shock proofing society
TRANSCRIPT
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Shockproofing Society
How Californias Global Warming SolutionsAct (AB 32) Reduces the Economic Pain ofEnergy Price Shocks
September2010
JamesFine
EnvironmentalDefenseFund
ChrisBusch
CenterforResourceSolutions
RemyGarderet
EnergyIndependenceNow
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ACKNOWLEDGMENTS
WehavebuiltonaconceptualframeworkconceivedbyMichaelGibbsattheCalifornia
EnvironmentalProtectionAgency.Wearegratefultohimforencouragingustodeveloptheidea
further.DavidKennedy,StaffEconomistattheCaliforniaAirResourcesBoard,kindlyresponded
tomultiplerequestsforclarificationandprovidedsomeofthedataweuse.Withinour
organizations,wethankMatthewBrown(EIN),TysonEckerle(EIN),NathanielKeohane(EDF),
Sergio
Marquez
(EDF),
Timothy
OConnor
(EDF),
Arthur
O'Donnell
(CRS),
Lori
Sinsley
(EDF),
Jeff
Swenerton(CRS),GernotWagner(EDF),andDerekWalker(EDF).Wealsothanktheexternal
reviewers,whohaveeachofferedusefulinput:AdamRose(UniversityofSouthernCalifornia),
SoniaYeh(UniversityofCalifornia,Davis),CamilleKustin(BetterWorldGroup),WilliamDean
(Cal/EPA),andMorrowCaterandBreAndaNorthcutt(CaterCommunications);andwethankthe
economistsattheCaliforniaEnergyCommissionwhodugdeeplyintoourmethods:PierreduVair,
AdrienneKandel,ChrisKavalec,andAnissBahreinian.Noteverysuggestionwereceivedhasbeen
incorporated.Remainingerrorsaretheresponsibilityoftheauthors.
CoverImage
Thiswork
is
licensed
under
the
World
of
Stock
Royalty
Free
License.
To
view
acopy
of
this
license,
visitwww.worldofstock.com/license.htm.Imagecredit:AlanCrosthwaite/WorldofStock.
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TABLEOFCONTENTS
ACKNOWLEDGMENTS.............................................................................................................................................................2
TableofContents....................................................................................................................................................................3
ExecutiveSummary.................................................................................................................................................................4
a.
WhatCalifornia
Spends
on
Energy
Imports
.......................................................................................................................
4
b. ValuingAB32Benefits:ImportationEffect........................................................................................................................5
c. ValuingAB32Benefits:RetailEffect..................................................................................................................................6
d. Conclusions........................................................................................................................................................................6
1.Introduction........................................................................................................................................................................7
a. OverviewofReport............................................................................................................................................................7
b. EnergyPriceHistoryandFuturePriceShocks....................................................................................................................7
c. AB32ScopingPlan...........................................................................................................................................................11
d. RetailEffectBenefits........................................................................................................................................................15
e. ImportationEffectBenefits..............................................................................................................................................15
2.RetailEnergyPriceShocks..................................................................................................................................................16
a. HypotheticalEnergyPriceShocksandDemandResponses.............................................................................................16
DriverFuelingCostsDuringPriceShocks.........................................................................................................................17
DemandDeclines
in
Response
to
Price
Shocks
.................................................................................................................
18
b. FindingsaboutRetailEffects............................................................................................................................................19
c. ConservativelyLowFindings............................................................................................................................................22
3.ImportationEffects.............................................................................................................................................................23
a. OilImportExposure.........................................................................................................................................................24
b. NaturalGasImportExposure...........................................................................................................................................27
c. ImportSavingsfromAB32..............................................................................................................................................29
d. ImportSavingsfromAB32inPriceShocks......................................................................................................................31
4.Conclusions........................................................................................................................................................................32
References.............................................................................................................................................................................35
AppendixA:Methods.............................................................................................................................................................37
a. PriceShockAnalysis.........................................................................................................................................................37
1.AB32InducedChangesinEnergyUse.........................................................................................................................372.DevelopRetailPriceRelationships...............................................................................................................................38
3.DevelopPriceSpikeScenarios......................................................................................................................................44
4.IncorporatePriceElasticityofDemandResponse........................................................................................................46
5.CalculateBenefitasEnergySaved,MultipliedbyPriceSpikeIncrement.....................................................................47
b. ConsumerSurplus............................................................................................................................................................47
c. ImportAnalysis................................................................................................................................................................51
AppendixB:SummaryofExistingMacroeconomic AnalysesofAB32Measures.....................................................................52
AppendixC:DiscussionofOtherCoBenefits..........................................................................................................................57
a. AvoidedClimateDamages...............................................................................................................................................57
b. PublicHealthBenefits......................................................................................................................................................58
c. Innovation........................................................................................................................................................................58
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EXECUTIVESUMMARY
Thepriceofgasolineisatellingeconomicweathervane.Whengasischeap,itisnotgivenmuch
attention.Whengaspriceshitrecordhighs,however,asin2008,thedownsideofAmericas
dependenceonimportedenergyismadepainfullyobvious.ThisreportanalyzeshowAssembly
Bill(AB)
32,
Californias
Global
Warming
Solutions
Act,
will
help
protect
Californias
economy
from
energypricespikesbyreducingCaliforniasdependenceonimportedoilandnaturalgas.
