Analysis of the California ARB’s Scoping

Plan and Related Policy Insights

David Montgomery
October 4, 2010
S
Sacramento,
t CA

This work was performed at the invitation of and in collaboration with the California Air
Resources Board in response to Resolution 08 08-47
47 with the goal of better understanding the
sensitivity of economic impact estimates to methodologies, assumptions, and policy measures

Overview of the study

1. We modeled ARB’s five core cases under input assumptions

similar to ARB’s.
2. In addition, five other cases under CRA’s input assumptions were
modeled.
3 Scenarios highlighted in the presentation
3.
SP (Case 1) C&T SP-Alt SP-NoOff SP_WMOS
(Case 2)

C
Complementary
l M
Measures I l d d
Included E l d d
Excluded I l d d
Included I l d d
Included I l d d
Included

Cost Assumptions ARB ARB CRA ARB ARB

Offset Availability 4% 4% 4% None WM

4. We used CRA’s MRN-NEEM model for the analysis

Notes: SP = ARB Scoping
g Plan
WM = Waxman Markey
Complementary measures = LCFS, 33% RPS, EE/DSM, CHP, and 4% VMT Reduction
1
 Summary – Comparison of ARB and CRA Findings
• E
Estimates
ti t off overallll iimpacts
t iin 2020 vary greatly
tl ddepending
di on ththe ttreatment
t t off
complementary measures, offsets, and technology cost assumptions:*
– Allowance prices range from $50 to $80 per metric ton of CO2 ($0.50 to $0.80 per
gallon of gasoline)
– Costs range from $200 to $500 per capita (0 (0.5%
5% to 1
1.1%
1% of income per capita)

• CRA and ARB both find even 4% offsets significantly reduce costs of meeting an
emissions target with permit prices reduced by between 33% (CRA) and 80% (ARB)

• CRA and ARB differ in how command and control measures affect policy costs: CRA
finds that measures that reduce flexibility (i.e., “complementary measures”), increase
costs of complying with AB32; whereas ARB finds these measures reduce costs
– RES and LCFS contribute most of the added cost in CRA CRA’ss analysis

• CRA’s and ARB’s models are sensitive to assumptions about technology costs,
economic forecasts, and development so flexibility in policy design is critical
– Accounting for likely higher costs of procuring and delivering low carbon fuels to
the California fleet raises the costs of complying with the LCFS and increases the
cost of the overall program by over 40%
– Costs are significantly less under the IEPR 2009 emissions forecast, than under
the 2008 Scoping Plan, which used the IEPR 2007 emissions forecast
• When comparing a case with limited complementary measures, Case 5, ARB finds
2020 per capita costs of $270 vs. CRA’s cost estimate of $290
2 *All numbers in 2007$s.

Excluding complementary measures cuts program costs by 50%

• Overall policy costs cannot
b inferred
be i f d from
f the
th CO2
allowance price because
AB32 combines a market-
CO2)

$90 based program to reduce

C&T carbon emissions ((e.g.,
g , cap-
p
e ($2007/MTC

$80
and-trade) with command-
$70 and-control mandates (e.g.,
complementary measures).
$60
SP
owance Price

$50 • Achieving the same cap

cap, the
complementary measures
$40 prescribe more expensive
$30 carbon emission reductions
than the cap-and-trade
2020 Allo

$20 program alone, resulting in

$10 lower allowance prices, but
higher total compliance costs.
$0
$0 $10 $20 $30 $40 $50 $60 $70 •RES
RES and LCFS are
2010-2020 Societal Costs (B$2007) responsible for most of the
cost increase, not efficiency
standards intended to address
SP (Case 1) C&T market failures in energy use
All Complementary Measures Included Excluded

3
 Allowing offsets mitigates costs of AB32

• Allowing use of more

offsets from a broader
range of sources can cut
$90
wance Price ($2007/MTC O2)

SP-NoOff
costs by a third while
$80 preserving
i emission
i i
reductions
$70 Exclude Offsets
$60 • It holds under both ARB
and CRA modeling g
SP
$50 framework, with or with the
Include More complementary measures,
$40 Offsets and both sets of cost
$30 assumptions.
SP_WMOS
2020 Allow

