How Can California and Other States Lead Effectively on Climate Change Policy?

American Council for Capital Formation Newsletter
July-August, 2006

(PDF)

Several states are evaluating proposals to require reductions in greenhouse gas emissions (GHGs) and some have mandated renewable energy standards and called for reductions in motor vehicle emissions. When states consider proposals that will require curbing energy use or switching to more expensive energy sources, they need to weigh carefully the costs and benefits in terms of economic impacts and environmental effects.

For example, the California Legislature is considering Assembly Bill 32, which requires that California reduce its statewide GHG emissions to 1990 levels by 2020. The bill requires that utilities include the carbon emissions from imported electricity which means that coal-fired electricity would tend to be replaced by electricity produced from natural gas, hydro or nuclear power. In addition, California law already requires that 20 percent of electricity be produced from renewables by 2017. Before adopting a mandatory emission reduction target, Californians may find it useful to examine the evidence on the potential impact of these mandates on economic and job growth. Another key question is whether California’s “going it alone” in mandating emission reductions would make a significant contribution to slowing the growth of global GHG emissions.

A major stumbling block to California’s meeting the AB 32 targets is its projected increases in emissions and population over the next 14 years. California’s GHG emissions are projected to grow by 27 percent from 2000 to 2020 under the baseline forecast (See Figure 1). The baseline forecast already includes assumptions about increased energy efficiency but, even so, GHG emissions are projected to rise to 600 million metric tons of carbon dioxide (MMTCO2) by 2020, compared to the AB 32’s required reduction to 426 MMTCO2 (see Figure 1). Sharp cutbacks in California’s energy use would be necessary to close the gap in 2020 between projected emissions and the AB 32 target. The projected increase in California’s population (from 30 million residents in 1990 to 37 million residents in 2004 and 44 million in 2020) will make emission reductions very challenging, since more people means more energy is needed for home heating and cooling, job growth and transportation.

To illustrate the difficulty of reducing California’s emissions to 1990 levels by 2020, consider that over the 1990-2000 period, per capita emissions in California fell by only 2.9 percent (see Table 1). California’s projections show that, under its baseline forecast, emissions per capita will decline by 2.3 percent from 2000 to 2010 but will increase by 0.9 percent from 2010 to 2020.

The technologies simply do not exist to reduce total (and per capita) emissions over the next 14 years by the amounts mandated in AB 32 - to say nothing of the time and expense required to replace existing energy using equipment - without severely reducing the growth in California’s Gross State Product (GSP) and in employment.

State policymakers should instead focus their efforts on ways to improve their economies and environment, including improving the tax treatment of new investment through faster depreciation and investment tax credits, which could reduce growth of greenhouse gas emissions as well as enhance productivity growth. Further, we should continue to support measures like the Asia-Pacific Partnership on Clean Development, an agreement with developing countries to promote economic development and the spread of clean, less emitting energy technology. Effectively addressing the threat of climate change requires a global, long-term approach.