Untilnow,moststudiesofthecostsandbenefitsofAB32implementationhaveassumedsmooth
andsteadyincreasesinenergyprices.Yethistoryshowsthatenergypricesaresubjecttoperiodic
spikesorshocks.Pricesinrecentdecadeshavebeenhighlyvolatile.Since1973,Americanshave
experiencedsixshockswhencrudeoilpricesrosebyanaverageof179%inoneyear.Thisreport
isthefirstanalysisthatconsidersreducedexposuretoenergypriceshocksasabenefitfrom
implementationofmeasuresdetailedintheAB32ScopingPlan.Wedothisbyestimatingthe
avoidedexpendituresforenergythatwouldresultfromahypotheticalcrudeoilandnaturalgas
priceshockin2020.
Specifically,we
asked:
if
state
agencies
implement
energy
related
measures
in
Californias
ClimateChangeScopingPlan,howmuchmoremoneywillCaliforniaenergyuserssave ifcrude
oilandnaturalgaspricesdoubledintheyear2020andremainedatthatlevelforoneyear?
Theanalysisisbasedontwohypotheticalbutplausiblepriceshockscenariosinyear2020:
Moderateshockscenario,involvingayearlongdoublingoftheU.S.Departmentof
EnergysAnnualEnergyOutlook(AEO)2020referencecrudeoilandnaturalgasprice
forecasts($114.50perbarrel(bbl)forcrudeoiland$7.43permillionbritishthermalunits
(MMbtu)fornaturalgas).
Largeshock,involvingayearlongdoublingoftheAEO2020highpriceforecasts
($181.18/bbland$7.80/MMbtu).
ThevalueofAB32drivenreductionsinfossilfuelsin2020canbeviewedtwoways:
ImportationEffect:ReducedexpendituresonoilandnaturalgasimportsintoCalifornia
willbe$10.0billionin2020attheAEOreferencepriceforecast,andwouldincreaseto
$18.8billioninthemoderatepriceshock,or$29.6billionforalargepriceshock.
RetailEffect:Reducedexpendituresfortransportationandelectricityfuelsandindustrial
useofnaturalgas,propane,andoilswillrangefrom$4.8$9.6billionforthemoderate
andlargeshockscenarios,respectively.1
a. WhatCaliforniaSpendsonEnergyImportsCalifornias
sizable
and
growing
demand
for
natural
gas,
oil,
and
refined
products
(e.g.
gasoline
anddiesel)farexceedsinstateproduction,leavingCaliforniaincreasinglydependentonoiland
1TheseareenergysavingsaboveandbeyondthoseatpricelevelsimpliedbytheAEOreferenceforecast,whichtheCaliforniaAir
ResourcesBoard(CARB)hasestimatedtobe$7.5billion(CARB2010,p.55).Toprovideanexampleforcontext,thepriceofgasolineis
oneretailpricechangethatweinvestigate.Themoderateshockisa$1.09pergallonincreaseingasoline,whereasthelargeshockisa
$2.35pergallonincrease.
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naturalgasimports.Inthisreport,importsrefertosuppliesoriginatingoutsideCalifornia,which
includesbothneighboringstatesandforeigncountries.
In2006,Californiausedtheenergyequivalentof593millionbarrelsofoiltopoweritscars,
trucks,planes,buildings,andindustry.Californiasoffshoreoilrigsandonshorewellsproduced
about265millionbarrelslessthanhalfofwhatwasconsumed.In2006,Californiatherefore
importedabout
328
million
barrels
of
oil
for
its
own
use.
At
the
current
price
of
about
$75
per
barrel,thisisequivalenttospending$25billionannually,or$68millioneachday.The
dependenceonimportednaturalgasisevengreater:nearlynineofeverytencubicfeet(87%)
usedinCaliforniaisimported.
Californiasenergyimbalanceisgrowing.Californiasoilproductionhasbeenonasteadydecline
sinceitspeakaround450millionbarrelsinthemid1980s.WhileAlaskanoilinitiallymadeupthe
differenceforCaliforniabasedrefiners,Alaskanproductionhasalsodeclinedrapidly,andis
expectedtocontinuetodecline.
b. ValuingAB32Benefits:ImportationEffectBy
2020,
the
total
oil
based
energy
use
for
transportation
fuels
and
other
oil
uses
is
expected
to
betheequivalentof614millionbarrelsperyear(mb/y),upfrom576mb/yprojectedfor2012in
theabsenceofAB32implementation.GivendeclininginstateandAlaskanoilproduction,
Californiawillincreaseoilpurchasesfromforeigncountriesandneighboringstates.
