California’s Shock Absorber: The Energy Economic Security Benefits of AB 32

There are many ways to categorize the costs and benefits of acting swiftly and decisively to fight global warming, and many perspectives from which to view those categories.

Cost-benefit analyses of climate policy traditionally focus on emissions abatement as the primary cost and avoided energy use as the major benefit. This approach emphasizes the perspective of regulated entities that are required to invest in reducing emissions, while also considering the perspective of energy users paying utility bills.

Cost-benefit studies also assume smooth price trajectories for energy sources such as crude oil and natural gas.  Doing so, however, overlooks another significant benefit of climate policy, which is insulating our economy from international energy price shocks.

In a report authored by myself and two other economists, we observe that these price shocks have occurred on a regular basis and then we put a dollar value on the “energy economic security” benefit  of reduced dependence on fossil fuels as a consequence of AB 32 in the event of another energy price shock in the year 2020. The key findings: California could save up to $30 billion in 2020, or up to $670 per household.

History of Oil Price Shocks

Five significant energy price shocks have occurred since 1979 during which the price of crude oil increased an average of 179% in one year. Shocks are likely to occur again for a variety of reasons, such as China and India’s growing demand for fuel, political instability in oil-producing nations, and ever-increasing costs of accessing fossil fuel reservoirs (and associated accidents, such as the BP oil rig disaster in the Gulf of Mexico).

In our report, we’ve estimated the monetary value of avoided energy expenditures as a consequence of implementing measures in the AB 32 Scoping Plan. We’ve examined two hypothetical price shocks:  a year-long doubling of the U.S. Dept. of Energy’s Annual Energy Outlook (AEO) year 2020 ‘reference’ and ‘high’ price forecasts for crude oil and wholesale natural gas.

To put these scenarios into context, the table below shows how the price shocks translate into retail price changes for conventional fuels:

Fuel Prices in 2020 Initial price before spike Price increase –  moderate spike Price increase –  large spike Units of Measure
Gasoline $3.42 $1.09 $2.35 $2007/gallon
Diesel $6.44 $1.21 $2.63 $2007/gallon
Propane $2.54 $0.84 $1.81 $2007/gallon
Other Oils $3.40 $1.21 $2.63 $2007/gallon
Aviation Fuel $2.61 $1.05 $2.28 $2007/gallon
Natural Gas $0.0125 $0.0081 $0.0089 $2007/cubic foot

Two Takes on Savings

We quantified the benefits from two consumer perspectives: (a) avoided retail energy purchases (“retail effect”): and (b) lowered expenditures on California energy imports (“importation effect”) as determined by the difference between in-state demand and production for crude oil and natural gas.

Here’s what we found (values presented in year 2007 dollars):

Importation Effect: Oil and natural gas imports to meet California demand will be reduced by $10.0 billion in 2020 at the AEO reference price forecast.  The reduction in import expenditures would be $18.8 billion in the moderate price shock and $29.6 billion for a large price shock.

Retail Effect: Reduced expenditures for transportation and electricity fuels, and industrial use of natural gas, propane, and oils will range from $4.8–$9.6 billion for the moderate and large shock scenarios, respectively.  The energy expenditure savings for the retail effect are in addition to AB 32-related savings at price levels implied by the AEO reference forecast, which the California Air Resources Board (CARB) has estimated to be $7.5 billion (See CARB’s Updated Economic Impact Analysis of the Climate Change Scoping Plan, p.55).

These findings indicate how implementing AB 32 would reduce our dependence on imported fossil fuels and save our economy billions of dollars in the case of another price shock.  More detailed findings are provided in the following two charts.

Retail Effect Findings:  Avoided Expenditures by Fuel Type in 2020

Importation Effect Findings: Expenditures on Crude Oil and Natural Gas Imports to Meet California Demand in 2020

 

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