Tag: California

Eyes on the Prize: Federal Climate Policy Should Preempt State and Regional Initiatives

In just a few days, Senators John Kerry, Lindsey Graham, and Joe Lieberman will release their much-anticipated proposal for comprehensive climate and energy legislation – the best remaining shot at forging a bipartisan consensus on this issue in 2010.  Their proposal has many strengths, but there’s an issue brewing that could undermine its effectiveness and drive up its costs.  I wrote about this in a Boston Globe op-ed on Earth Day, April 22nd (the original version of which can be downloaded here).

Government officials from California, New England, New York, and other northeastern states are vociferously lobbying in Washington to retain their existing state and regional systems for reducing greenhouse gas emissions, even after a new federal system comes into force. That would be a mistake – and a potentially expensive one for residents of those states, who could wind up subsidizing the rest of the country.  The Senate should do as the House did in its climate legislation:  preempt state and regional climate policies.  There’s no risk, because if Federal legislation is not enacted, preemption will not take effect.

The regional systems – including the Regional Greenhouse Gas Initiative (RGGI) in the Northeast and Assembly Bill 32 in California – seek to limit carbon dioxide emissions from power plants and other sources, mainly by making emissions more costly for firms and individuals.  These systems were explicitly developed because the federal government was not moving fast enough.

But times have changed.  Like the House climate legislation passed last June, the new Senate bill will feature at its heart an economy-wide carbon-pricing scheme to reduce carbon dioxide emissions, including a cap-and-trade system (under a different name) for the electricity and industrial sectors.  (In a departure from the House version, it may have a carbon fee for transportation fuels.)

Though the Congress has a history of allowing states to act more aggressively on environmental protection, this tradition makes no sense when it comes to climate change policy.  For other, localized environmental problems, California or Massachusetts may wish to incur the costs of achieving cleaner air or water within their borders than required by a national threshold.  But with climate change, it is impossible for regions, states, or localities to achieve greater protection for their jurisdictions through more ambitious actions.

This is because of the nature of the climate change problem. Greenhouse gases, including carbon dioxide, uniformly mix in the atmosphere – a unit of carbon dioxide emitted in California contributes just as much to the problem as carbon dioxide emitted in Tennessee.  The overall magnitude of damages – and their location – are completely unaffected by the location of emissions.  This means that for any individual jurisdiction, the benefits of action will inevitably be less than the costs. (This is the same reason why U.S. federal action on climate change should occur at the same time as other countries take actions to reduce their emissions).

If federal climate policy comes into force, the more stringent California policy will accomplish no additional reductions in greenhouse gases, but simply increase the state’s costs and subsidize other parts of the country. This is because under a nationwide cap-and-trade system, any additional emission reductions achieved in California will be offset by fewer reductions in other states.

A national cap-and-trade system – which is needed to address emissions meaningfully and cost-effectively – will undo the effects of a more stringent cap within any state or group of states.  RGGI, which covers only electricity generation and which will be less stringent than the Federal policy, will be irrelevant once the federal system comes into force.

In principle, a new federal policy could allow states to opt out if they implement a program at least as stringent.  But why should states want to opt out?  High-cost states will be better off joining the national system to lower their costs. And states that can reduce emissions more cheaply will be net sellers of Federal allowances.

Is there any possible role for state and local policies?  Yes.  Price signals provided by a national cap-and-trade system are necessary to meaningfully address climate change at sensible cost, but such price signals are not sufficient.  Other market failures call for supplementary policies.  Take, for example, the principal-agent problem through which despite higher energy prices, both landlords and tenants lack incentives to make economically-efficient energy-conservation investments, such as installing thermal insulation.  This problem can be handled by state and local authorities through regionally-differentiated building codes and zoning.

But for the core of climate policy – which is carbon pricing – the simplest, cleanest, and best way to avoid unnecessary costs and unnecessary actions is for existing state systems to become part of the federal system.  Political leaders from across the country – including the Northeast and California – would do well to follow the progressive lead of Massachusetts Governor Deval Patrick and Secretary of Energy and Environmental Affairs Ian Bowles, who have played key roles in the design and implementation of RGGI, and yet have also publicly supported its preemption by a meaningful national program.

California’s leaders and those in the Northeast may take great pride in their state and regional climate policies, but if they accomplish their frequently-stated goal – helping to bring about the enactment of a meaningful national climate policy – they will better serve their states and the country by declaring victory and getting out of the way.

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Too Good to be True?