ThevalueofCaliforniaenergyimportsin2020willdependontwofactors:(a)pricesofcrudeoil
andnaturalgas,and(b)instatefuelproduction.IfenergypricesareattheAEOforecast
referenceprice($114.50perbarrelforcrudeoil),andCaliforniaproductiondeclinesattherate
experiencedover20062008(2.17%peryear),withoutanyAB32measures,theoilimportbill
in2020wouldbe$49.2billion.2Importexpendituresincreasesubstantiallyintheenergyprice
shockscenariosthatweinvestigate.
AddingnaturalgastothepicturerevealsthatCaliforniasrelianceonfossilfuelenergyimportsisevenmoresevere.WithoutAB32implementation,expendituresfornaturalgasimportsinto
Californiawillbe$11.6billionfortheAEOforecastreferenceprice.Californiaislikelytocontinue
toimport$60.9billion(AEOreferenceprice)to$94.2billion(AEOhighprice)worthofcrudeoil
andnaturalgasin2020.Underworstcaseconditions,withalargepriceshock,slowinginstate
production,andsteadyconsumerdemand,Californiawouldspendupto$182.7billionin2020to
importoilandgas,whichequatestonearly$13,000perhousehold.
ThegoodnewsisthatAB32canreducetheamountthatCalifornianspayforoutofstatecrude
oilandnaturalgasby$10billionin2020,assumingAEOforecastreferenceprices.IfCalifornia
experiencespriceshocksin2020,theAB32benefitofavoidedimportationexpenditureswould
befrom
$18.8
billion
to
$29.6
billion,
respectively,
in
the
event
of
moderate
and
high
price
shocks.ThisisbasedonanestimatethatAB32measuresimplementedby2020willavoidenergy
demandequivalentto75millionbarrelsofoiland189trillionBTUs(TBtus)ofnaturalgas.
2Alldollarvaluesinthisreportareinyear2007dollars,indicatedby$2007inchartsandtables.
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c. ValuingAB32Benefits:RetailEffectWeconsiderwhatwerefertoasretaileffects,thehigherexpendituresformostoftheprimary
fuelscombustedintheCaliforniaeconomy,includinggasoline,jet,anddieselfuelfor
transportationandindustrialuseofnaturalgas,propane,andasuiteofderivatesofcrudeoil.
Underenergypriceshockconditions,thisavoidedenergydemandduetoAB32measures
wouldsavepeopleandbusinessesbuyinggasoline,diesel,jetfuel,propane,naturalgas,and
industrialoilbetween$4.8$9.6billionbeyondthesavingsalreadyreflectedinother
macroeconomicstudies.Thisrangeamountsto$332$670insavingsfortheaverageCalifornia
householdin2020takingintoaccountpopulationgrowth.
Initsupdatedeconomicanalysis,CARBestimatesthatAB32wouldsaveconsumers$7.5billionin
energyexpenditures.TheseresultsarebasedontheAEOmidrangepriceforecastfor2020.Retail
effectssavingsunderpriceshockcircumstancesareinadditiontothe$7.5billionthatCARB
estimatedatlowerenergyprices.Theimportationeffectsforcrudeoilareextrapolatedfromthe
samegasolineanddieselconsumptionfiguresusedtoestimateretaileffects.Similarly,thesame
naturalgasdataareusedinbothretailandimportationeffectsanalyses.Inessence,theretailand
importationeffectsaretwodifferentperspectivesonthesameenergysavings.Asaresult,the
twosets
of
numbers
should
be
considered
separately;
they
cannot
be
summed
for
atotal
benefit.
d. ConclusionsWedefineenergyeconomicsecurityasreducedexposuretofossilfuelpricespikes,andthen
proceedtoanalyzethisyettobequantifiedbenefitofCaliforniasClimateChangeScopingPlan.
Themacroeconomicanalysesthatdominatethediscussionofeconomicimpactsignorethe
vulnerabilitiesimposedbyCaliforniasdependenceonimportedoilandnaturalgas.Tobegintofill
thegapinourunderstandingofthefullbenefitsofAB32,wecalculatethesavingsthatwould
followunderpriceshockconditionsduetoreducedrelianceonfossilfuelslikecrudeoiland
naturalgas.Wequantifythisbenefitintermsofbothavoidedconsumerspending(retaileffects)
andreduceddependenceonimportedenergy(importationeffects).
OurresearchputsthevalueofincreasedenergyeconomicsecurityfromAB32measureinthe
tensofbillionsofdollars.Ourfindingsshouldbeconsideredconservativelylowforseveral
reasons.Wedonotconsiderpriceincreasesinconsumergoodsthatresultfromenergyprice
shocks,nordoweanalyzeashocklastingbeyondoneyearinlength,eventhoughthreeofthe
fivemostrecentshocksresultedinpricesthatweremorethandoublethestartingpointafter24
months.Finally,theonlycostsweconsideraredirectcostsouranalysiscapturesnoneofthe
indirectcoststhatwouldripplethroughtheeconomywhenthenextoildisaster,outbreakofwar,
orsomeotherunpredictableeventcausesoilpricestojump.
