AB 32 Scoping Plan “Biased” and “Incomplete,” Outside Reviewers Say

The state’s economic analysis justifying a multi-billion plan to sharply reduce greenhouse gas emissions over the next 12 years is “flawed,” “biased,” as well as underestimates costs and overstates savings, according to six economists who critiqued the proposal. 

A separate assessment by the Legislative Analyst published Nov. 17, concluded that the California Air Resources Board’s AB 32 Scoping Plan contains an “inconsistent” and “incomplete” evaluation of costs and savings and fails to prove that by 2020 implementing the plan would create a slight economic benefit for the state. 

The air board, which is scheduled to vote on adopting the plan at its meeting Dec. 11 and Dec. 12, said in its response to the criticisms that it is “confident that its results reflect a sound analysis” and insists the economic impact of its plan will still be positive. 

“(The) comments provide a number of critiques and suggestions on aspects of our analysis,” the board wrote in the conclusion of a 13-page response to the evaluation of its plan by the economists. “In some cases, we agree with the suggestions for improvement, while in others we believe that our approach is appropriate.  

“Economic modeling is not an exact science, and there will always be different opinions about assumptions and how to apply the available tools.  This is to be expected. Even taking into account the major points raised, the economic impact of the proposed plan is positive for most indicators.” 

Under AB 32, the landmark measure committing California to reducing greenhouse gas emissions to 1990 levels by 2020, a Scoping Plan outlining how to achieve that goal was to be created by the board. 

That plan, issued in late June, recommends 31 actions to reduce greenhouse gas emissions by roughly 29 percent by 2020. 

Of the 31 actions, five are responsible for reducing over two-thirds of the emissions. 

They are: creating a low-carbon fuel standard, increasing electricity from renewable sources to 33 percent by 2020, implementing regulations to increase vehicle fuel efficiency to 44 miles per gallon, improving energy conservation and efficiency and establishing a market-based system in which polluters can buy and sell credits. 

The economic justification of the Scoping Plan — although referenced in the draft report posted on the air board’s webpage in June, — was not made public until September 17.  The board projects its plan will be a net economic gain for California, eventually yielding $16 billion in net annualized savings. 

To determine the plan’s soundness, AB 32 requires that outside economists conduct a “peer review” of the cost-benefit analysis on which it’s premised. 

Actually, the board admitted to the Legislative Analyst that rather than first determine a proposed strategy’s cost effectiveness, it picked what it wanted to include in the Scoping Plan, then conducted its economic analysis. 

“It’s unclear whether any findings about cost-effectiveness influenced either the mix of measures included in the scoping plan or the relative importance of each of those measures to achieve emissions reductions,” the Legislative Analyst wrote in its report. 

On November 26, the day before Thanksgiving, the air board posted the conclusions of the economists on its webpage. 

There are two documents on the board’s webpage relating to the peer review. The first is a two-page summary written by the board of the conclusions of the economists – all of whom have PhDs and extensive experience. 

The second document begins with a more detailed 13-page response by the board to the critiques of the economists. Next, are 16 pages of memos and letters relating to what the board seeks from the plan’s reviewers. 

Then come the actual comments of the economists.  

Several of the economists either begin or end their critiques by saying they support the board’s goal of lowering greenhouse gas emissions. 

They also raise several similar criticisms. Chief among them is the economic analysis offers only one prediction of the future. 

The economic analysis is “missing completely any information that decision-makers would have about what futures could, as they evolve, lead the state to a 2020 future completely different from the one depicted,” wrote Gary Yohe, Woodhouse-Sysco professor of economics at Wesleyan University. 

“Those decision-makers are therefore uninformed about what to monitor in the intervening 12 years so that they could, if need be, make “mid-course corrections” before they become too expensive,” said Yohe. 

“One of the best uses of models such as those used here is the examination of comparative policy designs, and the current analysis does not do this. As such it gives the appearance of justifying the chosen options rather than evaluating them,” wrote Janet Peace and Liwayway Adkins of the Pew Center on Global Climate Change. 

“There is no comparison of the costs of (the air board’s) chosen portfolio of policies with alternative policies, nor with different stringencies and/or weightings of the policies in its portfolio,” wrote Robert Stavins, a Harvard University John F. Kennedy School of Government professor with a 24-page curriculum vitae.  

“Hence, it is absolutely impossible to use the present economic analysis to determine whether (the board’s) Scoping Plan represents a truly cost-effective means of reducing California’s contribution to greenhouse gas concentrations in the atmosphere,” Stavins said. 

