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Little federal action and the possibility that California’s landmark climate bill will be suspended – how did we arrive here?  Why haven’t we made more progress? 

The federal progress on climate policy that had been anticipated after the 2008 election has failed to materialize.  In California, the situation is not much more satisfactory.  Once boldly leading the way, now California proponents have taken on a defensive posture.   For months now, the undercurrent driving climate policy development in California has been Proposition 23, the measure that would suspend Assembly Bill 32, California’s economy-wide emission reduction law which underlies a suite of important policies. Proposition 23 would require California to lower unemployment to 5.5% for four straight quarters from 12.5% today.  California has only enjoyed unemployment below this level continuously for a year three times in the last thirty years. 

Another perhaps related development has been the California Air Resources Board (CARB) proposal on how to distribute permits under the tradable permit system, which was released May 17^th.  This will be a crucial decision to the fairness of the program.  Resources For the Future’s Dallas Burtraw has said that the assignment of tradable permits under cap-and-trade would be the largest distribution of property rights by the government since the land grants of the settling of the American West.

The CARB proposal calls for 100% free allocation to large industrial sources in the program’s first compliance period, 2012-2014.  This despite the fact that the bulk of the economic evidence shows that this would vastly overcompensate the regulated companies, leading to windfall profits, because much of the cost of carbon can be passed along to consumers.  In the face of industry threats to leave the state, it is challenging to prove before the fact that the impact of requiring the auction of allowances will be small enough so as to not tip the balance against businesses struggling to survive.  In fact, studies like Grubb et al. (2009), which is based on empirical evidence from Europe, have shown that competitiveness concerns are minor, and that existing differences in input costs (including energy and transport costs), safety concerns, and other factors constrain leakage.

The electricity sector is to be treated differently under CARB’s proposal, with a type of hybrid free allocation and auctioning.  Electric utilities would receive free allowances but would be required to auction them with the California Public Utilities Commission, or a similar institution, directing utilities on how to use the revenue (e.g. to provide more incentives for energy efficiency that would serve to counter higher electricity prices).   In the transportation sector, CARB signals their intention to auction tradable permits that would be needed for emissions associated with burning of transportation fuels, which are to be covered starting in 2015. 

Permit allocation issues and cap-and-trade design questions will be answered in regulations establishing that program which the law calls for to be adopted by the end of this calendar year.

Little federal action and the possibility that California’s landmark climate bill will be suspended – how did we arrive here?  Why haven’t we made more progress? 

Some observers have pointed to the priorities of the Obama administration.  After the lengthy fight to pass health care reform, appetite for compromise had further diminished.  By the time the financial reform had been wrangled through the Senate, the midterm elections were already looming large.

The economic downturn has also played a role.  The greatest sense of economic insecurity in decades makes the politics of fear all that much more effective. The myth of a dichotomy between economic progress and environmental quality dies slowly. Perversely, uncertainty about climate and energy policy keeps capital on the sidelines in the electricity sector as companies wait for greater clarity, serving to dampen any potential private sector source of economic stimulus and job creation.

In retrospect, it is not surprising that wealthy vested interests have refused to meekly raise the white flag of surrender.  Many of the largest carbon emitters are also the most profitable enterprises in the country, and spend the most on lobbying.  Despite recent growth, lobbying for clean energy is still dwarfed by fossil fuel interest spending.  According to the Center for Responsive Politics, electric utilities and the oil & gas sector were among the top five sectors in terms of money spent on lobbying in 2009, spending $119 million and $75 million respectively.  A recent New Yorker article detailed the efforts of the billionaire Koch brothers to undermine climate and energy legislation. 

A different narrative to explain the lack of progress is developed by an LA Times writer, who argues that the benefits of renewable energy are less tangible to the public and less easy for politicians to promote.  He writes:

 “The argument that climate legislation would create jobs ‘did not get traction,’ in the Senate, said John Rowe, chairman and CEO of the Chicago-based electric utility giant Exelon and a climate bill supporter. ‘And that’s probably because, if you build or run a big central station plant, coal or nuclear, you can see a lot of high-paying jobs that are right there closely identified with it. If you build more distributed things like solar and wind, it’s more difficult to identify jobs to go with it.’” (Los Angeles Times, August 3, 2010)

The “2 million jobs” referenced in this piece was taken from a Center for American Progress study on the benefits of comprehensive clean energy and climate policy.

Despite the lack of resounding success, my view is that careful analysis to assess and illustrate the environmental and economic benefits of smart climate and clean energy policy has a role to play.   

There is lot of interesting work being done on the psychology of decision-making as it relates to climate by the Center for Research on Environmental Decisions at Columbia and by other academics like Stanford’s Jon Krosnick, but environmental economists are not going to suddenly specialize in political or communications jujitsu (though incorporating the alarming findings of climate scientists into our work makes obvious sense).

I would humbly suggest the following as avenues for productive work.

Recognizing that policymakers and the public have demonstrated an appetite for benefit-cost analyses, we should work to make these better.  The macroeconomic analyses I see dominating discussions in both Sacramento and Washington are often taken as comprehensive while they ignore a multitude of benefits.  For example, these analyses have not integrated the value of avoided climate damage, public health benefits, induced innovation, or reduced dependence on oil and related benefits.  Another area needing attention involves work to characterize the scope of money-saving energy efficiency measures, which in turn depends on the extent of market failures other than the lack of a price on greenhouse gas emissions.

Policymakers need the tools to show, ex-ante, that carbon prices can be passed through to consumers, in order to make the case for auctioning.  The aforementioned Grubb et al. paper shows this after the fact.  In California, UC Berkeley Professor Roland-Holst’s modeling finds little evidence of leakage, but the lack of firm-level heterogeneity make Computable General Equilibrium models not particularly apt for analyzing the issue of whether or not climate policy might cause economic activity to relocate to areas that are not subject to carbon regulation. 

In addition to the above incremental improvements to the decision framework, I join with those who have pointed out that an “insurance framing” is more appropriate to the uncertainty inherent to climate policy choices.  With economic luminary Harvard Professor Martin Weitzman supporting this idea (as in his paper “Additive Damages, Fat-Tailed climate Dynamics, and Uncertain Discounting”) there seems to be progress on this front. 

The lack of progress to date on climate policy is disappointing, but it must not lead us environmental economists to despair or a feeling of obsolescence.  In the face of unwelcome developments, what choice do we have but to take stock and marshal onwards?