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1.INTRODUCTION
PoliciesthathelpCaliforniarespondtoglobalwarmingalsowillhelptobuffertheeffectsoffuture
energypricespikes,astheywilllowerthestatesdependenceonimportedenergysuppliesthat
are
priced
by
global
demand.
In
this
report,
we
quantify
the
benefits
California
will
gain
from
reducedexposuretoanoilpriceshockin2020fromimplementationofAB32measures.
Specifically,wevecreatedaquantitativemodel3thatbuildsontheexistingmacroeconomic
forecastsbyCaliforniasAirResourcesBoardandtheU.S.EnergyInformationAdministrationand
representsdifferentviewsaboutfuturepricesandhowCalifornianswillrespondtopriceshocks.
WeanalyzetwoperspectiveswhenquantifyingtheenergyeconomicsecuritybenefitsofAB32:
1. Retaileffects:Theavoidedpaymentsbyenergyconsumers,suchasdriversbuyinggas,airlinespurchasingjetfuel,andindustrialfacilitiesobtainingboileroil.
2. Importationeffects:Theavoidedvalueofenergyimports,whichisthedifferencebetweenCaliforniaenergydemandandinstateproduction.
a. OverviewofReportThisfirstchaptersurveysthehistoryofenergypricesanddescribeshowAB32willreduceenergy
demandin2020.Chapters2and3provideestimationofpreviouslyunaccountedforeconomic
energysecuritybenefitsofAB32fromthetwoperspectivesdetailedaboveretailand
importationeffects.TheConclusion,Chapter4,providescontextforthequantitativeanalysis,
includingtheobservationthatthisreporthasonlyilluminateddirectsavingstotheeconomy;the
totalwouldbemuchlargerwhenindirecteffectsareconsidered.AppendixAprovidesadetailed
explanationofourmethods.AppendixBdiscussestheexistingliteratureontheeconomicimpacts
ofAB32withafocusonasetofthreerecentlycompletedmacroeconomicstudies.AppendixC
offerssomediscussiononthemanyadditionalbenefitsthatwillbegainedfromactingswiftlyand
effectivelytofightclimatechange,includingareducedlikelihoodoftheworsteffectsofglobal
warming,co
pollutant
reductions,
and
new
opportunities
for
innovators
and
entrepreneurs.
b. EnergyPriceHistoryandFuturePriceShocksDebatesaboutwhenoilwouldreachitsmaximumproductionratesbeganinthe1950s,andtruly
enteredthemindsofAmericanconsumersintheearly1970s4.Thepast40yearsrevealthehigh
volatilityofcrudeoilandnaturalgaspricesandahistoryofdramaticpriceincreases.Asshown
Figure1AandTable1A,inthepast40yearsAmericanshaveexperiencedsixsignificantgasprice
shocksfollowingspikesintheworldoilmarket.
3StatewideHolisticOilCostKalculator(SHOCK).TheSHOCKmodelcontainsenergyuseinformationonlyforCalifornia,sowecallthis
versionSHOCKCA.4MostfamousistheworkofM.KingHubbertfortheU.S.GeologicalSurveyinthe1940sand1950s.Forexamples,seeHubbert,1949,
orHubbert,1956,andanonymousopinion,"IsOilNearingaProductionCrisis?"inPetroleumWeek,1956.Referencesinthisfootnote
fromwww.hubbertpeak.com/hubbert/Bibliography.htm,lastvisitedJuly14,2010.
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Table1A:MajorCrudeOilPriceShocks
(Source:EIAPetroleumPriceData,AuthorsCalculation)
ShockYear NotableEventsNominalChangeinthePriceofCrude
OilafterOneYear
1973OPECoilembargo,ArabIsraeliYomKippur
WarNotavailable5
1979IranianRevolution,OPECproduction
decline180%
1991 IraqiinvasionofKuwait,GulfWar 129%
1999 ReboundfromAsianFinancialCrisis 263%
2003Oilscarcityfears,MiddleEasthostilities,
and
Price
Speculation
145%
2008MiddleEasthostilities,Iraqi&North
Koreannuclearscares,HurricaneKatrina173%
Average 179%
5Weexcludethe1973shockfromthetablebecausewehavenotbeenabletolocatemonthlypricedata,butthemagnitudeofthe
shockappearstohavebeenaboutthesameastheothers.
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Figure1A:InflationAdjustedandNominalCrudeOilPrices,19462010
(pricesin2010dollars)
Thepriceofcrudeoilhasrisenandfallendramaticallyduringthepastfivedecades.
Duringthelastfivepriceshockevents,crudeoilpricesincreasedbyanaverageof179%within
oneyear
(see
Table
1A).
In
the
face
of
such
aprecipitous
rise,
drivers
had
little
opportunity
to
adjustbehaviors.