In its response, the board said its approach was “appropriate,” adding that an “analysis of strategies that ignore the requirements of AB 32 and other statutes governing the board’s actions relative to reducing greenhouse gas emissions is not supportable and would not be useful in guiding the board’s consideration of the plan.” 

Stavins described the board’s analysis as “deficient in critical ways,” and “severely flawed.” He lamented the board not involving outside experts in creating their initial economic modeling and, with some clairvoyance, predicted: 

“I fear that at this stage of the process, (the board) will find itself in a position of being compelled to publicly defend its economic analysis from critiques such as my own, rather than significantly amend it in response to expert commentary.” 

The board’s economic model purports to compare business-as-usual — the status quo of greenhouse gas emissions — with what will occur in 2020 if the actions in the Scoping Plan are taken. 

Stavins, who has written extensively on the economics of climate change, echoed a point made by the Legislative Analyst that the board overstates the problem it credits its plan with addressing. 

Much of the net savings from the Scoping Plan – some $11 billion — comes from implementation of regulations to increase fuel efficiency and, thus, reduce vehicle emissions. 

Those regulations stem from a bill carried by then Assemblywoman – now Senator — Fran Pavley, an Agoura Democrat. The legislation preceded AB 32. 

Rather than counting the emission reductions of the Pavley regulations as part of the status quo that existed before AB 32, it is counted as one of the AB 32 actions. 

“The impacts of the Pavley standards are incorrectly attributed to (the board’s) Scoping Plan, and the energy-efficiency gains that those standards are believed to yield constitute the vast majority of the net cost savings that (the board) attributes to the Scoping Plan,” Stavins wrote. 

“Interestingly, (the board) takes an inconsistent approach with some other policies which it acknowledges would impose serious costs, such as the Renewable Portfolio Standard,” Stavins wrote. “(The board) places these in the baseline scenario, thereby not including their cost in the cost estimate for the Scoping Plan. 

“Thus, (the board) has selectively included and excluded various non-AB 32 policies in its baseline precisely in ways that lead systematically to under-estimating the cost of the Scoping Plan.” 

(Editor’s Note: Emphasis by Stavins) 

The board countered that its baseline is “appropriate.” There is no inconsistency because the only measures included in its plan were ones like the Pavley regulations in which “greenhouse gas emission reductions are the primary driver.”  

So while implementation of a law to expand the use of solar energy contributes to reducing greenhouse gas emissions it would not be counted as part of the AB 32 solution since emissions reduction isn’t its primary purpose. 

Matthew Kahn, professor at UCLA’s Institute of the Environment, began by saying he was a “100 percent supporter” of reducing greenhouse gas emissions. But he questioned the board’s analysis. 

“AB 32 is presented as a risk-less “free lunch” for Californians. Nowhere in this economic document could I find any mention of the words ‘risk’ and ‘uncertainty’.

“These economic models predict that this regulation will offer us a ‘win-win’ of much lower greenhouse gas emissions and increased economic growth,” Kahn wrote. 

“I would like to believe this claim but after reading through the Economic Analysis and the five appendices there are too many uncertainties and open microeconomic questions for me to believe this. The net dollar cost of each of these regulations is likely to be much larger.” 

Among Kahn’s questions is how the board can predict a .4 percent increase in manufacturing employment due to AB 32 regulation given an expected 14 percent rise in electricity prices. 

 “The micro-econometrics literature has concluded that increased energy prices retards manufacturing employment growth. The manufacturing results reported here contradict the findings from the micro-econometric literature.” 

Kahn also cites a June 2008 quarterly report form Public Utilities Commission that says there have been 61 new renewable energy contracts approved. If all came online by 2010, the state could reach its target of having 20 percent of its electricity come from renewables. 

However, the PUC notes, “only 14 contracts for ~400 megawatts have come online. California’s (investor-owned utilities) would need about 3,000 more new megawatts in the next two years to be able to meet 20 percent in 2010. 

“It is worth noting” the PUC report continues, “that reaching the 20 percent goal in 2013 would leave the (investor-owned utilities) only seven years to achieve the 60 percent increase in (renewable) generation needed to reach a 33 percent target in 2020.” 

Echoing the other reviewers, Kahn concludes: 

“It is quite plausible that (the board’s) models have generated accurate predictions of the most likely scenario for 2020 but a risk averse population needs to know what may happen in the ‘worst case’ scenario and what is the probability of such events. 

“My bottom line is that (the board) deserves ample credit for its efforts up until this point but this Economic Supplement provides an incomplete report on what we know and need to know about the economic consequences of this important regulation.” 

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