Choosing Winners and Losers
The Externalities of Banning Energy Sources
California is known nationally and internationally for its leadership in setting ambitious climate goals and spurring innovation that has evolved how the world thinks about energy production, efficiency, and transmission. With each new legal and regulatory enactment, California policy should remain technology-neutral to protect jobs, encourage innovation, and maintain growth while looking at ways to reduce greenhouse gas (GHG) emissions.
To that end, California passed the first of its kind cap-and-trade program, applicable to stationary sources and transportation fuels, including oil and gas production, manufacturing, and electricity generation, allowing market prices to drive down emissions while maintaining its strong economy. This approach is prudent since California contributes only 1% to global GHG emissions.
In the energy field, California utilizes a Renewable Portfolio Standard, setting a percentage goal for renewable energy while allowing electric utilities to undertake long-term Integrated Resource Planning to figure out how to transition the energy grid to accommodate a growing portfolio of renewable sources. California also is the leading regulator of automotive emissions in the country, pioneering limits on tailpipe emissions and control technologies years before federal requirements. This balanced approach has likely led to California maintaining its leadership in the global economy and energy world, and has served as a model that California should continue to follow.
On the other hand, the California Legislature is not immune to the urge to force the market to adopt specific technologies or services, either by an outright ban on certain energy sources or a mandate on a certain energy mix. For example, in 2018 Governor Edmund G. Brown Jr. signed SB 834 (Jackson; D-Santa Barbara) banning any future expansion of offshore oil and jeopardizing existing infrastructure necessary for existing in-state production to continue. Also last year, AB 1745 (Ting; D-San Francisco) was introduced in an attempt to ban all combustion engines in the state, but failed to garner sufficient votes in committee.
Despite state leadership in reducing GHGs, California’s economy still relies on fossil fuels. As the state transitions away from this traditional source to renewable energy, the Legislature must account for the effects on consumers, motorists, and residents’ quality of life that come with legislated bans and mandates. Renewable energy and fossil fuels should not be viewed as diametrical opposites. A mix of both is required to maintain a secure energy grid and protect jobs. An appropriate balance can be struck to set forth a model for other states and the world to follow.
The Policy Issues
• Combustion Engine Bans Have Disproportionate Impact on Poor and Working Class Californians. Transportation accounts for a large portion of California’s GHG inventory. Legislators have introduced bills to ban combustion engines in each of the last two years, and no doubt will continue to sponsor similar legislation in the future. A targeted ban disproportionately harms poor, minority, and middle class workers who commute long distances in older vehicles due to the high housing costs in California’s major metropolitan areas. Most working Californians cannot afford and do not choose to purchase electric vehicles. Solutions need to be developed that are even-handed and take into account all the costs of climate policy.
California lays claim to the country’s most developed electric vehicle market in the nation. As California leaders push for even more purchase and use of electric cars, the blessings of fewer GHG emissions are limited by the serious logistical challenges brought on by economy-wide electrification. Electric vehicles for example, may be unusable following a natural disaster, when electric service may be unavailable for several days or weeks. In addition, evacuation distances for those escaping wildfires or other natural disasters may exceed the range of an electric vehicle on a single charge, or charging stations may become inaccessible.
• Picking Winners and Losers Hinders Innovation. California policy makers have historically preferred and provided financial and market incentives for solar and wind energy over other renewables, hindering innovation by narrowly defining “renewable” as a list of preferred options, making other technology less cost competitive in California. California also cannot rely 100% on solar and wind—it requires storage when the sun stops shining and wind stops blowing, or requires a reliable backup generation.
Battery storage technology is touted often as the response to concerns over reducing the role of natural gas as a clean, fast-ramping resource. However, battery storage is not yet available at a level necessary to maintain power after dark or when the wind is low, constituting less than 1/10th of 1% of defined renewables in use in California. After closure of California’s last nuclear generating facility, the remaining reliable backup generation will be natural gas. California is lagging on energy storage, and if the state also bans or limits natural gas, it will be left with nothing to keep the lights on. Legislators must be sure that the physics of the grid is kept top of mind when enacting energy policy.
Nuclear energy, was once heralded as the clean and green option. France, for instance, is the world’s largest net exporter of clean electricity and provides Switzerland, Italy, and Belgium with loads of cheap energy. Californians have had an ambivalent and inconsistent relationship with energy generation technologies. Their flirtation with nuclear power was brief, and the skepticism over costs, unanswered safety issues, and unresolved concerns over waste disposal overcame the obvious advantages that nuclear generation represents for climate health.
California was a world leader in moving generation from coal and oil to natural gas, creating some of the greatest improvements in air quality in the country while making significant progress in GHG emissions. But that progress was already banked by the time that serious climate policy was debated in the last decade, leaving policy makers the choice of standing still or seeking the next big thing in clean electrical generation. California legislators continue to introduce bills mandating procurement of wind and solar, despite the impracticability of doing so, thereby limiting innovation and technology in other areas of energy production.