Ourhypothetical2020priceshockscenariosareinformedbyourresearchintopriceshocks,but
differsomewhatinmagnitudeanddurationfromthehistoricalrecord.Thedefinitionofaprice
shockinouranalysisisaninstantaneousdoublingofwholesalecrudeoilandwholenaturalgas
pricesonJanuary1,2020thatremainsatthatlevelforafullyear.AsFigure1Bindicates,ourtwo
shockscenariosinvolvesteeperpriceincreases,butaperiodofhighpricesthatisshorterthan
pastshocks,asweconsiderasimpleoneyearjumpforanalyticalclarityandtractability.Tobetter
representa2020shockthatbehaveslikepastshocks,ourcalculusshouldconsideradoublingof
pricesfortwoyearsratherthanone.Inthisrespect,ourhypotheticalscenariosproduce
conservativelylowresults.
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Figure1B:CrudeOilPriceShocks,19792009inInflationAdjustedDollars,
&Hypothetical2020PriceShocks
Thelastfivepriceshocksweremarkedbysteadyincreasesinpricesforaperiodupto24months,
butourhypotheticalshockslastexactly12months;ourestimatesarethusmoreconservativethan
maybeexpectedinthefaceofanactualoilshock.
(Source:Authorscalculations,EIAdata.)
0%
50%
100%
150%
200%
250%
300%
350%
400%
1 2 3 4 5 6 7 8 9 10 1 1 12 1 3 14 1 5 16 1 7 18 1 9 20 2 1 22 2 3 24
%Changef
rom
FirstMonth
CrudeOilPriceShockAnalysis
forFive24MonthPeriods
1979Shock1990Shock1999Shock2003
Shock
2008Shock2020ModerateShock2020LargeShock
Americanconcernaboutenergypriceshocks,dependenceuponimportedfossilfuel,and
dwindlingoilsupplieshasbeenexpressedinspeechesbyeveryPresidentsinceNixon.6Pastprice
shocks,aswellaspoliticalrhetoricaboutenergyindependence,wereandlikelywillcontinueto
betheconsequences
of
political
tensions,
including
wars;
and
non
competitive
behavior,
notablycollusionbyoilproducingcountries.Newtechnologies,regulatoryinterventions,and
unseeninnovationwillalsopresentbothnewsuppliesandenvironmentalandfinancialrisks.
6SeeEDFvideo:APleatoPresidentObama:40YearsandStillNoActionathttp://climateprogress.org/2010/07/09/edf
videoclimateandcleanenergy/lastvisitedSept.1,2010.
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c. AB32ScopingPlanAB32requiresCaliforniatocapitsglobalwarmingpollutionemissionsat1990levelsby2020.
WhileavarietyofexistingstateandfederalmeasureswillhelpreduceCaliforniasdependenceon
conventionalenergysupplies,theyarenotsufficienttobringthestatesgreenhousegas
emissionsdownto1990levels.TheAB32ScopingPlanlaysoutmeasurestoputthestateon
tracktomeetitseconomywidepollutionreductioncommitment,includingbyreducingoverall
energyuse,asshowninFigure1C.7TheCaliforniaAirResourcesBoard(CARB)istheleadagency
chargedwithimplementingtheAB32ScopingPlanmeasures.
Figure1C:ReducedFossilEnergyDemandfromAB32andTwoQuantification
PerspectivesofthisReport
LinesshowCaliforniaenergydemandwithandwithoutimplementingAB32measures.Thisstudy
examinesthevalueofthedifferenceintotalenergydemandintermsofexpendituresforenergy
importsintoCalifornia,andretailenergyexpenditures.Energydemandpresentedheredoesnot
includeelectricityimportedfromotherstates.
(Source:CARBdata,J.Kravitz)
AB32policieswillleadtotheadoptionoflowercarbonfuels,moreefficientvehicles,better
performingappliances,andhightechhomes,aswellasgreateruseofclean,safe,domestic
renewablefuelslikeelectricitygeneratedfromthesunandwind(seeFigure1D).Asaresult,
Californiawillreduceitsdependenceonconventionalenergysupplies,andtherebydecreaseits
7TheScopingPlanisavailableathttp://www.arb.ca.gov/cc/scopingplan/document/scopingplandocument.htm
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collectiveexposuretoeconomicdamagefromsharp,rapidincreasesinglobalpricesfor
conventionalsourcesofenergy.8Werefertothisbenefitofinsulationfromfossilfuelprice
shocksasanimprovementinenergyeconomicsecurity.Wequantifytheenergyeconomic
securitybenefitsofAB32bydevelopingahypotheticalspikeinoilandnaturalgaspricesto
estimatethesavingstotheCaliforniaeconomythatwillberealizedoncetheAB32ScopingPlan
measuresareimplemented.
By2020,cleanenergyandconservationpoliciesinspiredbytheneedtotackleclimatechangewill
meanlessoverallenergydemandinCalifornia.9ForCalifornia,theAB32ScopingPlanlaysout
measuresthat,inadditiontothosealreadyimplementedatthestateorfederallevel,cap
emissionsat1990levels.Achievingthisemissionscapwilltranslateintoavoidedcostsfor
transportationfuels,aswellasavoidedcostsfornaturalgas,propane,andfuelsderivedfrom
petroleum.
