Analysis of the 2006-07 Budget Bill Legislative Analyst's Office February 2006

Governor’s Climate Change Initiative

The budget proposes funding across several state agencies to begin implementation of the Governor’s Climate Change Initiative, which focuses on reducing greenhouse gas (GHG) emissions. In this analysis, we describe the Governor’s proposal, consider the state’s existing GHG reduction efforts, and make recommendations to assist the Legislature in evaluating the policy choices inherent in the Governor’s proposal.

Governor’s GHG Reduction Targets

In June 2005, the Governor issued an executive order that established ambitious greenhouse gas emission reduction targets for the state. In response, a multiagency Climate Action Team was formed to develop strategies to meet the Governor’s targets. The budget proposes $7.2 million and 23.4 positions across several state agencies to begin implementation of Climate Action Team recommendations.

California’s Emissions of GHGs. Greenhouse gases trap solar heat within the earth’s atmosphere, thereby warming the earth’s temperature. While both natural phenomenon (mainly water evaporation) and human activities (such as the burning of fossil fuels) produce GHGs, increasing concern has been placed on concentrations of GHGs resulting from human activities and their relation to the increase in mean global temperatures over the past century.

On a per-person basis, California emits fewer GHGs than most other states. Nonetheless, California, as a populous state, is a significant emitter of GHGs. For example, the state is the second largest emitter of GHGs in the United States and one of the largest emitters of GHGs in the world, when compared to other countries’ emissions. While many human activities contribute to California’s GHG emissions, the largest sources in recent years, in order of magnitude by sector, have been transportation, industry (including industrial burning of coal and petroleum, cement and lime production, and mineral extraction), electricity production, agriculture, and forestry. Figure 1 shows estimates by the California Energy Commission, based on federal data, of California’s annual human-produced GHG emissions since 1990. (Data are not readily available prior to this period.) From our review of commission reports, it appears that the acceleration in the amount of GHG emissions since 1995, as shown in Figure 1, is largely attributable to an increase in economic activity in the state during that period.

Governor’s Executive Order. On June 1, 2005, the Governor issued an executive order that established the following GHG reduction targets for the state, as a guide for state action to address the economic, social, and health impacts of global warming:

• By 2010-Reduce GHG emissions to year 2000 levels.

• By 2020-Reduce GHG emissions to year 1990 levels.

• By 2050-Reduce GHG emissions to 80 percent below year 1990 levels.

In response to the executive order, the Secretary for Environmental Protection formed the Climate Action Team (CAT) made up of representatives of the state’s environmental protection, agricultural, transportation, housing, and utility agencies. The CAT then developed strategies in support of the order, which it published in December 2005 as a draft report to the Governor and the Legislature. The draft CAT report recommended four actions “essential” to meeting the Governor’s GHG emission reduction goals: (1) require climate change emissions reporting from all emitters of GHGs, starting with the largest emitters (such as electricity generators and cement producers); (2) levy fees on gasoline and diesel sales to reduce demand for these fuels and to fund promotion of alternative, cleaner fuels; (3) coordinate state investment funds, such as public pension systems and the Public Interest Energy Research fund, to reward industry development of emission reduction technologies; and (4) encourage companies to take early action to reduce their climate change emissions in anticipation of subsequent state, federal, or international emissions reduction programs.

Budget Proposal. The budget proposes funding for the Governor’s Climate Change Initiative, a collection of strategies intended to begin implementation of CAT recommendations and the GHG reduction targets identified in the executive order. The budget proposes $7.2 million ($135,000 General Fund, $7 million various special funds) and 23.4 positions across a number of agencies in support of the Climate Change Initiative. Figure 2 lists those agencies included in the Climate Change Initiative, as well as the funding proposed for each agency and the specific strategies assigned to them.

Efforts Underway to Curb GHG Emissions

Many efforts are currently underway to reduce California’s emissions of greenhouse gases, several of which were initiated by the Legislature.

