Engineers analyze the economics of California’s greenhouse gas goals
Two years ago when California Governor Arnold Schwarzenegger signed the bill “AB 32” into law, his office hailed the legislation as a “landmark bill that establishes a first-in-the-world comprehensive program of regulatory and market mechanisms to achieve real, quantifiable, cost-effective reductions of greenhouse gases.” Since then the challenge has been to make it work economically, technologically, and environmentally. Enter the engineers (and economists) who can contribute a unique understanding of all those aspects.
Few debate that the legislation is historic. It obliges California, one of the top 10 economies in the world (on par with Italy) to reduce carbon emissions to 1990 levels by the year 2020 and to prepare to cut them to the governor’s goal of 80 percent below 1990 levels by 2050.
But management science and engineering Professor James Sweeney, one of several Stanford faculty members helping the state figure out how to implement AB 32, is past celebrating the law’s passage and is instead focused squarely on its consequences.
“California is pushing the envelope and if we don’t do it right, if we mess up, we could set backwards the goal of solving climate problems,” he said. “If we do it right we’ll move the goal forward. The stakes are very big.”
Sweeney, who directs the Precourt Center for Energy Efficiency at Stanford, made those remarks during a July 11 panel discussion on the challenges of implementing AB32. Joining him were fellow MS&E Professor John Weyant, director of Stanford’s Energy Modeling Forum; economics professor Larry Goulder; and Eileen Tutt, deputy secretary for external affairs for the California Environment Protection Agency. All four panelists have had active roles in the rulemaking process that will determine whether, as Sweeney put it, California does it right.
The panel was part of a daylong Energy Summit at Stanford’s Arrillaga Alumni Center, co-sponsored by the Precourt Center and the Silicon Valley Leadership Group.
But what will it cost?
The legislators who wrote AB32 recognized that economic and social concerns have a huge role to play in achieving environmental goals. They therefore included language requiring that the state pursue greenhouse gas reductions by the most cost-effective means.
To help inform such policy choices, Sweeney, Weyant and an army of 13 graduate and undergraduate students have estimated the costs of the many means people have proposed for reducing the California’s greenhouse gas emissions by 170 million metric tons a year (what will be needed to get to 1990 emissions levels in 2020). There are major differences in the “bang for the buck” from different technologies.
For example, capturing and sequestering the carbon dioxide emissions of coal-fired power plants was literally off the chart in how expensive it would be per ton of emission reduction. And while Sweeney acknowledged being a big fan of gas-electric hybrid cars that can be plugged in to increase their range on electricity alone, the calculations rank it as one of the more expensive measures at $80 per metric ton of carbon dioxide reduction. Making a Prius a plug-in, for example, costs about $9,000.
A clear winner, however, is adopting higher federal fuel efficiency standards for cars in general, because the market for new cars has systematically led to heavier, less fuel efficient vehicles than would optimal for consumers over the vehicle life-cycle, even ignoring the greenhouse gas implications of gasoline consumption, Sweeney says. Meanwhile, California’s adoption of the Pavley Law, which limits greenhouse gas emissions from cars well beyond the federal fuel economy standards, would cost only $30 per ton of emission reduction, even if consumers considered only the first three years of vehicle operating costs.
Sweeney, who serves as an adviser to Gov. Schwarzenegger, cautioned the hundreds in the audience that no matter how California implements AB 32, the savings from greater energy efficiency and other benefits will not outweigh the expenditures of developing and using most technologies.
“It will not be free, but it will be worth doing,” he said.
Savvy strategies
Properly analyzing the costs of various measures is only part of the challenge. Even if all the costs were known perfectly, the state would still need to develop policies that will motivate Californians to produce and adopt the best greenhouse gas reducing innovations and behaviors. As a member of the Economic and Technology Advancement Advisory Committee of the state Air Resources Board, Weyant investigated not only the available policy strategies but also many of the devilish details that could derail them. The board is the body that must develop the state’s AB 32 implementation plan.
One issue the committee tackled was how to accelerate the pace of research and development of energy saving technologies. Many economists are hopeful that the state can create a profit motive by introducing a “cap and trade” system, in which polluters can buy and sell “allowances” to pollute which limit statewide the total emissions level. As Goulder explained, polluters who lower their emissions below their quota can make money by selling their excess pollution “rights” to companies who can’t lower their emissions enough.
But Weyant said his committee doesn’t see the cap and trade system as being enough on its own to propel innovations forward fast enough. Instead, the state will need to augment market incentives with direct regulations to spur technology development. And because many companies will be reluctant to invest in basic research if they cannot be sure of the payoff down the line, the state should also be prepared to contribute public money to spur early-stage research and development, as well as some carefully selected demonstration projects..
Even that might not be enough, Weyant cautioned, if the state cannot also ensure an adequate supply of tech-savvy workers who can carry out this research and development. That means the state’s education system will have a key, if not obvious, role to play in fighting climate change.
So too will the environmental regulations governing the construction of new power plants that make use of renewable energy sources, Weyant said. The state is going to require a much larger fraction of its power come from cleaner sources, but to make that economically attractive, it will have to do such things as streamline the process for siting, permitting, and providing power transmission access for these plants.
With a mountain of options to consider and cost estimates to pore over, the state must decide on a “scoping plan” for its overall plan of action by Jan. 1, 2009 and must begin full implementation of all its regulations and programs in 2012, Tutt said.
Sweeney says the effects of California’s moves might be felt around the globe, not just in the atmosphere but politically as well.
“We’re dealing with our planet,” Sweeney said. “What California does will push the nation and what the nation does is going to make a difference to the rest of the world.”