• Renewables Are Just Part of the Mix. Legislators should consider the negative social and environmental externalities of picking one technology over another. For example, many solar panels installed over the last several decades are reaching the end of their useful lives. As the number of permitted hazardous waste facilities in-state declines, California is forced to ship its hazardous waste to states or nations with fewer environmental regulations, effectively shifting our problems onto others. Batteries too cause unforeseen externalities. Like many of our consumer electronics, batteries use precious metals that are mined in countries without the rights granted to California workers, without environmental regulations, and where massive amounts of GHGs are emitted during the mining and transport process.
• Some California Industries Rely on Natural Gas. For the last few years, legislators and agencies have targeted natural gas production and use, imposing regulatory moratoriums on new gas hookups without first studying the effects, and introducing bills to ban or curtail the use of this baseload, reliable backup power source. It is important to remember that certain industries cannot continue to operate in California if natural gas is banned. For instance, clay roof tile manufacturers, asphalt companies, mortuaries, and some food production facilities require massively high heating units. Natural gas is the most efficient, and sometimes only source that will allow kilns, ovens, and stoves to reach the appropriate temperature. Banning gas means these companies must move out of state, or close altogether, requiring more imports and thus more GHG emissions from transport into the state. Given the already-soaring cost of housing, increasing the cost of building materials seems unwise.
• Banning Natural Gas and Oil Production in the State Means More Imports. California residential electricity rates are the fifth highest in the nation, and commercial and industrial ratepayers pay as much as 50% to 70% above the national average. California regularly ranks in the top three states for highest retail gasoline prices, just behind Hawaii and often tied with Alaska. Prices average more than 60 cents higher than the rest of the nation due to factors that include state excise taxes, costs passed on from climate change regulations (cap-and-trade and the low carbon fuel standard), a reduction in the number of refineries operating in California, and the absence of interstate pipelines, such that transportation fuel can be imported only via ship or truck.
Proponents of energy policies that ban in-state natural gas and oil production fail to acknowledge unintended consequences such as increased oil and gas imports, higher energy costs for residents, less tax revenue for the state, fewer in-state jobs, and negative environmental and labor impacts.
Despite the most stringent environmental and energy policies in the country, California’s fuel consumption is at the highest level since 2009, according to the California Energy Commission, because of a booming economy and growing population. Home to 40 million residents, 35 million registered vehicles, 145 airports, 32 military bases, and 11 public ports, including three of the nation’s “megaports” (Los Angeles, Long Beach and Oakland), California’s demand for oil and gas is still very large and remains the leading energy source powering our economy.
Severin Borenstein of the Energy Institute at Haas recently wrote that “emissions from cars, trucks, and airplanes have been rising by about 1.5% per year since 2012” (August 6, 2018 blog post). With both California’s in-state production and imports from Alaska declining due to energy policies and economics, California relies on imports from more than nine foreign countries for the majority of its crude oil, the California Energy Commission reports. In fact, California has increased crude oil imports from foreign countries from 5% of in 1992 to 56% in 2017, importing approximately 354 million barrels of crude oil a year at a cost to California at around $20 billion annually (the Brent spot price for oil was around $52 as this article was written).
California could better spend some of this money on existing in-state oil and gas production facilities, which keep jobs and capital in California, instead of funding foreign oil regimes. Moreover, in-state oil and gas production would also then be subject to California’s much stronger environmental and labor laws.
Simply curtailing oil and gas production in California does not necessarily lead to lower global emissions or even a cleaner environment. Quite the contrary, policies banning in-state production of oil and gas will inevitably shift California supply to less environmentally conscious (and less worker friendly) countries or states for import. The non-partisan California Energy Commission data on the state’s consumption show this.
With that shift to less in-state production and more foreign imports comes even greater negative externalities, including increased GHG emissions from the overseas or cross-country transport of fuels into California; a reduction of in-state jobs either directly or indirectly related to production and distribution of oil and gas; funding foreign regimes known for human rights violations; an increased chance of oil spills correlated with longer transportation routes that are less efficient and more prone to spills; and a significant loss of tax revenue for California that could be used for school funding, infrastructure and many other social services.
Keeping oil and gas production in California while providing incentives for new technology allows California to subject oil and gas companies to California environmental laws and regulations—which are the most stringent in the nation—while allowing the fifth largest economy in the world to thrive.
Lawmakers already have introduced bills aimed at banning the sale of nonzero-emission combustion engines by 2040, specifying energy procurement sources, offshore oil production bans, and building and appliance electrification standards. Outright bans, without accounting for the full economic and environmental impacts of what will happen, miss the whole picture, potentially damage the state’s economy, and do not necessarily contribute to a reduction in global GHGs or a cleaner environment. Although we anticipate additional legislation targeting oil and gas production in-state, CalChamber is committed to working with legislators so that they better understand the implication of these policies for California’s economy and environment.
Energy policy is complex, with known and unknown externalities every time a bill is proposed picking energy winners and losers. The Legislature should be careful to evaluate each policy within the broader system of energy, economy, and the environment. If it does, California can: continue to be a leader in global climate change and have the strongest economy in the nation and world; work with other states and countries to develop new strategies and technologies; allow the bipartisan processes such as the extension of the cap-and-trade program, to work; continue to support the more than 300,000 jobs directly or indirectly related to the oil and gas industry, all while imposing the toughest environmental laws and regulations in the country.
For years California focused inward and is on track to achieving its ambitious energy goals. We can now focus outward and be a model for stability
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