How Even Stronger California Climate Policies Could Spark A $7 Billion Economic Opportunity

How Even Stronger California Climate Policies Could Spark A $7 Billion Economic Opportunity


California is a global leader in the clean energy transition, with some of the world’s most ambitious decarbonization policies. But even the Golden State, which met its 2020 greenhouse gas emission reduction target four years early, should be doing more.

Results from the newly released California Energy Policy Simulator (EPS) find the state’s existing climate policy strategy risks falling short of California’s 2030 target of 40% emissions reductions below 1990 levels. Findings suggest 2030 emissions will exceed the target by about 25 million metric tons – roughly 10 percent – even using optimistic assumptions about policy effectiveness.

There is still time to adjust, and the California EPS analysis identifies a package of policies that gets emissions on track. The policies are constrained to using currently available technologies and include a mix of ratcheting up existing policies and new initiatives. If implemented, these recommendations could be a net positive for the economy. California EPS results suggest that together, the recommended policies would create $21 billion dollars in net benefits, including $7 billion in direct economic benefits and $14 billion in health and climate benefits.

Six policies to get on track for the 2030 target

California’s climate strategy calls for the state’s cap-and-trade program to make up the difference between reductions delivered by other policies and the 2030 target. But limitations in the economic model previously used to evaluate the 2030 strategy leave questions about whether the cap-and-trade program will be able to “close the gap.” Our new model, the California EPS, provides unsurpassed integrated evaluation of economy-wide carbon pricing and sector policies. The California EPS is an open-source, peer-reviewed tool, available for download and use without charge.

Our modeling identified six recommendations, including a mix of strengthening current policies and new initiatives. Policy recommendations were crafted to reach the 2030 target while maximizing cost-effectiveness and minimizing political obstacles and technological risk.

1. Fortify the cap-and-trade program. California’s climate strategy calls for the state’s cap-and-trade program to soak up the difference between the 2030 target and the effects of other policies. The state should link the program’s price floor—the minimum price accepted at emission permit auctions—to whether or not emission reductions are on pace for the 2030 target, with the minimum price rising faster if emissions are not falling fast enough. The California EPS models an increase in the expected carbon price from $29 to $63 dollars in 2030. This recommendation is the largest single driver of emission reductions in the package.

2. Modestly boost clean electricity goals. Senate Bill 100 sets a 60% renewable electricity standard for 2030 and calls for completely decarbonizing the state’s electricity supply by 2045. These are already strong goals, but the electricity sector’s rapid pace of technological progress creates a cost effective opening for an even faster transition. Increasing the 2030 requirement for carbon–free electricity by 7% cuts electricity sector emissions by 8 million metric tons of GHG emissions compared to existing plans. 

3. Accelerate transportation sector decarbonization. Increase the share of new car and light truck sales to at least 80 percent zero emission vehicles by 2030, boosting electric vehicles (EVs) on the road to at least 7.5 million in 2030.

4. Jump start building electrification transformation. Increasing advanced electric heat pumps to at least 50% of new sales of water heaters and space heaters for residential buildings delivers 2 million metric tons of additional GHG emissions reductions in 2030.

5. Establish a zero emission performance standard for heat in the industry sector. Nearly 20% of California’s natural gas demand is due almost entirely to making steam for oil extraction, necessary to coax the state’s low quality oil reserves from the ground. This policy would jump-start the use of existing solar thermal heat—using mirrors to concentrate sunlight, a mature and proven technology—in the state’s oil fields. It would also encourage faster commercialization of other promising emerging technologies.

6. Introduce a GHG emission performance standard for concrete production. Cement is the largest source of coal combustion in California, but exciting innovation in this industry could change that. We recommend setting a technology-neutral standard requiring steadily lower emissions from concrete production and, in parallel, a border carbon adjustment for imported concrete. Concrete imported from jurisdictions with weaker climate policies would be required to pay a fee—the border adjustment—to account for unregulated GHG emissions, leveling the playing field for in-state producers.

The World Resources Institute’s Dan Lashof has articulated the idea of a “clean concrete standard,” elegantly covering both in-state production and imports in a single policy proposal modeled on the state’s low carbon fuel standard, which has already successfully vanquished legal challenges in the courts.

How stronger climate action can boost economic growth

Decades of research and development (R&D) and support to bridge the “valley of death” between the lab and commercial success have led to innovation and falling costs for a range of key technologies that will be important to winning the battle against climate change, such as renewable energy, LEDs, and batteries and electric vehicles (EVs).

However, the benefits of technological progress are not behind us. R&D and support to bridge the valley of death deserve to be greater, but are above historical levels. From options for decarbonizing cement to green hydrogen, a survey of the innovation pipeline uncovers many promising emerging options, and future cost improvements are a good bet. Both high quality statistical analysis and technology-specific case studies show that once a technology reaches commercial viability, its increasing use over time drives innovation and lowers prices through learning-by-doing and economies of scale.

For example, several studies predict the upfront cost of smaller EVs will be less than their gasoline powered counterparts within a few years, including research from the International Council on Clean Transportation (ICCT) which finds even long range (250 mile plus) fully electric large SUVs will be more affordable to purchase than comparable gasoline SUVs by 2028.

EVs are about 2.5 times more efficient than conventional gasoline vehicles, leading to lower fuel costs. As a result, the total cost of owning an EV will be lower than a gasoline vehicle for many California households already. 

However, even a promising technology like vehicle electrification requires policy support to overcome the built in advantages of legacy technologies. The lack of a price on carbon is one well recognized market failure, but a range of other market failures also exist, which can lock in current technologies. For any single company building EVs, the convenience of ubiquitous coverage offered by the current fueling system effectively blocks competition. The economic potential of EVs and their crucial role in lowering GHG emissions have created great momentum, but the market transformation could stall without continued support to coordinate the infrastructure buildout and provide automakers enough confidence to make investments in the next generation of EVs.

The evidence so far – California’s economy outperforms the rest of the United States while reaching the 2020 target

In 2006, when California’s Assembly Bill 32 set its target to reduce GHG emissions below 1990 levels by 2020, no other state or country in the Western Hemisphere had set an economy-wide emissions limit. Several studies predicted economic devastation would follow, but in fact, California reached the target four years early in 2016, while the state’s economy outperformed the rest of the United States.

While these “daydreams of disaster” may seem like obvious political ploys in retrospect, they point to the fact it took courage for California’s policymakers to push through uncertainties and advance the frontiers of climate policy leadership. And the results since have disproven the notion that climate leadership necessarily undercuts economic growth. To the contrary, California has shown that robust economic performance is possible even as climate policy ambition ratchets up. Since adopting Assembly Bill 32 in 2006, California has stepped up from the 8th to the 5th largest economy in the world. The state has grown jobs at a rate about 50 percent faster than the rest of the nation while doubling the pace of economic expansion as measured by GDP.

An evidence-based reason for optimism

Our model indicates that current policy is unlikely to deliver the emission reductions required to put the state on track for its next milestone in 2030. But, ultimately, the story emerging from California EPS results is a hopeful one. Stronger climate action has the potential to deliver an estimated $7 billion in direct economic benefits and $14 billion in social benefits. These cost savings include future success in capturing cost-effective opportunities to shift electricity demand from peak to off-peak times. Building a more efficient, flexible grid is just one of the hurdles ahead. This shift will be a significant challenge, but decades of sustained innovation and falling clean energy prices have put the solutions in reach. Bequeathing a reasonably hospitable climate to our children and future generations has never been more affordable.



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