Governor Got it Right on Global Warming

San Francisco Chronicle
By Margo Thorning
May 5, 2006

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Californians have led the way in several key environmental policy areas over the years including requiring catalytic converters on cars, sulfur dioxide and nitrous oxides trading to reduce particulates in the air and clean water and landuse restrictions. Naturally, many Californians think their state should take the lead in reducing greenhouse gases, even if none of their neighbors follows suit.

Last year, when Gov. Arnold Schwarzenegger signed the executive order establishing emission reductions for the state, Californians, who are all heart, greeted the order with enthusiasm. Thus, it came as a shock to many when Schwarzenegger recanted on mandatory targets at his climate summit on April 11. Saying he "didn't want to scare businesses out of California," the governor suggested that California try reducing carbon dioxide emissions voluntarily. Is this approach sound? Should the governor have insisted on mandatory targets?

A look at the evidence suggests that Schwarzenegger's instinct is the right one. First, mandatory emission caps are not likely to promote new energy technologies because caps will force industry to direct resources to near-term, "end-of-pipe" solutions rather than promote spending for long-term technology innovations that will enable the United States to reduce greenhouse gases and increase energy efficiency. An emissions trading system, such as the one put in place in the European Union last year, sends the wrong signals to investors because it will create uncertainty about the return on new investment. A mandatory cap would be seen by business as just the "first step" in a likely series of increasingly stringent targets.

Investors realize that if a mandatory emissions program were established in California, they would be disadvantaged vis-a-vis other states without targets and with the European Union because EU regulations tend to be more flexible and accommodating. California businesses would certainly also be disadvantaged against competitors in India or China who have no emissions reduction targets under the Kyoto Protocol.

A large body of economic research by respected U.S. academic and energy-modeling firms show that near-term mandatory emission reduction targets increase energy prices and reduce economic growth and employment. The economic analysis provided by the California Climate Action Team is incomplete and provides a misleading picture of the likely consequences of sharp cutbacks in energy use and a requirement that 20 percent of all electricity consumed in California be from renewable sources. Now is the time for California to provide incentives for companies to voluntarily undertake additional carbon dioxide intensity reducing investments, not promote a system that increases the risk of any investment in our economy.

Economic growth itself can be a powerful factor in reducing the amount of energy used to produce a dollar of output. For example, the United States, with its voluntarily approach to emission reduction, has cut its energy intensity by 12.2 percent over the 1997-2003 period compared to only 7.6 percent in the EU with its mandatory approach. The key factor in the this country's greater success is its rapid economic growth, which averages over 3 percent per year compared to 1 percent in the EU.

In addition, sharp increases in energy prices are already encouraging households and businesses in the United States to consume less energy. Data from the U.S. Department of Energy's Energy Information Administration showed that in 2005, energy consumption declined in the United States in spite of strong economic growth.

Global warming requires global solutions. For example, Chinese firms use four times as much energy as a U.S. firm to produce a dollar of output and seven times more than Japan. If China, India, Brazil, and other developing countries had access to even current energy and manufacturing and technologies, their emissions would be far lower.

California can do its part to promote cost-effective solutions for energy efficiency, carbon sequestration and innovative new technologies by keeping its economy strong and avoiding mandatory curbs on emissions.

Margo Thorning, who has a doctorate in economics, is senior vice president and chief economist at the American Council for Capital Formation, a Washington-based group that advocates "strong capital formation, a balanced regulatory regime and costeffective environmental policies."