More On

Regulatory: The cost/benefit analysis of California’s climate change policy

Considering the bottom line of California’s far-reaching climate change regulatory strategy

In December 2008, the California Air Resources Board (CARB) approved the AB 32 Scoping Plan, establishing the state’s comprehensive climate change policy including the Cap and Trade Program. The 152-page policy document sets forth the framework for an envisioned monumental shift in business practices across the breadth of California’s trillion-dollar economy that is just now starting to ramp up.

It is difficult to determine how much money the Cap and Trade Program will ultimately cost or save California businesses, and when. However, the one thing businesses can be certain of is that implementing AB 32 will affect their bottom line.

How does one environmental policy shift affect an entire economy? Because CARB used the full breadth of its authority under AB 32 in developing the Scoping Plan, as reflected in the following sentence pulled directly from the CARB economic analysis of the plan:

“The Scoping Plan contains measures designed to reduce greenhouse gas (GHG) emissions by increasing the efficiency with which California uses all forms of energy and by reducing its dependence on the fossil fuels that produce greenhouse gases.”

There are over 70 GHG reduction measures listed in the Scoping Plan, and most will influence the cost or use of energy. Since it takes energy to run a business, be it gasoline, diesel, natural gas or electricity, any change to the unit costs and/or overall amount of energy used will have a direct economic effect on a business. Most of the measures outlined in the Scoping Plan implemented this year affect both of these energy parameters.

While the effects for businesses, whether positive or negative, may be relatively modest this year, they will grow in significance as the AB 32 program matures and approaches its 2020 statutory deadline for policy success (and beyond).

The Cap and Trade Program puts a price on carbon, with the program designed to ensure that the cost of carbon influences economic decisions. Other measures, such as renewable energy and low-carbon fuel requirements, create indirect cost pressures on economic decisions. The consequence is a market dynamic change intended to lead California businesses and individuals to use less energy through increased efficiencies and changed practices. In short, the economic and political viability of the Cap and Trade Program lies in the belief that less fossil fuel-derived energy will be consumed if it is more expensive and there are economically viable alternatives available to reduce fossil fuel-based energy consumption.

A simple example of this new equation lies in the purchase of a new, more fuel efficient car or truck. Due to the increased costs to design and build the more efficient vehicle, its purchase price will be higher for the foreseeable future, but its operating costs will be lower over the rest of its life. Until new vehicle fuel technologies and related efficiencies settle into a predictable economic model, businesses will have to make an educated guess as to what is best for their bottom line. This same calculus will present itself repeatedly, whether a business is evaluating leasing or buying property, signing a fixed-price contract for utilities and a long-term contract for waste hauling, and so on.

The common component in these decisions is what the estimated costs of electricity, natural gas and transportation fuels are over the next several years and how the prices of new green technologies and replacement fuels will compare to traditional fossil fuels, thus affecting costs for everything from leased space to appliances. There are many research institutions, environmental groups and trade/industry organizations actively studying these questions, but the answers provided to date diverge significantly.

For companies making these decisions on a regular basis, starting this year the Cap and Trade Program is making the math more complicated because there are still many unknowns. Businesses need to try to account for the implications of the policies adopted because of AB 32 as best they can. As the Cap and Trade Program matures, however, there will be fewer and fewer financial variables, and businesses will be able to make sound economic decisions based on known factors.

Contributing Author

author image

Thomas McMorrow

Tom McMorrow is a Partner at the law firm Manatt, Phelps & Phillips, LLP, in the Sacramento Government practice group and is Chair...

Bio and more articles

Contributing Author

author image

Jon Costantino

Jon Costantino is a Senior Advisor at law firm Manatt, Phelps & Phillips, LLP, in the Sacramento Government practice group. He manages complex...

Bio and more articles

Join the Conversation

Advertisement. Closing in 15 seconds.