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Early leadership on climate policy can pay off for California, study says
New UC-led report makes case that climate action to meet Governor Schwarzenegger's goals is likely to promote economic growth in the state

| 26 January 2006

A team of two dozen prominent experts led by two Berkeley professors has released a report on the economic implications of meeting targets that aim at reducing global-warming emissions.

The goals established by California Gov. Arnold Schwarzenegger in 2005 include reducing greenhouse-gas (GHG) emissions to 2000 levels by the year 2010, and to 1990 levels by 2020.

Key points from 'Managing Greenhouse-Gas Emissions in California'

After detailed examination of a range of actual and proposed policies, we find that the aggregate economic benefits of many GHG-mitigating policies outweigh their microeconomic costs, and more generally that it is possible for the state to reconcile growth and environmental objectives. Moreover, some of the most prominent policies have the potential to help meet the state's ambitious GHG-reduction objectives, while at the same time stimulating aggregate economic growth by increasing productivity and efficiency.

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Many studies emphasize the costs of policies that deal with climate change because they look only at the direct effects. This one finds that many policies under active consideration in California actually save money and increase employment overall because the indirect effects are so important. These overall benefits only become apparent when the economy-wide implications of the policies are taken into account. For example . . . energy savings allow consumers to increase other spending, largely on in-state goods and services, and this stimulates California growth and employment. Industry-specific and bottom-up studies of GHG policies fail to capture these indirect benefits, giving disproportionate emphasis to direct costs. An economy-wide perspective . is needed to balance the adjustment and growth perspectives.

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Globally, increasing GHG emissions are assumed to be essential to a growing economy. This is not true in California. The state can take an historic step by demonstrating that reducing emissions of GHG can accelerate economic growth and bring new jobs. Moreover, exercising leadership in this area plays to California's comparative economic advantage in the U.S. and world economies as a first-tier innovation economy. California can gain a competitive advantage by acting early in the new technologies and industries that will come into existence worldwide around the common goal of reducing GHG emissions.

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Innovation will be essential to meeting the Governor's targets, especially meeting the mid-century target, which requires a profound refashioning of the economy away from carbon-based fuels. Such a major technological advance to support environmental goals will require additional policy action.... Designing an effective combination of market-based regulations, regulatory standards, and innovation policies is an important issue for policy research in California.

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The key policy challenge for the period 2000-2030 is not to pick the "right" technology that will achieve the reduction in GHG emissions the Governor has targeted for 2050. It is not possible for anyone to make that choice today, nor will it be possible to do so in 2020. The goal for now through 2020 or so is to promote the conditions that will lead to the development, by around 2030, of a suitably rich and promising portfolio of potential technologies so that the "right" choice can be made then.

"Managing Greenhouse Gas Emissions in California," issued on Monday, Jan. 23, finds that just eight policy strategies can take California halfway to the governor's 2020 targets while increasing the Gross State Product by approximately $60 billion and creating more than 20,000 new jobs.

"Our study demonstrates that taking action to reduce global-warming emissions in California is good for the California economy," said Michael Hanemann, professor of agricultural and resource economics and co-author of the report. "Our research indicates that not only does climate action pay, but early climate action pays more."

The report was presented to the California Climate Action Team, a state task force established by Schwarzenegger, during public hearings earlier this week. It corroborates the state's recent findings that the governor's targets can be achieved with net economic benefits. Using the Berkeley Energy and Resources model - a state-of-the-art, economy-wide forecasting tool devised by David Roland-Holst, adjunct professor of agricultural and resource economics and a report co-author - the team analyzed eight strategies in detail, tracing complex market interactions across key elements of the California economy.

The team also evaluated the importance of technological innovation and market-based incentives in meeting the governor's goals, recommending the use of market-based regulation as part of a more comprehensive approach and giving specific recommendations for a state-based "cap-and-trade" program.

"Our model is designed to capture the economy-wide implications of policies," said Roland-Holst."The climate-action strategies benefit California economically because innovation and efficiency save money for California consumers, who re-direct their spending in ways that stimulate in-state job growth."

The report also analyzed the economic impacts of taking the lead in adopting policies to reduce GHG emissions. It concludes that "just as Silicon Valley gained economically from being the leader in the Internet revolution, so, too, will California gain an economic advantage from being the leader in the new technologies and the new industries that will come into existence worldwide around the common goal of reducing GHG emissions."

"Our analysis reveals the power and promise of taking early initiative," concluded Alex Farrell, assistant professor in Berkeley's Energy and Resources Group and co-author of the report. "By acting sooner, California benefits more quickly from faster economic growth and improves its competitive position in a global market increasingly focused on climate action."