
The reason is that restricting GHGs at specific facilities gives companies incentives to make changes that just shift the GHG emissions elsewhere, particularly out of state. The California oil refining industry has been at the center of these facility-cap discussions, and provides a good illustration of the problems.[1]
If a California refinery were faced with a binding GHG cap, the two most likely ways it would comply are by reducing the amount of oil it refines (and thus the amount of gasoline and other refined products it produces) and/or by changing the type of oil it refines.
Reducing the amount of oil it refines means that there is less in-state production of gasoline and other products. But that does not reduce the amount of gasoline we consume in California, at least not by much, because (with an extra 10-20 cents per gallon for shipping) California-specification gasoline can be brought in from refineries around the world. So, the reduction in in-state production just creates “leakage” of production to out-of-state facilities, generally taking high-paying jobs with them.
In fact, that is exactly what happened after the fire at Exxon’s Torrance refinery in February 2015, causing gasoline prices to spike. It takes about a month to order and receive delivery for imported gasoline that meets California specifications. As the figure below shows, gasoline imports to the west coast (the vast majority of which are to California) skyrocketed about a month after the mid-February fire (the blue lines). The fire drastically reduced GHG emissions from the Torrance refinery, but those were likely more than offset (due to additional transportation) by increases in emissions from refineries elsewhere in the world.
Some advocates for restricting refinery GHG emissions have argued that we just need to get off of gasoline, and this would be a first step. I completely agree that we need to replace gasoline, but facility-specific GHG caps are not a step in the right direction. The Torrance refinery fire took out about 10% of the state’s capacity to produce California-specification gasoline, but as the figure below shows it did not put a noticeable dent in California gasoline consumption, which has continued to trend upward since 2013. Consumption in March through December 2015, after the fire, was 2.6% higher than the same months in 2014.
Other supporters of capping GHGs from in-state refineries argue for the need to prevent imports of crude oil from the Canadian tar sands, which is substantially more GHG intensive (in production and refining) than other crude. (Though let’s not forget that the GHG emitted when you burn a gallon of gasoline in your car are still much greater than all the upstream GHG emissions from creating that gallon.) But just as reduced production in-state will push that production to more distant refineries, reducing California purchases of Canadian tar sands crude will push purchases of that crude to more distant refineries. The effect of this supply “reshuffling” on world GHG emissions will likely be very small and may not even be a net reduction.
If capping GHGs at California facilities won’t do much to lower world GHGs, might it still lower local pollution? It might, because sometimes lowering a facility’s GHGs is indeed associated with lowering its local pollutants. But the fact that this association is very imperfect suggests that squeezing GHGs to reduce local pollutants will miss many of the opportunities for reducing local pollutants, opportunities that the facilities won’t have an incentive to pursue unless their local pollution is regulated directly.
And capping GHGs at industrial facilities will do nothing to reduce by far the largest source of dangerous local emissions, which is exhaust from trucks, ships and construction equipment.
Moreover, because designers of the state’s climate change programs understand that leakage and reshuffling are not really reducing global GHG emissions, and that they are likely to hurt the California economy, the programs include incentives (and some restrictions) to prevent these responses. So, to the extent that facility-specific caps reduce in-state GHG emissions, they do so in ways that other state policies are specifically designed to prevent.
Hazardous air quality in disadvantaged communities is a very serious problem, but capping GHG emissions at facilities in those communities is not a serious solution. And in the process it will undermine California’s programs and leadership in addressing climate change. Let’s solve local air pollution by regulating (and taxing) it directly.
[1] The refining industry is also the subject of a proposed rule of the Bay Area Air Quality Management District (rule 12-16) that would cap GHG emissions from each refiner in the bay area. The Advisory Council to BAAQMD (of which I am a member) has put out a report recommending against adoption of rule 12-16.
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Severin Borenstein is Professor of the Graduate School in the Economic Analysis and Policy Group at the Haas School of Business and Faculty Director of the Energy Institute at Haas. He received his A.B. from U.C. Berkeley and Ph.D. in Economics from M.I.T. His research focuses on the economics of renewable energy, economic policies for reducing greenhouse gases, and alternative models of retail electricity pricing. Borenstein is also a research associate of the National Bureau of Economic Research in Cambridge, MA. He served on the Board of Governors of the California Power Exchange from 1997 to 2003. During 1999-2000, he was a member of the California Attorney General's Gasoline Price Task Force. In 2012-13, he served on the Emissions Market Assessment Committee, which advised the California Air Resources Board on the operation of California’s Cap and Trade market for greenhouse gases. In 2014, he was appointed to the California Energy Commission’s Petroleum Market Advisory Committee, which he chaired from 2015 until the Committee was dissolved in 2017. From 2015-2020, he served on the Advisory Council of the Bay Area Air Quality Management District. Since 2019, he has been a member of the Governing Board of the California Independent System Operator.
Energy Institute Blog 
Just making the case that accounting for public health benefits is necessary for identification of optimal abatement
Severin, SB 100, which promises to make nuclear energy part of California’s Renewable Portfolio Standard, has the potential to make our state a center for development of new nuclear tech. The bill, currently before California’s Senate Appropriations Committee, includes “zero-emission facilities” in RPS goals for 2045.
Do we prioritize keeping high-paying fossil fuel jobs in-state, or create new jobs in energy – ones with a future?
EJ communities are for the most part lower income and less expensive communities. Beverly Hills has no factories and no freeways as opposed to Compton which has both. The price of a square foot of land in BH is several times that of Compton. To your point we could get rid of the factories and refineries and lose the jobs that go with them. Then the EJ community would have another problem, homelessness! As the emitters leave and they are, we are seeing gentrification in those same communities and increasing homelessness in urban areas. Often these policies have unintended consequences. The old people use to say “It’s like cutting off your nose to spite your face.”
Would you agree that cost-benefit analyses should account for the value of public health benefits? I’m not attempting to conflate design choices and evaluation. Just making the case that accounting for public health benefits is necessary for identification of optimal abatement.
Absolutely. But cost benefit analysis should also consider alternatives, which in this case would include regulating/pricing the local pollutants directly.
Chris, one of the important economic lessons is that to address multiple objectives optimally requires applying multiple policy instruments. In this case, GHG emissions can be controlled through cap & trade, and local pollutants can be controlled by local controls. Trying to do everything with a single instrument makes achieving either set of goals more difficult.