Document Type:Technical Results
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Through Executive Order S-3-05, Governor Schwarzenegger established new greenhouse gas reduction goals for California and initiated a process to develop plans for meeting these new targets. The California Global Warming Solutions Act of 2006 (AB 32) mandates reductions in future California greenhouse gas emissions so that 1990 levels are reached by 2020. Many key aspects of the policies California intends to implement to meet the near term mandate and long goals remain unclear. This report provides an analysis of the macroeconomic effects of climate policy scenarios.
The Secretary of Cal/EPA was directed to coordinate the efforts of other relevant state agencies through an interagency Climate Action Team (CAT) formed to analyze the economic impacts of climate change and to propose mitigation strategies and adaptation measures. Based on its earlier analyses of the economic implications of California climate policies, EPRI was invited to participate in developing the specifications for CAT's most recent update of its strategy document and to serve as one of three teams of modelers that would conduct macroeconomic analyses using common assumptions but independent modeling approaches. Late in the analytical process, however, it became apparent that there were material differences in modeling approaches and assumptions. Because of these differences and the lack of time to resolve them, CAT decided to drop the CRA/EPRI analysis from its update report. EPRI is publishing here the results of the analyses conducted by CRAI that examined the macroeconomic effects of the climate policy scenarios included in the September 7, 2007 draft CAT update report.
To analyze the macroeconomic effects of climate policy scenarios included in the September 7 draft CAT update report.
The project team used a multi-state computable general equilibrium (CGE) model, MRN-NEEM, to analyze the economic impacts of nine policy implementation scenarios developed in cooperation with the CAT. MRN-NEEM simulates the entire U.S. economy and has power plant level detail on the electricity sector. Rather than measuring implementation costs only in terms of changes in gross state product (GSP), the analysis also focused on potential gains or losses to the state's economic welfare. Such welfare impacts—defined in terms of changes in future consumption—provide a measure of how policy implementation decisions will actually affect the average Californian. The welfare measure captures the economic impact of a policy over its life and is the most useful measure to use when evaluating the economic impacts of climate policies. MRN–NEEM model's horizon extends to 2050.
Key results of the EPRI study include the following:
Market-based strategies such as cap-and-trade programs cost California less than command-and-control strategies.
The economic costs of achieving AB 32 GHG emission reductions can vary by as much as 25% depending on specific implementation choices. This variance depends on whether implementation includes a cap-and-trade program and the breadth of such a program and also on the extent of emission reductions achieved through command-and-control programs such as efficiency standards.
Using measures such as changes in gross state product (GSP) and personal income for a single year can be misleading when comparing policies. One needs to compare results over longer periods in order to understand the impacts of strategy implementation. For example, the GSP loss for Scenario 1 is higher than that of Scenario 5 in 2020; but the total cost of Scenario 5 is higher than that of Scenario 1 across all years in the MRN-NEEM analysis period, which extends to 2050.
Exempting sectors from the statewide cap and addressing their emissions either solely through efficiency standards or by omitting their emissions from control altogether increases the overall cost of reaching California's emissions targets.
The benefits of offsets are substantial. Allowing California to meet 10% of its emission reduction obligations through offsets lowers the economic loss by 15% to 20% compared to a scenario in which no offsets are allowed.
This study has explored some key issues associated with California's current climate policy. Many important policy decisions remain, and the results of these choices will likely have significant implications for California's economy. The details of implementation matter and will affect electricity and energy markets along with all other aspects of California's economy. Getting the "rules right" will likely affect the rest of the country as well since California's leadership role places it in a position of influence as other states and regions consider legislation. This report considers the question of "market failure" and whether or not there are pervasive opportunities for net economic benefits from government regulations designed to correct these "failures." CAT and EPRI reached different conclusions about the pervasiveness of market failures. A large body of economic literature supports the EPRI view that market failures, though present in the economy, are relatively small. On the other hand the CAT believes that consumers and business are incorrectly responding to price signals in the economy and that large economic benefits will result from government regulations related to energy efficiency.
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