The Economics of Greenhouse Gas Control and the California Clean Car Program

By Joseph Bast

Published November 12, 2003

Since my distinguished colleague, Dr. Sallie Baliunas, is going to address the science of global warming, I will devote my 15 minutes to the economics of the issue. My talk has two parts, the first on the cost of reducing greenhouse gas emissions here in New Jersey, and the second more narrowly on the Clean Car Act.

Legislative Status

The lame duck session starts November 13 and runs approximately 50 days. Four bills concerning environmental regulation are pending that are of particular interest to me:

AB 2095 / SB 1328 increases fines for noncompliance with the renewable energy portfolio standard from $10,000 to $100,000

AB 3238 makes emission reporting mandatory for all power generators.

AB 3491 prohibits diesel trucks from idling at marine terminals.

S 2351 adopts California Clean Car standards.

The first three bills are intended to address the fear of global warming by reducing greenhouse gas emissions. Some advocates of the fourth–adopting California standards for car and truck emissions–defend it mostly on public health grounds, but it has a strong link to global warming, too: Adopting California standards could legally commit New Jersey to adopting caps on carbon dioxide emissions from cars and trucks.

Reducing Greenhouse Gas Emissions Is Expensive

Renewable fuels are expensive and rarely used. Nonhydro-renewable fuels produced only 2.1 percent of the nation’s energy in 2001 and is projected to account for only 3.3 percent by 2025. (Energy Information Administration)

Most anthropogenic carbon dioxide comes from fossil fuel combustion, and most greenhouse gas control strategies therefore rely on raising energy prices to reduce emissions. Higher energy prices, though, have pervasive and negative economic effects.

A rapid transition from fossil fuels would require the premature retirement of assets worth hundreds of billions of dollars.

Cars and trucks produce between one-third and one-quarter of anthropogenic carbon dioxide. The only way to reduce CO2 emissions from cars and trucks is to reduce the motor fuels they consume, i.e., increase their fuel economy. This is much more expensive than other reduction opportunities and results in more highway fatalities.

Best Cost Estimates for the Kyoto Protocol

The Kyoto Protocol would require the U.S. to reduce its greenhouse gas emissions to 7 percent below 1990 levels by 2012. It’s economic effects have been carefully studied. Consensus estimates are:

Cost per ton of carbon avoided is about $226

Reduce GDP by $300 to $400 billion a year

Destroy 2.4 million jobs

Reduce average annual household income by $3,300 (in 2001 dollars)

Increase energy prices by 55 to 85 percent

In short, the economic impact of reducing greenhouse gas emissions would be enormous.

New Jersey Has the Nation’s Most Ambitious Greenhouse Gas Control Program

In 1998, then-governor Christie Whitman set a goal of reducing total greenhouse gas emissions to 3.5 percent below 1990 levels by 2005.

To reach that goal, the state has imposed a “social benefit charge” on every utility bill in the state. The tax collects $358 million a year to fund greenhouse gas reduction programs.

New Jersey’s 1999 Electric Discount and Energy Competition Act requires that 6.5 percent of the state’s electricity be generated from renewable sources by 2012.

Utility companies must provide “environmental disclosures” to their customers describing carbon dioxide emissions and the environmental impacts of the electricity they are supplying.

Gov. James McGreevey is working on other measures, including expanding the state’s renewable energy requirements and building more energy-efficient public schools.

New Jersey appears likely to reach its goal of a 3.5 percent reduction from 1990 greenhouse gas levels largely by increasing its reliance on nuclear power. (PSEG)

State Programs Are 10x as Expensive as National Programs

Geographic restrictions on a greenhouse gas program doubles the cost per ton of carbon emissions avoided, because they make it impossible to exploit lowest-cost opportunities first.

Relying on command-and-control regulations increases cost four-fold (Tietenberg).

A 50 percent “leakage” rate doubles the cost of every net ton of carbon avoided. (For every ton of carbon New Jersey avoids, another state or country will increase its emissions by approximately a half-ton.)

Cost per ton of carbon avoided is therefore ten times as high as a national program: $2,260

How Much Would It Cost for NJ to Reach the Kyoto goal?

New Jersey would need to reduce its greenhouse gas emissions by 11.10 million metric tons carbon equivalent (mmtce) to meet the goal set under the Kyoto Protocol.

New Jersey state government is currently spending $55 per ton to reach its goal of 3.5 percent less than 1990 by 2005, so it would have to spend at least $611 million per year to attain the Kyoto goal.

New Jersey state government would lose $4.5 billion each year in tax revenue as a result of slower economic growth.

The total cost of such a greenhouse gas program–$5.1 billion–would consume 24.4 percent of the entire New Jersey state budget (2001 general fund = $21 billion, NASBO).

A state greenhouse gas program would cost New Jersey consumers and businesses $25.1 billion a year due to higher energy costs and lost wages.

A state greenhouse gas program could cost the average household in New Jersey $8,198 a year.

Obviously, this is impossible. No one supports spending over $8,000 per household per year in the hope of delaying the onset of climate change.

Is It Worth It?

New Jersey’s emission reductions would be too small to have any effect on global climate.

The benefits of modest global warming would offset the costs: By 2060, global warming is likely to have a small (0.2 percent of GDP) positive effect on the U.S. economy. (Robert Mendehlson)

The global benefits of reducing emissions today are an order of magnitude less than the cost.

The burden would be disproportionately borne by taxpayers, the elderly, and the poor.

