California: Climate Policy Postmodernism (all-pain, no-gain for feel-good elitism)

By Tom Tanton -- October 4, 2012

“There is a vast difference between doing the right thing and doing the thing right. In this case, CARB is implementing AB32 in ways that ignore current realities and that likely make matters worse…. It is time for a major reset of the underlying law and its regulatory implementation.” – T. Tanton

The California Air Resources Board (CARB) is all-in, damn-the-torpedoes relating to AB 32, the state’s 2006 anti-global warming law, even while acknowledging that it will drive up the cost of energy. CARB chair Mary Nichols confirmed the start of a statewide cap-and-trade auction system November 14 under which industrial firms will buy and sell emission rights for pollutants–despite receiving unrebutted testimony from manufacturers and business owners about the very onerous, and even devastating, impact of moving forward with the auction.

Background

When the California’s Global Warming Solutions Act was enacted in 2006, things were quite different. Electricity prices were being pushed down by the early expansion of natural gas plenty. Other states and nations were considering similar climate change programs, and, in fact, the Western Climate Initiative set up by Western Governors looked to increase trade in emission allowances. Unemployment in the State was at about 7 percent, and the foreclosure debacle hadn’t yet hit (which would drive many cities to the brink of bankruptcy).

The prospect of “leakage” was known, but not the extent. Too much faith was held in the Hobson’s choice of cap-and-trade as opposed to the more draconian option of command-and-control regulation. And finally, national cap-and-trade seemed to be coming.

My how things have changed—except for the commitment to economy destroying state policies. The most notable change is that, nationwide, greenhouse gas emissions have already dropped to 1992 levels, without interventionist policies. California’s carbon intensity has improved 21 percent since the turn of the century. Compare this to AB32’s goal of reaching 1990 statewide emissions by 2020.

Impact of Natural Gas Plenty

The price of wellhead gas reported by U.S. Energy Information Administration in January 2006 was just over $8/MMBtu. In January of 2012, it was $2.89/MMBtu, a drop of over 60%. For consumer and electric generators using natural gas, this is a beacon during otherwise tough economic times. It also destroys a large part of the economic rationale for CARB’s economic analysis of measures implementing California’s Global Warming Solutions Act, even with the 2010 update of that original economic analysis.

Much of the benefit from implementing the policies and programs was based on the cost savings consumers would achieve by installing energy conservation measures (never mind they likely would have installed those anyway, in direct response to market signals.)

By reducing the amount of avoided energy payments, but doing little to reduce the cost of the efficiency measure, the economic benefit of this portion of AB32’s implementation all but disappears. It also would benefit electric generators using natural gas (about 60% of California’s generation) but that is offset by the increasing requirement for expensive renewables, which become relatively even more expensive due to the competition from lower natural gas prices.

The Sound of One Hand Clapping

The Western Climate Initiative (WCI) was developed by seven U.S. states (California was joined by Oregon, Washington, Utah, Montana, New Mexico and Arizona) and several Canadian provinces along the western rim of North America. The lofty goal of WCI was to combat global warming – independently from their national governments, through emissions trading allowances under a declining cap.

Yet today, only California and two Canadian provinces are active in WCI. And, in a strangely ironic commentary on California’s business climate, the administrative arm (WCI, Inc.), formed to track and clear trades, is to be headquartered and chartered in Delaware.

Unemployment and Foreclosures

Today’s unemployment in California hovers just over 10%, with many areas suffering more than 15%. Foreclosures of homes and businesses remain at all time highs. Four California Cities have declared bankruptcy and others are close to doing so. Manufacturers and businesses are leaving the state in an years on-going exodus.

Leakage

From 2000 to 2010, the carbon-dioxide intensity of the U.S. economy—measured as metric tons carbon dioxide equivalent (MTCO2e) emitted per million dollars of gross domestic product (GDP) — improved by over 17 percent or 1.7 percent per year.