8AmorediversifiedenergysupplyforCaliforniawillhedgeagainstconventionalpriceshockeffects,anddiversificationisagoodrisk
management strategyingeneral.However,werecognizethatincreaseduseofrenewableenergyandothernonconventional
approachescouldthemselvesintroducesomepricerisk.Solar,wind,andgeothermalenergydonotthemselvescarryapricetag.
Nonetheless,theequipmentneededtocapturethemrequiresimportedmaterials.9Foraspecificexample,considermoreefficientcarsontheroaddrivingfewermilesandusinglesscarbonintensivefuels,saving
about300TBtu,whichis2.4milliongallonsofgasoline.
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Figure1D:StatewideEnergyDemandForecastWithandWithout
ImplementationofAB32
AB32measureswillreducedemandforprimaryfossilfuels,partlybyusingmorerenewablefuels.
(Source:CARB,
Updated
Economic
Impact
Analysis
of
the
Climate
Change
Scoping
Plan)
10
AviationFuel
Biomass Coal Diesel Ethanol
LandfillGases /Waste
Propane(LPG)
GasolineNatural
GasNuclear
OtherOils
Renewables
2020 No AB32 551 67 77 501 122 24 281 1,689 1,828 319 537 482
2020 AB 32 Implementation 527 75 68 413 114 24 273 1,390 1,639 319 520 839
Savings from AB 32 (24) 8 (9) (87) (8) - (7) (299) (189) - (18) 357
(500)
-
500
1,000
1,500
2,000
TBtu
perYear
10TheseforecastsbyCARBareinputstoourstudyandaredrawndirectlyfromCARB'sUpdatedEconomicImpactAnalysisof
CaliforniasClimateChangeScopingPlan(CARB2009).Startingonpage21,CARBprovidesdetailedadescriptionofassumptionsabout
whatmeasureswillbeimplementedduetoAB32.ThecasewithoutAB32implementationconsidersthefollowingmeasurestobein
place:
20%RenewablePortfolioStandard
VehicleemissionsperformancestandardsestablishedinAB1493(PavleyI)
Federalappliancestandards
Federalrenewablefuelsstandard
CARBalsopresents,forbothAB32andnoAB32cases,emissionsandenergyusebysector,andbyelectricitygenerationenergy
source(Table7).
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Figure1Eshowsthefossilfuelenergydemandthatisincludedinouranalysistotalforecasted
Californiademandin2020aftertheimplementationofAB32.Itshowstheproportionofthetotal
demandcoveredbyouranalysisandalsoillustratesthat,evenafterAB32reductions,Californiais
stillexpectedtoconsumelargequantitiesoffossilfuels.
Figure1E:TotalCaliforniaEnergyDemandin2020withAB32Implementation(TBtu,
%Total)
EvenafterAB32reductions,Californiawillstillconsumelargequantitiesoffossilfuels,butthe
percentageoffossilfuelswillbelowerwithAB32.Also,thisstudycoversmostofCalifornia
primaryfossilfuelusefor2020.
(Source:CARB,UpdatedEconomicImpactAnalysisoftheClimateChangeScopingPlan)
EnergyNotinThisStudy,
1,439,23%
Gasoline, 1,390,22%
Diesel, 413,7%
Propane(LPG), 273,4%
OtherOils, 520,8%
AviationFuel,
527
,9%
NaturalGas, 1,639,27%
EnergyInthisStudy,
4,762,77%
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d. RetailEffectBenefitsInChapter2,wefocusonRetailEffects,whicharethefuelcostsCalifornianswillavoidasa
resultofAB32inthecaseofouroilpriceshockscenarios.InCARBsanalysisattheAEOreference
price,savingsonenergywillamountto$7.5billion.Wefindthat,intheeventoffuelpricespikes,
theimplementationoftheAB32ScopingPlanwilldeliveradditionalsavingsof$4.8billionto$9.6
billioninavoidedfuelcostsaboveandbeyondthe$7.5billionestimatedbyCARB.
Weemphasizethattheseareonlythedirectbenefits,notcountingrippleeffectsontheeconomy
asawhole.Thesepotentialbenefits,likeallthosecharacterizedinthisreport,aredirectresultsof
AB32implementation(excepttotheextentthatotherstatepolicy,orfederalpolicy,inspiresthe
samemeasurestoavoidenergyuseanddiversifyenergysupply).
e. ImportationEffectBenefitsInadditiontoaretaileffectofconsumerwelfarelossesduetohigherenergyprices,asecond
potentialconsequenceoflessenergyuseinCaliforniaisreduceddependenceonimportedcrude
oilandnaturalgas.Currently,Californiaimportsmorethanhalfofthecrudeoilused,andnearly
90%ofnaturalgas.11InChapter3,weestimatethemonetaryvalueofavoidedcrudeoiland
naturalgasimportsthatwillbeavoidedin2020aftertheAB32ScopingPlanmeasureshavetakeneffecttheimportationeffect.