$20 • Flexible mechanisms are

$10 valuable for mitigating cost
increases due to higher
$0 than expected emissions
$0 $20 $40 $60 $80 and technology costs
2010-2020 Societal Costs (B$2007)
• Offsets lessen incentives
for investment to leave
SP No Offsets Waxman-Markey
Waxman Markey California by lowering
(Case 1) (Case 2) Offsets allowance prices
Complementary Measures Included Included Included
4
Offsets in 2020 (MMTCO2) or (%) 4% None 50

Results are sensitive to assumptions about costs of new

technologies
• Accounting for likely higher
$90 costs of procuring and
CO2)

delivering low carbon fuels to

ce ($2007/MTC

$80 the CA fleet raises the costs

of complying with the LCFS
$70
Increase in technology costs and increase the cost of the
$60 overall program.
SP SP-Alt
SP Alt
$50
2020 Alllowance Pric

• The overall program costs

$40 increase by $40 billion
dollars.
$30
$20

$10
$0
$0 $20 $40 $60 $80 $100 $120
2010-2020 Societal Costs (B$2007)

SP (Case 1) SP-Alt
Complementary Measures Included Included
Cost Assumptions ARB CRA

5
Policy Costs are Sensitive to Policy Decisions and Outside Forces

$90

MTCO2)
C&T SP-NoOff
$80

Allowance Price ($2007/M

$70 R
Remove
Exclude Offsets
Complementary
$60 Measures
Higher Costs
$50 SP SP-Alt

$40 Include more

offsets
$30
$20 SP_WMOS
2020 A

$10
$0
$0 $20 $40 $60 $80 $100 $120
2010-2020 Societal Costs (B$2007)

SP C&T SP-Alt SP-NoOff SP_WMOS

(Case 1) (Case 2)
Complementary Measures Included Excluded Included Included Included
Cost Assumptions ARB ARB CRA ARB ARB
6 Offset Availability 4% 4% 4% None WM

Conclusions – CRA’s Analysis Shows:

• Increased reliance on a market-based approach, e.g., cap-and-trade, can achieve the
emission target at substantially lower cost than the Scoping Plan’s approach that relies
heavily on complementary measures
– Complementary
p y measures that mandate technologies
g without an underlying
y g market
failure, like RES and LCFS, cause most of avoidable cost
– Policy design choices have an important impact on total costs

• Including offsets reduces permit prices and overall program costs while maintaining overall
emission
i i reductions
d ti
– 4% offsets lower program costs and permit prices by 15% and 33%, respectively
– Increasing availability of offsets from 4% to the amount prescribed by the Waxman-
Markey bill lowers program costs and permit prices further by another 15% and 33%

• External factors can also contribute to higher than expected costs, highlighting the need for
compliance flexibility and cost containment mechanisms
– Higher than expected emissions growth and technology costs would increase program
costs substantially
substantially. For example
example, higher alternative fuel costs greatly increase the
costs of complying with the LCFS.

• Replacing or linking AB 32 with a national cap and trade program could lower costs by 50%
and achieve similar contributions to global emission reductions in the long run

7
 Thank You
For Additional Information Contact:

Paul Bernstein pbernstein@crai.com

David Montgomery dmontgomery@crai.com
Sugandha Tuladhar stuladhar@crai.com

For more details on this study, please see:

htt //
http://www.crai.com/uploadedFiles/analysis-of-ab32-scoping-plan.pdf
i / l d dFil / l i f b32 i l df

For media inquiries, please contact:

Andrea Goodman at (617) 425-3333
425 3333 or at agoodman@crai
agoodman@crai.com
com

Backup Slides

9
 Excluding complementary measures cuts program costs by 50%

• Overall policy costs cannot

MTCO2) be inferred from the CO2
$90 No Complementary Meas.
allowance price because
C&T C&T-Alt
$80 AB32 combines a market-
ce ($2007/M