The decrease in U.S. CO2 emissions in 2009 resulted primarily from three factors: an economy in recession, a particularly hard-hit energy-intensive industries sector, and a large drop in the price of natural gas that caused fuel switching away from coal to natural gas. This further lowered our emissions intensity. Improvements occurred even in years of economic growth, not just recession.

California is better on average than the rest of the country. In a late 2007 Report by the Congressional Research Service, the various states were compared on both total GHG emissions and by GHG emissions intensity. Naturally, as the eighth or ninth largest global economy (albeit falling from 5th or 6th in 1990) the TOTAL emissions for California ranked second highest (worst) nationally but second LOWEST (best) in intensity. Globally from a per capita standpoint, California had the 46th lowest emissions.

California’s emissions intensity may be a beacon to other states and countries, but implementing cap-and-trade, and more generally AB32, will increase global emissions, by forcing businesses, manufacturing, and even agriculture out of state, where emissions intensities are much worse, leading to emissions “leakage.” California will simply begin importing more goods we used to make and grow—cement from Arizona, food from South America, high tech devices from Asia– with a net increase in global emissions.

Recognizing the potential for leakage, the CARB is implementing a program of “transition assistance” to industries they deem are threatened by trade competition, due to the higher imposed cost of obtaining emission credits under the cap-and-trade program. “Transition assistance” is just a euphemism for giving away free emission credits during the first auction. But if it’s good one time, why not always? If it is good for select sectors, why not all?

Declare Victory and be Done?

EIA has reported that, nationally, greenhouse gas emissions have declined in 2011. In 2011, GDP grew by 1.8 percent, but emissions decreased by 2.4 percent (136 million metric tons). This indicates that the carbon intensity of the economy declined by about 4.2 percent. The 2011 decrease is only the fourth year since 1990 to experience a decline in carbon intensity of greater than 3.5 percent for the economy as a whole and only the sixth year since 1990 to experience an emissions decline.

Since 1990, energy-related carbon dioxide emissions in the United States have grown much more slowly than GDP – in 2007 emissions were 19 percent greater than their 1990 level, but by 2011 were only about 9 percent above the 1990 level. GDP has increased by 66 percent over that same period.

The carbon intensity of the energy consumed improved in every sector of the U.S. economy. A carbon intensity decline in the electric power sector (-4.0 percent) which accounted for 40 percent of total U.S. primary energy use in 2011, drove the lower carbon intensity of the energy supply.

As mentioned above, the carbon intensity of the energy supply (CO₂/Btu) declined in every sector in 2011. With the exception of the transportation sector, this decline was influenced by the decline in the carbon intensity of the electric power sector. The share of non-carbon emitting generation in the electric power sector grew from 30 percent in 2010 to 31 percent in 2011. Natural gas generation (the lowest carbon intensity per Btu of the fossil fuels) increased 3 percent and coal (almost twice as carbon intensive as natural gas) declined by 6 percent.

While this has occurred for a variety of reasons, it is of important note that draconian and costly measures such as contained in California’s implementation of AB32 are not part of the reason.

In a 2012 greenhouse gas emission inventory report, CARB notes that the total statewide net emissions between 2000 and 2009 decreased from 459 to 453 MMTCO2e, representing a 1.3 percent decrease from 2000 and only a 6.1 percent increase from the 1990 emissions level, much less than originally forecast in 2006 and later when control measures and the cap and trade program were being developed.

Per capita emissions in California have decreased from 2000 to 2009 (by 9.7 percent), but the overall 9 percent increase in population during the same period offsets the emission reductions. From a per capita sector perspective, industrial per capita emissions have improved 21 percent from 2000 to 2009. Were it not for population increases, California would be ahead of schedule in achieving the reductions called for in AB32.

Conclusion

There is a vast difference between doing the right thing and doing the thing right. In this case, CARB is implementing AB32 in ways that ignore current realities and that likely make matters worse. How much more different do things have to get before CARB acknowledges the futility of their quest? It is time for a major reset of the underlying law and its regulatory implementation.