AsaresultofAB32,fortheyear2020,weestimatethatCaliforniasimportationofcrudeoilwill
fallby18%(75billionbarrelsofoilnotimported)andimportationofnaturalgaswillfallby10%
(189TBtuofnaturalgasnotimported).Thesavingsonoilandnaturalgasimportsamountsto
$10.0billion(attheAEOreferenceprice).Inthemoderateandlargepriceshockscenarios,
savingsarenearlydouble:$18.8billionand$29.6billion,respectively.Someofthesesavingswill
translateintolowerprofitsforenergycompaniesandtheirshareholders,aconsequencewedo
notattempttocalculate.
11Sheridan,M.(2006),andCEC,(2009a,pg.132.
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2.RETAILENERGYPRICESHOCKS
ThischapterprovidesaretailperspectiveontheenergycostsavingsthatAB32wouldprovidein
theinstanceofapriceshock.Weaskthecentralquestion:withoutimplementationofAB32
measures,howmuchmoremoneywillCaliforniaenergyuserspayintheyear2020ifwholesale
crudeoil
and
natural
gas
prices
double
and
remain
at
that
level
for
one
year?
We
conclude
that
Californianswillspend$4.8$9.6billionmoreonenergy,orbetween$332$670onaverageper
Californiahousehold.12
a. HypotheticalEnergyPriceShocksandDemandResponsesWeestimateretailenergypricechangesinCaliforniathatmightfollowfromthedoublingofcrude
oilandwholesalenaturalgasprices,whicharesetatthenationalorinternationallevel.Weuse
statisticaltechniquestodescribequantitativelyhowretailenergypriceschangeinCaliforniawhen
wholesalepriceschange.UsingAEOfuelpriceforecasts,weuseregressionanalysistodevelopa
mathematicalrelationshipbetweenchangesincrudeoilpriceandchangesintheCaliforniaretail
pricesforgasoline,diesel,propane,aviationfuel,andindustrialoilprices.Similarly,weusethe
samestatistical
technique,
regression
analysis,
to
develop
amathematical
relationship
between
forecast(HenryHub13)wholesalenaturalgaspricesandindustrialretailnaturalgasprices.The
wholesaleandretailpriceshocksaresummarizedinTable2A.AppendixAhasmoredetailabout
howwholesalepriceshocksarefeltbyretailcustomersinCalifornia.
12BasedonCaliforniaDepartment ofFinanceprojectionof44.1millionCaliforniaresidents,14.4millionhouseholdsin2020.
13HenryHubisthepointinLouisianasnaturalgaspipelineatwhichtheNewYorkMercantileExchange(NYMEX)setspricesfor
naturalgasfutures.
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Table2A:FuelPrices:InputsandShockScenarioAssumptions
ThistabledetailsAEOforecastedoilandnaturalgaspricesandassociatedretailenergypricesin
California,andpricechangesinthetwopriceshockscenarios.Allvaluesarein2007dollars.
(Source:SHOCKCA)
InitialAEO
Forecast
(price)
Moderate
shock(change)
Moderate
shock(price)
Large
shock
(change)
Large
shock
(price)
Units
CrudeoilandHenryHubnaturalgasprices
Crudeoil 114.50 114.50 229.0 247.86 362.36 $2007/barrel
Naturalgas 7.43 7.43 14.86 7.80 15.23 $2007/MMbtu
Californiaretailenergyprices
Gasoline 3.42 1.09 4.51 2.35 5.77 $2007/gallon
Diesel 6.44 1.21 7.66 2.63 9.07 $2007/gallon
Propane 2.54 0.84 3.37 1.81 4.35 $2007/gallon
Otheroils 3.40 1.21 4.61 2.63 6.02* $2007/gallon
Aviation 2.61 1.05 3.66 2.28 4.89 $2007/gallon
Naturalgas 0.0125 0.0081 0.0206 0.0089 0.0214 $2007/cubicft
*Numbersmay
not
sum
due
to
rounding
errors.
DriverFuelingCostsDuringPriceShocks
Peopleandbusinessesthatdependheavilyondrivingareparticularlyvulnerabletoenergyprice
shocksbecausetheybuyalotoffuel.CARBestimatesthatAB32policieswillsaveCalifornians
nearly$2billionperyearinreducedvehiclemilesoftravel,andanother$1.7billionannuallyin
reducedfuelexpendituresduetovehiclegreenhousegasemissionsstandards.TheCARBanalysis
assumesasteadyincreaseinthepriceoffuel,withoutconsiderationoftheadditionaleconomic
impactsoflikelypriceshocksinthefuture.Ourreportquantifiestheadditionalsavingsto
Californiaconsumersintheanticipatedeventofanoilpriceshock.
Whenapriceshockhits,Californiadriverswillspendmoremoneyatthepumps.Themagnitude
ofextraexpenditureswilldependonvehiclemilesdrivenandindividualvehiclefuelefficiency.
