Legislative Analyst to California: Rely More on the Most Cost-Effective GHG Reduction Strategies

The Legislative Analyst’s Office (LAO), the California Legislature’s non-partisan fiscal and policy advisor, released its annual report on California’s climate policies, recommending that “[i]n the future, the Legislature might want to rely more heavily on the most cost-effective programs, such as cap-and-trade.” The Legislature should heed this advice to meet the state’s ambitious greenhouse gas (GHG) goals while at the same time avoiding increases in California’s already highest-in-the nation cost of living. After all, California cannot solve the climate crisis alone—if it is to serve as a model for emissions reductions AND economic growth to be adopted by other jurisdictions across the globe, it must demonstrate that costs can be contained.

The report, entitled Assessing California’s Climate Policies—Electricity Generation, analyzed major policies to reduce electricity sector emissions, including the Renewable Portfolio Standard (RPS), which requires California’s electricity providers to procure a percentage of power from certain defined renewable resources, the California Solar Initiative (distributed solar), Net Energy Metering (NEM) (rooftop solar), emissions performance standards, and cap-and-trade. The LAO report is released annually, as required by AB 398 (E. Garcia, 2017), which was a bipartisan, CalChamber supported bill to re-authorize the use of California’s Cap-and-Trade Program.

The Legislative Analyst also provided the following topics as “Key Issues for Legislative Consideration”: (1) Comprehensive Policy Evaluations Lacking: (2) Mix of Policies Likely Not Most Cost-Effective Way to Reduce GHGs; and (3) High Electricity Rates Could Be A Barrier to GHG Reductions.

The LAO analysis supports CalChamber’s position that cost-effectiveness in GHG reductions must continue to be a focus. It states that there are substantial differences in the price per ton of GHG emissions under this suite of policies, from $150-$200/ton on average for distributed solar to marginal costs of $20/ton under cap-and-trade. According to the report, the RPS program was a significant driver of reductions at a direct cost of $1 billion annually, that rooftop solar is generally more costly, and “much more costly than utility-scale solar.” The CSI program had significantly higher costs than the RPS, and NEM (associated with rooftop solar) results in significant cost shifts from solar customers to noncustomers. The report states that cap-and-trade is a significantly more cost-effective program than many others and that such programs should be given priority consideration.

As the reader likely already knows, cap-and-trade is a market-based system that “caps” overall emissions, effectively creating a carbon pricing structure to drive down carbon emissions. Proceeds from auctions of units of carbon emission are then used by California to fund other emission reductions program. Last year, the Legislature approved a $1.04 billion spending plan to reduce GHG and improve air quality, all funded by cap-and-trade. This year, cap-and-trade is expected to generate approximately $2.573 billion in funding.

With respect to comprehensive policy evaluations, the report suggests that while the state policies are likely a substantial driver of reductions, a wide variety of other factors likely had a significant influence, such as declines in the price of natural gas and renewables, federal policies, voluntary purchases of “green” electricity, and the closing of the San Onofre Nuclear Plant, the latter of which actually increased overall emissions when this zero emission resource was taken offline. Overall, LAO report suggests that the Legislature continue to study the actual emissions reductions of all policies, which are currently difficult to measure, as California moves toward its 2030 goals.

Most evident is that before additional policy decisions are made, the Legislature should ensure that GHG reductions are done in a reasonable, cost-effective manner, and ensure that costs are not simply shifted from one ratepayer group to another. Market-based approaches to GHG reductions appear to be the most cost-effective method to date, and all policies should continue to be studied and evaluated to ensure a robust policy mix that ensures reliability while keeping rates low. As the LAO report emphasized, reliance on cost-effective programs is key.

Leah Silverthorn, Policy Advocate