WCI: Costly, or cost-effective investment?

 Yesterday the price of oil rose $25.  In one day. 

Some might ascribe that rise to the shaky financial markets, to fear and anxiety about the global economy.  Underlying that obvious connection, however, is the equally obvious fact that the United States and the world have become far too dependent on oil.   Oil is the new gold.  To investors it's safe harbor in an economic storm.

So the concept that the Western Climate Initiative (cap and trade framework announced today at http://www.westernclimateinitiative.org/) could raise energy prices is 1) not very convincing in today's economy, with huge harmful energy price fluctuations occurring day-to-day, month-to-month, and year-to-year; and 2) improbable in light of economic analysis.

Economic analysis?  In a penetrating and thorough economic analysis two years ago, commissioned by the British government, Sir Nicholas Stern showed that the costs of addressing global climate change were minute compared to the costs of climate change itself (http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/sternreview_summary.cfm).  Impacts of converting to a lower-emissions economy, as a percentage of gross world product, were calculated in the low single digits over coming decades.

That global analysis was helpful.  More pertinent to today's issuance of a regional emissions trading system by seven western states is the analysis of California's emissions global warming program recommendations, released last week by the California Air Resources Board (http://www.arb.ca.gov/cc/scopingplan/document/economic_analysis_supplement.pdf).

The main findings of the recent California analysis:

• By reducing emissions, California saves money for households and businesses through energy efficiencies and competition in the energy marketplace.
• By reducing emissions, California experiences faster and stronger economic growth than it would in the business-as-usual scenario.
• By reducing emissions, California saves money for small business, which "will experience a slight economic benefit as a result of lower energy expenditures."
• By reducing emissions, California creates more jobs - 100,000 more - than if it did nothing.

The California economic analysis is conservative.  It "likely understates" the positive impact of emissions reduction because it can't adequately capture price risk.  It can't predict sharp, unexpected costs of our current energy system like those experienced in the last five or six years, and most painfully in the past year, when the price of oil rose far beyond the high-price scenarios the U.S. Energy Information Administration. 

In 2006 the California Public Utilities Commission found that energy efficiency efforts over the previous 20 years had produced enormous economic benefit for Californians, whose per capita electricity consumption has stayed level since about 1985 (while average U.S. consumption rose about 60%).  All those new hot tubs, plasma TV's, and computers running all night?  The system handled them, at lower cost.  Customer savings with cost-effective energy efficiency, in 2006, were estimated at over $1 billion per year (ftp://ftp.cpuc.ca.gov/Egy_Efficiency/CalCleanEng-English-Aug2006.pdf).  Being efficient isn't expensive; it's the highway to affordability.  Under the WCI's new regional emissions cap and trade program, it will be the first place for cost savings throughout the economy.

Today Americans spend about $500 billion to import foreign oil.  Using energy more efficiently and providing new alternatives will allow the western states to keep some of that money flowing in the regional economy.  Providing low-emissions alternatives and creating efficiency also means we can avoid the most expensive schemes to produce more and more oil - heating shale, drilling in marginal geographies, forcing more and more oil out of expiring fields through tertiary recovery.  Some of these higholy costly schemes make sense only in an economy that is too dependent on oil - and is ignoring viable, practical alternatives.  WCI will mobilize efficiency and alternatives, creating competition and choice in the  energy marketplace.

Of course there are other non-economic costs to today's energy system.  Should we sacrifice the Rockies to a tight network of natural gas and oil fields and pipelines?  Should we drill everywhere, including the Arctic National Wildlife Refuge and offshore, before converting to new energy sources?  Should we continue creating conditions causing health problems like asthma in our cities and oilfield/refining communities?  The list of human and environmental costs of not changing our energy systems is long and scary.

The Western Climate Initiative is a bold step forward - but it isn't a costly step.  Conventional energy resources are already growing more and more expensive, and the WCI offers a route to a more affordable, profitable, inclusive, and sustainable energy future in the western United States.