CRA Cost b
basedd program tto reduce
d
$70 Assumptions carbon emissions (e.g., cap-
ARB Cost and-trade) with command-
$60 Assumptions and-control mandates (e.g.,
$50 SP SP-Alt the complementary
p y
wance Pric

Complementary Meas. measures)

$40
• Under either CRA or ARB
$30 assumptions, the
2020 Allow

complementary measures
$20 prescribe more expensive
$10 carbon emission reductions
than cap-and-trade program
$0 alone, resulting in lower
allowance prices, but higher
$0 $20 $40 $60 $80 $100 $120 total compliance costs.
2010-2020 Societal Costs (B$2007)
SP (Case 1) C&T SP Alt
SP-Alt C&T Alt
C&T-Alt
Complementary Measures Included Excluded Included Excluded
Cost Assumptions ARB ARB CRA CRA
10
 Offsets reduce costs of AB32 implementation by $7 to $24
billion and allowance prices by about $25/MTCO2

wance Price ($2007/M TCO2) • Allowing use of more

Lower level of offsets offsets from a broader
$90
SP-Alt SP-NoOS range of sources can cut
$80 costs in half while
Comp. Meas.
preserving emission
$70 Excluded
Comp. Meas. reductions
Included
$60
W-M Offsets SP • Flexible mechanisms are
$50 valuable for mitigating cost
Increased level of offsets increases due to higher
$40
than expected emissions
$30 and technology costs
2020 Allow

$20 • Offsets lessen incentives

$10 for investment to leave
California by lowering
$0 allowance prices
$0 $20 $40 $60 $80
2010-2020 Societal Costs (B$2007)
SP SP-NoOS Waxman-Markey
y SP-Alt
(Case 1) (Case 2) Offsets

Complementary Measures Included Included Excluded Excluded

12
Offsets in 2020 (MMTCO2) or (%) 4% None 55 4%

Cost of complementary measures more sensitive to

technology costs than pure cap and trade program
MTCO2)

• Accounting for likely higher

$90 costs of procuring and
Cap 1a Cap 1b
$80 delivering advanced low
ce ($2007/M

carbon fuels to the California

$70 CRA Cost fleet adds $20 to $40 billion
ARB Cost Assumptions dollars to the overall program
$60 Assumptions
1b costs
1a
$50
wance Pric

$40 • When complementary

measures are excluded
$30 program costs are less
sensitive to technology
2020 Allow

$20 uncertainty because the

market is no longer
$10 constrained in its choice of
$0
$ technologies
2

$0 $20 $40 $60 $80 $100 $120

2010-2020 Societal Costs (B$2007)
SP (Case 1) C&T SP-Alt
SP Alt C&T-Alt
C&T Alt
Complementary Measures Included Excluded Included Excluded
Cost Assumptions ARB ARB CRA CRA
13
CO2 Reduction Supply Curve
CO2 Reduction Supply Curve
O2)
Price ($/MT CO

S
P*

Program Cost

0 E*
Emissions Reductions (MM MT CO2)

E* = Emission reductions needed to meet cap

P* = P
Permitit price
i ffor E* reductions
d ti
Program Cost = The area defined by 0SE*
14

Command and Control Programs Raise Costs and Lower Permit Prices
CO2 Reduction Supply
pp y Curve
MT CO2)
Price ($/M

PMkt
P

Mk

PCC D
C
B
A

E0A EAB E* EBC ECD

Emissions Reductions to Meet Cap (MM MT CO2)
C & D represent command and control measures
EAB = EBC = ECD
Cost under efficient policy = A+B; Permit price = PMkt
Cost under C&C low cost = A+C; Permit price = PCC
Cost under C&C high cost = A+D; Permit price = PCC
15
 Including Offsets Lowers Program Costs and Permit Prices

MT CO2)
SNoOffsets
Price ($/M

SOffsets
P

PNoOffsets SMoreOffsets

POffsets
PMoreOffsets

E*
Emissions Reductions to Meet Cap
p ((MM MT CO2))

16