Policy Documents

Balancing Fiscal, Energy, and Environmental Concerns: Analyzing the Policy Options for California’s Energy and Economic Future

Timothy J Considine and Edward Manderson –

Some people view California’s energy sector as a blueprint for how America should be powered in the future. California leads the nation in non-hydroelectric renewable energy production. Although household energy use per capita in California has been increasing, industrial and service sector energy efficiency in the state continues to improve. Despite this, California is the second largest energy consuming state in the nation behind Texas and will continue to require more energy once economic growth returns.

Understanding the economic, fiscal, and environmental trade-offs in powering California’s energy future is the central objective of this study. California is increasingly dependent upon energy sources outside its borders. In 1970 California produced 62% of its energy yet by 2009 the state imported 67% of its energy needs. In addition to crude oil and natural gas, the Golden State is the largest importer of electric power in the United States.

California has a variety of energy supply options going forward. First, it could continue on its current path, increasing reliance on imported energy, which forms the business-as-usual scenario in this study. The second option is to increase production of wind, solar, and other forms of renewable energy. The recently passed California Renewable Energy Resources Act sets out the most ambitious renewable portfolio standard (RPS) in the country. The law requires 33% of electricity retail sales to be served by renewable energy resources by 2020. This study considers this scenario and an expansion to a 40% renewable standard by 2035.

Currently, natural gas plants are the most frequent choice for new power in California. Using natural gas fired electric power generation to replace electricity imports and cut carbon emissions, therefore, provides an alternative to development of renewable electric power generation. This study considers the costs and environmental trade-offs of replacing new renewable power due to the RPS from now to the year 2035 with combined cycle natural gas power. Some of this natural gas could be produced from deposits located within California.

Outside Alaska, California has the largest untapped potential for additional oil and gas production in the United States. Offshore California contains more than 10 billion barrels of oil and nearly 12 trillion cubic feet of natural gas. Onshore, the Monterey Shale may contain more than 15 billion barrels of oil. At current market prices, these reserves are worth more than $2 trillion. Given this enormous potential wealth, this report considers, as a case study, the development of a small portion of these reserves located off the coast of Santa Barbara.

To estimate the economic and environmental impacts of these energy supply options, this study develops an integrated framework that involves an econometric forecasting system of California energy demand coupled with engineering-economic models of energy supply, and economic input-output models of the California economy. The Jobs and Economic Development Impact (JEDI) models for California developed by the National Renewable Energy Laboratoryprovide estimates of the economic impacts of the electricity generation scenarios. Since the JEDI models are based upon input-output tables from Minnesota IMPLAN Group (MIG), Inc. these models are used to estimate the economic impacts of developing oil and natural gas resources off the coast of Santa Barbara.

During the early years of the RPS and natural gas scenarios, employment and value added increase over the baseline scenario because construction of these plants provides substantial economic stimulus to the local economy. As the higher costs of these facilities are recovered, however, electricity rates increase. These higher rates reduce consumer discretionary income and cash flow for businesses. These higher energy expenditures reduce value added and employment in the long run, so much so that they offset the short-run economic stimulus from building renewable or natural gas power generation plants.

The net effects of these impacts are displayed below in Table ES1 below. Despite an increase during the early years of the RPS scenario, the present discounted value of gross state product declines between $68.9 and $72.9 billion over the forecast horizon from 2012 to 2035. Annual employment levels are on average between 50 and 53 thousand lower than without the RPS. State tax revenues are between $13.4 and $15.4 billion lower over the 24-year forecast period. While greenhouse gas emissions are lower, they are achieved at relatively high cost in terms of additional energy expenditures per ton of avoided emissions. Early in the forecast period, these carbon emission reductions cost between $150 and $160 per ton. While these costs decline to about $62 per ton by 2035, they remain well above market prices for carbon permit prices. Investments in renewable energy may create jobs in the short run but raise energy prices and reduce economic growth in the long run.

The fiscal and economic impacts of building natural gas fired electricity capacity are not as severe as those under the RPS scenario with losses in gross state product between $11.7 and $13.3 billion (see Table ES1). These results, however, underscore the importance of inexpensive sources of base load generation from coal, nuclear, and hydroelectric resources in maintaining low cost electricity for the California economy. Even though natural gas is now relatively inexpensive, the projections of real cost increases for natural gas in future years used in this study increase the relative cost of electricity import replacement for California.

These cost increases, however, may be mitigated if California could develop its own oil and natural gas resources. Such development, however, has been stymied by public concern over perceived risks to the environment, in light of the SantaBarbara oil spill in 1968 and more recently the Deepwater Horizon oil well blowout in the Gulf of Mexico.

Developing offshore oil resources off Santa Barbara County and other counties, however, can be accomplished with completely different technologies than those employed in these two unfortunate incidents. Advances in three dimensional seismic technology and directional drilling now allow development of offshore oil and natural gas resources from onshore drilling sites, which greatly reduces the risks of widespread water contamination in the event of well-blowouts. Uncontrolled releases of drilling fluids on land are infrequent and the impacts are highly localized because access to well sites and equipment is much easier and closed system drilling practices, in which all drilling water and materials are tracked, ensures complete capture and safe handling of any residuals from the production process. These new technologies strongly suggest that the environmental impacts and risks from oil and natural gas development are manageable. So the key question is whether the economic benefits are worth accepting these risks.

With a case study of expanding existing oil and natural gas development in the Santa Barbara, this study finds that the economic and fiscal impacts of developing these resources are uniformly positive with the creation of between 22,000 and almost 25,000 jobs annually, between $82 and $84 billion in gross state product, and over $23 billion in state tax revenues over the next 25 years. With no feedback between economic growth and energy expenditures, carbon emissions under the Santa Barbara scenario are actually lower due to savings arising from reduced oil tanker traffic. If higher economic growth due to oil and gas development is considered, carbon emissions rise slightly compared to the baseline scenarios. Hence, allowing the production of crude oil and natural gas from Santa Barbara would unambiguously increase employment, output, and tax revenues with minimal increases in greenhouse gas emissions. These results suggest that developing the $2 trillion worth of unexploited oil and natural gas reserves in California would create thousands of additional jobs and generate billions more in state government revenues.

This study finds that renewable energy portfolio standards are an expensive way to cut carbon emissions. Moreover, any economic benefits derived from building renewable energy facilities in the short-run are more than offset by losses in economic output and employment as consumers struggle to pay for these facilities in the long run.

In contrast, a strategy of replacing crude oil and natural gas that would have been consumed anyway from imported sources with domestic production using indigenous resources increases gross state product, employment, and tax revenues. While the additional prosperity this strategy generates may slightly increase carbon emissions, it seems a small price to pay for the considerable benefits domestic oil and natural gas production generate.

If California decides to continue down the RPS path, one way to pay for this program is to allow the development of crude oil and natural gas resources. Indeed, with the prospect of developing the Monterey Shale, which could be considerably larger than the Santa Barbara oil development scenario examined in this study, the economy of the Golden State could once again shine.

Energy development choices need not be a zero sum game. Indeed, environmentally responsible development of fossil fuel resources could be complementary with renewable energy development, creating jobs and generating tax revenues to ensure a robust economy capable of creating and funding innovative renewable energy technologies of the future.