Guest Commentary: Climate Change Policy Comes with Economic Risks​

(Cross posted in The Sacramento Bee)

Loren-Kaye-2015-300x300Gov. Jerry Brown spoke to the United Nations Climate Summit last month. He made a strong pitch for state and local government activism to fight climate change. The governor also promised to set an ambitious goal for carbon reduction for 2030 that “will also require heightened political will.”

The governor’s timing is perfect because California’s climate change law is about to make a real impact on Californians.

Politicians, regulators and special interests have spent the past eight years claiming credit, pointing fingers, writing regulations, filing lawsuits, fighting a ballot measure and spending money taxed from just a few companies.

But beginning Jan. 1, the costs of controlling greenhouse gas emissions finally pass directly to motorists – just as the California Air Resources Board intended.

It’s not a secret that pricing is a key strategy to reduce carbon demand. “It may not be popular to say, but that’s necessary. Higher prices discourage demand,” former Senate leader Darrell Steinberg said.

Once this new cost is layered onto gasoline and diesel prices (estimated at 13 to 20 cents a gallon), it will be only the first step in what will be higher prices for a wide range of carbon-intensive products, not to mention a major shift in how the state’s economy is structured.

The main event will be how California chooses to regulate carbon emissions after 2020.

The air board has launched new rulemaking that would chart a path ostensibly to reduce greenhouse gas emissions by 80 percent below 1990 levels by 2050. This goal is in line with scientific guidance to achieve stabilization of atmospheric greenhouse gas concentrations – if achieved globally. For now, it appears that the Air Resources Board is aiming toward an interim target of 35 to 50 percent below 1990 levels, which it claims is achievable under existing policy goals.

So California will very likely continue to set the bar for carbon regulation – but so far no other state or the federal government has approached it. Indeed, few nations around the globe have been as committed to greenhouse gas reductions as California.

Leadership isn’t just being ahead of the pack – it’s getting the rest of the pack to follow. Other states and the federal government need more than just California’s good intentions and elaborate regulations to move into its orbit. As the executive officer of the Air Resources Board said, “What’s good for California, and what others will ultimately look to, is success. The ultimate test of success is going to be: Did it work?”

California represents less than 1 percent of global greenhouse gas emissions. Any solution that does not involve a global consensus will cause California to suffer very high costs without any benefits. With this in mind, noted environmental economists Todd Schatzki and Robert Stavins have outlined a possible next generation climate change framework. This approach would balance the goals of global leadership and broader participation in reducing greenhouse gas emissions with the health of the state’s economy.

The key element of this policy would be to carefully assess the environmental and economic performance of existing greenhouse gas reduction policies to determine how they have affected the California economy, whether any should be modified or eliminated, or whether new policies should be developed.

In light of the international negotiations on climate change, we should preserve flexibility by avoiding firm emission targets that go too far into the future. Increasing these targets should be conditional on reciprocal actions by other states or nations.

For an individual state like California, more stringent greenhouse gas reduction policies – without reciprocal actions by other states and nations – would lead to greater risks of economic activity fleeing California for other states and countries.

California’s current regulatory scheme relies on a suite of control measures to reduce greenhouse gas emissions, including a market-based cap-and-trade program along with specific mandates, such as a requirement to reduce the amount of carbon in motor fuels, quotas for electricity generated from renewable sources and increased automotive fuel efficiency, among others.

The interaction between the mandatory measures and market-based incentives “can produce perverse policy outcomes,” according to Schatzki and Stavins. Preparations for a next-generation policy should examine the economic efficiency and environmental effectiveness of these command-and-control measures, especially as they may have improved or undermined efficiencies achieved by cap and trade.

This analysis would inform a policy whose goal should be to increase the likelihood of broader international action while protecting the economic well-being of the state. This approach would minimize further erosion of California’s competitiveness and help inform other states that are choosing carbon reduction strategies of their own.

Loren Kaye is president of the California Foundation for Commerce and Education, a think tank affiliated with the California Chamber of Commerce.

Loren Kaye
Loren Kaye was appointed president of the California Foundation for Commerce and Education in January 2006. He has devoted his career to developing, analyzing and implementing public policy issues in California, with a special emphasis on improving the state's business and economic climate. He also was a gubernatorial appointee to the state's Little Hoover Commission, charged with evaluating the efficiency and effectiveness of state agencies and programs. Kaye served in senior policy positions for Governors Pete Wilson and George Deukmejian, including Cabinet Secretary to the Governor and Undersecretary of the California Trade and Commerce Agency. See full bio.