As the draft CAT report notes, there are numerous strategies currently being implemented in the state to address GHG emissions. In many cases, these existing strategies are the result of legislative action. The Legislature declared GHG reduction a policy priority when it enacted Chapter 769, Statutes of 2001 (SB 527, Sher), which declared it to be “in the best interest of the State … to encourage voluntary actions to achieve all economically beneficial reductions of greenhouse gas emissions from California sources.” Figure 3 highlights a number of the state’s existing GHG emission reduction strategies, both voluntary and mandatory, as well as applicable enabling legislation.

The Governor’s Climate Change Initiative contains a number of proposals that are conceptually consistent with legislative policy direction on particular strategies to reduce GHG emissions. For example, a number of strategies included in the budget proposal have been approved by the Legislature: promoting use of cleaner, alternative fuels; regulating emissions from motor vehicles; offering incentives to clean air technology developers; inventorying GHG emissions by source; attaining renewable energy portfolio standards; and setting energy efficiency standards.

Despite this level of conceptual consistency, the Governor’s initiative differs in some respects from legislative direction in terms of the specifics of how a strategy is to be implemented. For example, in some instances, the Governor’s proposal expands an existing GHG reduction program beyond the parameters set by the Legislature. Such is the case with the Governor’s proposal to extend to heavy-duty vehicles the GHG emission reduction methods applied under current law only to light-duty vehicles. Also, the Governor’s initiative would accelerate the statutory timeline for the renewable energy portfolio standard. As another example, the Governor’s initiative proposes to expand the use of biofuels through regulatory control measures, though the Legislature has authorized only the development of a plan to encourage use of such fuels and has not specified a regulatory role.

Legislature Needs to Set Overall Policy Direction

There are a number of major policy choices inherent in the Governor’s Climate Change Initiative that should be evaluated by the Legislature. These include setting greenhouse gas emission reduction targets, setting implementation priorities, balancing regulatory and voluntary strategies, and determining state versus local responsibilities. It is also important to ensure that efforts among state agencies are coordinated to prevent duplication and unnecessary costs. We recommend that the Legislature provide its direction for an overall climate change policy for the state in statute.

Despite similarities between legislatively endorsed GHG-reduction strategies and those proposed in the Governor’s budget, the Governor’s Climate Change Initiative raises a number of major issues for legislative consideration. We discuss below a number of the significant policy choices inherent in the Governor’s proposal that we think particularly merit legislative review.

GHG Emission Reduction Targets. Under the Governor’s proposal, the GHG emission reduction targets will drive the development, organization, implementation, and evaluation of the state’s GHG reduction efforts. Accordingly, there are major policy and fiscal impacts from adopting the targets. The Legislature therefore should evaluate the Governor’s proposed GHG reduction targets-reduction of GHG emissions to year 2000 levels by 2010, to year 1990 levels by 2020, and to 80 percent below year 1990 levels by 2050. For example, the Legislature should clarify the basis for the targets, ask whether the targets are too ambitious to be achieved or too low to make a difference, and determine whether the targets strike an appropriate balance between GHG reduction and the Legislature’s other policy priorities. How does the administration assess the costs and benefits of its target levels? There is much precedent for the Legislature setting goal-based targets in statute for the implementation of its policies. For example, the Legislature set a target of 50 percent of waste being diverted from landfills by the year 2000. Similarly, the Legislature has set targets for the amount of energy consumed from renewable sources by set dates. The Legislature should consider placing GHG reduction targets in statute, following its evaluation of the issue.

Setting Priorities for Implementation. As mentioned previously, the draft CAT report identifies four actions it considers essential to meeting the Governor’s GHG reduction targets. As with the setting of GHG reduction targets, the identification of priority actions will drive California’s climate change policy. The Legislature should determine whether the Governor’s priorities are consistent with its own priorities.