Global climate change is a serious environmental threat, and sound public policies are needed to address it effectively and sensibly.

There is now significant interest and activity within both the U.S. Administration and the U.S. Congress to develop a meaningful national climate policy in this country.  (If you’re interested, please see some of my previous posts:  “Opportunity for a Defining Moment” (February 6, 2009); “The Wonderful Politics of Cap-and-Trade:  A Closer Look at Waxman-Markey” (May 27, 2009); “Worried About International Competitiveness?  Another Look at the Waxman-Markey Cap-and-Trade Proposal” (June 18, 2009); “National Climate Change Policy:  A Quick Look Back at Waxman-Markey and the Road Ahead” (June 29, 2009).  For a more detailed account, see my Hamilton Project paper, A U.S. Cap-and-Trade System to Address Global Climate Change.)

And as we move toward the international negotiations to take place in December of this year in Copenhagen, it is important to keep in mind the global commons nature of the problem, and hence the necessity of designing and implementing an international policy architecture that is scientifically sound, economically rational, and politically pragmatic.

Back in the U.S., with domestic action delayed in the Senate, several states and regions in the United States have moved ahead with their own policies and plans.  Key among these is California’s Global Warming Solutions Act of 2006, intended to return the state’s greenhouse gas (GHG) emissions in 2020 to their 1990 level.  In 2006, three studies were released indicating that California can meet its 2020 target at no net economic cost.  That is not a typographical error.  The studies found not simply that the costs will be low, but that the costs will be zero, or even negative!  That is, the studies found that California’s ambitious target can be achieved through measures whose direct costs would be outweighed by offsetting savings they create, making them economically beneficial even without considering the emission reductions they may achieve.  Not just a free lunch, but a lunch we are paid to eat!

Given the substantial emission reductions that will be required to meet California’s 2020 target, these findings are ­- to put it mildly – surprising, and they differ dramatically from the vast majority of economic analyses of the cost of reducing GHG emissions.  As a result, I was asked by the Electric Power Research Institute – along with my colleagues, Judson Jaffe and Todd Schatzki of Analysis Group – to evaluate the three California studies.

In a report titled, “Too Good To Be True?  An Examination of Three Economic Assessments of California Climate Change Policy,” we found that although some limited opportunities may exist for no-cost emission reductions, the studies substantially underestimated the cost of meeting California’s 2020 target — by omitting important components of the costs of emission reduction efforts, and by overestimating offsetting savings some of those efforts yield through improved energy efficiency.  In some cases, the studies focused on the costs of particular actions to reduce emissions, but failed to consider the effectiveness and costs of policies that would be necessary to bring about those actions.  Just a few of the flaws we identified lead to underestimation of annual costs on the order of billions of dollars.  Sadly, the studies therefore did not and do not offer reliable estimates of the cost of meeting California’s 2020 target.

This episode is a reminder of a period when similar studies were performed by the U.S. Department of Energy at the time of the Kyoto Protocol negotiations.  Like the California studies, the DOE (Interlaboratory Work Group) studies in the late 1990s suggested that substantial emission reductions could be achieved at no cost.  Those studies were terribly flawed, which was what led to their faulty conclusions.  I had thought that such arguments about massive “free lunches” in the energy efficiency and climate domain had long since been laid to rest.  The debates in California (and some of the rhetoric in Washington) prove otherwise.

While the Global Warming Solutions Act of 2006 sets an emissions target, critical policy design decisions remain to be made that will fundamentally affect the cost of the policy.  For example, policymakers must determine the emission sources that will be regulated to meet those targets, and the policy instruments that will be employed.  The California studies do not directly address the cost implications of these and other policy design decisions, and their overly optimistic findings may leave policymakers with an inadequate appreciation of the stakes associated with the decisions that lie ahead.

On the positive side, a careful evaluation of the California studies highlights some important policy design lessons that apply regardless of the extent to which no-cost emission reduction opportunities really exist.  Policies should be designed to account for uncertainty regarding emission reduction costs, much of which will not be resolved before policies must be enacted.  Also, consideration of the market failures that lead to excessive GHG emissions makes clear that to reduce emissions cost-effectively, policymakers should employ a market-based policy (such as cap-and-trade) as the core policy instrument.

The fact that the three California studies so egregiously underestimated the costs of achieving the goals of the Global Warming Solutions Act should not be taken as indicating that the Act itself is necessarily without merit.  As I have discussed in previous posts, that judgment must rest – from an economic perspective – on an honest and rigorous comparison of the Act’s real benefits and real costs.

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