| Abstract: |
California’s Global Warming Solutions Act of 2006 limits California’s
greenhouse gas (GHG) emissions in 2020 to their 1990 level. Global climate
change is a pressing environmental problem, and the best possible public
policies will be required to address it. Therefore, analyses of prospective
policies must themselves be of high quality, so that policymakers can
reasonably rely on them when making the critical decisions they inevitably
will face. In 2006, three studies were released indicating that California can
meet its 2020 target at no net economic cost — raising questions about whether
opportunities truly exist to substantially reduce emissions at no cost, or
whether studies reaching such conclusions may simply severely underestimate
costs. This paper provides an evaluation of these three California studies. We
find that although opportunities may exist for some no-cost emission
reductions, these California studies substantially underestimate the cost of
meeting California’s 2020 target. The studies underestimate costs by omitting
important components of the costs of emission reduction efforts, and by
overestimating offsetting savings that some of those efforts yield through
improved energy efficiency. In some cases, the studies focus on the costs of
particular actions to reduce emissions, but fail to consider the effectiveness
and costs of policies that would be necessary to bring about such actions.
While quantifying the full extent of the resulting cost underestimation is
beyond the scope of our study, the underestimation is clearly economically
significant. A few of the identified flaws individually lead to
underestimation of annual costs on the order of billions of dollars. Hence,
these studies do not offer reliable estimates of the cost of meeting
California’s 2020 target. Better analyses are needed to inform policymakers.
While the Global Warming Solutions Act of 2006 sets a 2020 emissions target,
critical policy design decisions remain to be made that will fundamentally
affect the cost of California’s climate policy. For example, policymakers must
determine emission targets for the years before and after 2020, 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 decisions that lie ahead. As such,
California would benefit from studies that specifically assess the cost
implications of alternative policy designs.Nonetheless, 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 actually exist. In particular, 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
different market failures that lead to excessive GHG emissions makes clear
that to reduce emissions cost-effectively, policymakers should adopt a
market-based policy (such as a cap-and-trade system) as the core policy
instrument. The presence of specific market failures that may lead to some
no-cost emission reduction opportunities suggests the potential value of
additional policies that act as complements, rather than alternatives, to a
market-based policy. However, to develop complementary policies that
efficiently target such no-cost opportunities, policymakers need better
information than currently exists regarding the specific market failures that
bring about those opportunities. |