Balancing Regulatory and Voluntary Strategies. The Governor’s budget proposes development and eventual implementation of a mix of regulatory and voluntary measures to realize GHG reductions from numerous sources. The Legislature should evaluate the costs, effectiveness, and efficiency of applying regulatory and voluntary measures to different GHG-emitting sectors, as well as the need for additional statutory incentives or mandates. The Legislature should also consider who should pay for the implementation of these strategies, including the role of public versus private funding. We note that the Air Resources Board (ARB) in particular has a long history of using both regulatory (“command and control”) measures and voluntary measures (such as incentive payments for the replacement or retrofit of older, dirty diesel engines in vehicles and equipment) to improve air quality. When evaluating proposed voluntary measures, the Legislature should be provided with evidence that such or similar measures have worked in the past to achieve their desired results and have created outcomes that justify the level of state investment.

Lead Responsibilities for GHG Reduction Program. The Governor’s budget places coordination of the state’s GHG-reduction efforts with the Secretary for Environmental Protection, assigning other state agencies the responsibility to carry out specific GHG-reduction activities. While we think that the choice of the Secretary for Environmental Protection as the lead, coordinating agency for the Climate Change Initiative is one option, the Legislature may want to consider alternatives. For example, it may be administratively practical to consolidate responsibility for the state’s GHG-reduction efforts under the ARB, which already has primary statutory responsibility for the state’s air quality and the technical expertise from administering air quality programs for many years. Additionally, ARB is allocated the bulk of the funding under the Governor’s proposal.

State Versus Local Role in GHG Regulation. The ARB, along with 35 local air pollution control and air quality management districts, protects the state’s air quality. Responsibility for regulation of air pollution is generally divided between state and local governments by source of the pollution: local districts regulate stationary sources of pollution while ARB regulates mobile sources of pollution. Even though stationary pollution sources, subject to the jurisdiction of local air districts, are significant contributors to GHG emissions, the role of local air districts in implementing the Climate Change Initiative is unclear. Therefore, the Legislature should consider the role, if any, the state’s local air districts should play in the statewide GHG reduction efforts.

Effect of Initiative in the Context of Other State Activities Affecting GHG Emissions. The GHG reduction strategies proposed in the Governor’s budget are not the only state-level activities or policy choices affecting the amount of GHGs emitted in California. First, as mentioned previously, there are numerous efforts currently underway in various environmental protection and other state departments that are designed to reduce GHG emissions. While these current efforts appear to generally align with the Governor’s proposal in concept, it is not clear how the day-to-day practical implementation of the strategies in the Governor’s proposal will be coordinated and/or consolidated with these existing efforts. Without such coordination or consolidation, there is a risk of duplication, administrative inefficiencies, and weakened program performance.

Second, state-level policy choices made outside of the context of GHG reduction efforts can affect GHG emissions, and this impact can be positive or negative. For example, state actions related to transportation facilities, energy production, and land use can impact the state’s GHG emissions. Accordingly, in developing an overall climate change policy for the state, it will be important for the Legislature to consider the totality of the state’s activities and policy choices affecting GHG emissions.

Recommend Secretary Advise Legislature on Issues Raised. In order that the Legislature may fully evaluate the GHG emission reduction strategies and policy choices inherent in the Governor’s budget proposal, we recommend that the Secretary for Environmental Protection advise the policy committees charged with evaluating the set of issues that we have raised above. Specifically, the Secretary should advise the committees on:

• The feasibility and appropriateness of the Governor’s GHG reduction targets.

• Selection of the administration’s GHG reduction priorities, particularly the four essential actions identified by the CAT draft report.

• The relationship between Climate Change Initiative strategies and the state’s existing GHG reduction activities, as well as any other state activities that may significantly impact GHG emissions, directly or indirectly, positively or negatively.

• The cost and effectiveness of mandatory versus voluntary GHG reduction measures for different emission sources.

• The policy rationale behind assigning oversight and coordination of the Climate Change Initiative to the Secretary rather than another entity, such as ARB.

• The role of local air districts in administering and enforcing the initiative.

We think that the Secretary’s reporting on these issues will assist the Legislature in developing an overall climate change policy to guide state action that we recommend be put into statute.

Summary. Figure 4 summarizes the key issues and decisions we think the Legislature should consider in placing its climate change policy preferences into statute.