Thursday, 25 March 2010

AB 32 Scoping Plan Economic Analysis

The California Air Resources Board recently published a revised economic analysis of the AB 32 Scoping Plan implementation in order to focus the economic effects of reducing the state’s GHG emissions to 1990 levels by 2020. This updated analysis accounts for recent changes in the global and state economy, as well as new federal policies which have been adopted to reduce GHG emissions. The conclusions are that AB 32 would have a virtually indistinguishable impact on the California economy versus a business as usual scenario. This entry summarizes the report.

The modeled reference case is that California Economy would grow at an annual average rate of 2.4% between 2006 and 2020 and fuel expenditures grow at 1.7% per year. This reference case does not capture any of the consequences of inaction (adaptation costs or fuel price volatility). With the Scoping Plan, economic growth is still 2.4% per year, but fuel expenditures are reduced 4.9% (by 2020) and GHG emissions are reduced 15% relative to the reference case. Emissions reductions programs help limit cap and trade allowance price to $21/MTCO2e. In the worst case sensitivity analysis scenario, where all major emissions-reductions programs fail to provide forecast reductions, there is only a small decrease in California’s economy relative to the reference case.

ARB used the Energy 2020 model to simulate fuel demand for 40 industry category, 3 residential categories, and 3 transportation types. It also predicts supply, and hence price, for 30 different fuel products. For each category, the model simulates investment in energy efficiency, fuel choice changes, and end-use demand. It does this using information on costs (of energy and of energy efficiency capital investments), and other attributes, such as the convenience or acceptance of an energy efficiency investment.

Here’s a visual of how Energy 2020 works:

With the information on energy prices produced by the Energy 2020 model, ARB used the Environmental Dynamic Revenue Assessment Model (E-DRAM) to calculate a future year reference case and alternatives analysis for various policy bundle scenarios. (See Section 5 of the report for details on these scenarios). The model is capable of assessing 120 industrial sectors, labor, capital, 8 household sectors, 9 consumption sectors, 1 investment sector, 45 government sectors, and the rest of the world (188 sectors in total).

Here’s a visual of how E-DRAM works:

And how the 2 models interact:

After calculating the effects on each sector, the ARB used the models to combine these results in a macroeconomic analysis. The table below summarizes this analysis:

Chapter 8 discusses the effects of AB 32 implementation on small business, which are found to be “insignificant” overall, although certain sectors (mining, unities) while others would gain. UCLA’s own Matthew Kahn played a role in this analysis.

Overall, the report is quite robust in its analysis and key result: that shifting California to a lower carbon economy will have a negligible aggregate economic impact by 2020. The report should withstand academic criticism quite well. Certain findings, such as how AB 32 could cause small businesses which operate coin-operated laundry services to raise rates, could be misconstrued and used as an argument against Scoping Plan implementation. However, the report makes it clear that Scoping Plan implementation can give rise to new business opportunities which will enjoy revenue and employment growth as California, and the rest of the world, move to a low carbon economy.