First Piece of Advice to Policymakers
State legislators should oppose new efforts to cap or reduce greenhouse gas emissions because such efforts are expensive, slow economic growth, hurt the poor and elderly, and produce few if any economic or environmental benefits.

What Is the Clean Cars Act?

S 2351 “authorizes and directs DEP to implement Phase II of the California Low Emission Vehicle program in the state beginning in calendar year 2006.”

California standards for the fleet of new vehicles sold in the state (LEV) have historically been more stringent than national standards.

Phase Two of the California LEV program includes a “ZEV mandate”–zero and near-zero emission vehicles:

6 percent of cars be equipped with technology that reduces evaporative emissions by 2006.

4 percent of cars must be gas/electric hybrids or cars that run on alternative fuels by 2006.

By 2012, some zero emission vehicles (ZEVs), presumably with electric or fuel cell propulsion, would be required.

By 2018, 5 percent of new cars sold would have to be ZEVs.

The California Air Resources Board (CARB) is in rule-making for a carbon dioxide emission standard for cars and trucks.

Why Do Its Supporters Want It?

To attain the new National Ambient Air Quality Standards on time. (S 2351)

“Many of the nation’s largest car makers have the technology to run cars on alternative fuels and build cleaner gas-powered cars. Passing the Clean Cars Act will bring these cars to New Jersey.” (NJPIRG)

“Prevent tens of thousands of asthma attacks and emergency room visits … reduce our exposure to airborne carcinogens and prevent thousands of new cancer cases … save consumers thousands of dollars on gas costs and decrease our dependence on foreign oil.” (NJPIRG)

What’s Wrong with the Clean Car Act?

It isn’t necessary

It would be enormously expensive

It could commit New Jersey to caps on carbon dioxide emissions

Clean Cars Is Not Necessary

Air quality is already dramatically improving both nationally and in New Jersey.

Car emissions: Hydrocarbons down 98 percent, carbon monoxide down 90 percent, nitrogen oxides/mile down 89 percent. Diesel truck emissions down 94 percent, 89 percent, and 64 percent.

Car and truck emissions are falling 10 percent a year thanks to fleet turn-over.

Starting with the 2004 model years, federal car and truck emission standards result in emission reductions that are essentially the same as California standards.

Even without California standards, car and truck emissions will fall by 90 percent by 2020.

Vehicles that meet California standards are already being sold in New Jersey

The Clean Cars Act Would Be Expensive

A simple cost estimate cannot be made because LEV and Tier II use different methodologies and California’s ZEV requirement keeps changing.

The ZEV component can be expected to be expensive because ZEVs can cost up to $20,000 more than traditional cars and, since they are usually electric, the range is only 75 to 100 miles on a four to six hour charge. [Egenton]

Car and truck manufacturers will raise the prices of other vehicles to subsidize ZEV prices, otherwise consumers won’t buy them: Current sales of hybrids are tiny–“in all about 36,000 hybrids were sold in the U.S. in 2002, an increase of 73 percent from the previous years.” (NJPIRG)

Even CARB admits the ZEV mandates would cost $500,000 per ton of emissions avoided.

Targeting new cars instead of the small number of older, highly-polluting cars now on the road necessarily means a high cost per ton of emissions avoided.

The real cost driver could be the carbon dioxide caps now in rule making in California.

Carbon Dioxide Caps on Cars and Trucks?

Assembly Bill 1493, signed into law in 2002, empowers the California Air Resources Board (CARB) to set mandatory carbon dioxide emission reductions starting with the 2009 model year.

States that adopt California standards could be required to adopt the carbon dioxide standard when it is promulgated.

Currently available technology cannot meet the efficiency and emissions requirements of California’s new law without reducing vehicle size.

What’s Wrong with Carbon Dioxide Caps on Cars and Trucks?

“Raising CAFE standards to 40 mpg would reduce the car and light truck portion of greenhouse gases by less than one-half of 1 percent–a negligible amount.” (Sterling Burnett)

People change driving patterns and nullify the intended effects. Increasing the energy efficiency of cars and trucks may not reduce the total amount of carbon dioxide emitted if consumers use the savings in fuel cost to purchase bigger and more powerful vehicles, or if they drive more miles or drive alone more often in cars with higher fuel economy.

Substitution of materials such as aluminum and carbon fibers for steel increases the amount of energy consumed in manufacturing the vehicles, and hence emissions.

Lighter vehicles are less safe, all other considerations equal, than heavier vehicles. Between 5,740 and 11,070 people die every year due to CAFE standards. Raising CAFE standards from their current levels to 40 miles per gallon would kill an additional 2,255 people each year.

CAFE standards imposed a social welfare cost of $10 for every gallon of gasoline they saved. Increasing the CAFE standard for cars by 12.3 miles per gallon and for light trucks by 9.0 miles per gallon, would impose annual costs on society of more than $25 billion and eliminate more than 100,000 jobs in U.S. auto and supplier industries.

Second Piece of Advice to Policymakers
Adopting California’s low emissions vehicles (LEV) program isn’t necessary, would be extremely costly, and could lead to caps on carbon dioxide emissions from mobile sources.

Joseph Bast is president of The Heartland Institute, a national nonprofit research organization based in Chicago, Illinois. The views expressed in this presentation are his own and do not necessarily reflect the views of The Heartland Institute, and are not intended to hinder or support passage of pending legislation. For more information about The Heartland Institute, please visit http:www.heartland.org or call 312/377-4000. This paper is based on remarks presented to the Center for Policy Research of New Jersey on November 12, 2003.