UsingCARBsestimatethatthefleetaveragefuelefficiencyforthe2020Californiafleetwillbe
42.5milespergallon(mpg),weestimateacostrangeforthemoderateandlargepriceshocksas
determinedbyvehiclemilesoftravelasshowninFigure2A.Ratherthanadjustingmilesdriven
toreflectdriversdemandelasticity,weshowcostsasarangeofmilesdrivenwhileholdingfuel
efficiency(mpg)constant.Thechartshows,forexample,fortheaveragedrivercovering12,000
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milesannually,moderateandlargepriceshockswilltranslateintocostsrangingfrom$306to
$664,respectively.14
Figure2A:DriverCostImpactsfromPriceShocks($2007billions)
Theimpact
of
aprice
shock
can
be
translated
into
fueling
costs
for
drivers.
For
adriver
that
covers
12,000milesin2020inacarthatgets42.5milespergallon,thehypotheticalshockswillincrease
fuelingcostsby$306to$664inamoderateandlargeshock,respectively.
(Source:SHOCKCA)
$
$100
$200
$300$400
$500
$600
$700
$800
$900
IncreaseinDriverF
uelCosts($2007)
VehicleMilesofTravel
ModerateShock:GasolineIncreases$1.09/gallon
LargeShock:GasolineIncreases$2.35/gallon
DemandDeclinesinResponsetoPriceShocks
Inadditiontoenergypricechanges,thesecondkeyanalyticalcomponentisthechangeinenergy
usageduetoAB32implementation.Californiascleanandrenewableenergystrategieswillresult
inlowerdemandforenergyderivedfromoilandnaturalgas.Theeconomicsliteraturerefersto
thevariableweareinterestedinasthe"priceelasticity"ofdemand;itcanbethoughtofasthe
responsivenessinavariable(likeenergydemand)tochangesinanothervariable(likeenergy
price).Moretechnically,priceelasticityofdemandistheratioofthepercentagechangein
demandover
the
percentage
change
in
price.
We
searched
the
literature
for
elasticity
values
and
havesoughttocapturelow,middle,andhighestimates.Wegeneratedresultsusingthethree
valuesasamethodofshowingthesensitivityofourfindingstothisoneinfluentialinput
assumption.ThespecificvaluesusedintheanalysisareshowninTable2B.
14BasedonaCaliforniapassengervehiclefleetwideaveragefuelefficiencyof42.5mpgin2020(currentfleetmixaverageisabout25
mpg).
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Table2B:RangeofElasticityValuesandtheirSources
Demandforvariousfueltypeswillchangedifferentlywhenenergypricesspike.Wesurveyedthe
researchliteraturetoidentifythehighestandlowestvaluesandthenusedtheminthemoderate
andlargeshockscenarios.
(Sources:Vitoria
Transport
Policy
Inst.,
Haigler
Bailly
1999,
Espey
1998,
Goodwin
et
al
2004,
and
Dale
et
al
2009)
ShortTermPriceElasticityofDemand Low Mid High
Gasoline 0.03 0.15 0.34
Diesel 0.05 0.1 0.15
Propane 0.10 0.15 0.20
OtherOils 0.03 0.15 0.34
Aviation 0.05 0.1 0.15
NaturalGas 0.05 0.11 0.25
b. FindingsaboutRetailEffectsOurfindingsrepresentuncertaintyaboutthevalueofbenefitsacrossarangeofpossiblevalues.
Webringtogethertwodifferentdimensionsofuncertainty:(1)thesizeanddurationofretail
energypriceincreasesinCalifornia,and(2)howenergyusersrespondtothepriceincreaseby
reducingtheirdemand.Thisiscalledglobalsensitivityanalyses,exploringtheimplicationsof
differentcombinationsofassumptionssimultaneously.Thelowestresultfollowsfromadoubling
oftheAEOreferencepriceandalargerreductioninenergyuseduetotheincreaseinenergy
prices(i.e.
an
assumption
of
alarger
price
elasticity
of
demand).
The
highest
impact
follows
from
acombinationofalargerpriceshockandasmallerreductioninenergyuseduetothatprice
increase(i.e.anassumptionofasmallerpriceelasticityofdemand).
Havingexplainedourinputassumptions(Tables2Aand2B),ourfindingsfortheretailprice
shockimpactsaresummarizedinTables2Cand2D.
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Table2C:AB32SavingsfromReducedExpendituresinPriceShocks
Inamoderatepriceshockwithhighpriceelasticityofdemand,Californianswillavoid$4.8billion
inenergycosts.Inalargeshockwithlowdemandelasticity,theavoidedenergycostswillbe$9.6
billion.
(Source:SHOCK
CA)
PriceElasticityofDemand($2007billions)
FuelPriceScenario Low Mid High
LargeShock $9.6 $9.0 $8.1
ModerateShock $5.2 $5.0 $4.8
WefindthatAB32willsaveenergyusers$4.8$9.6billion(in$2007)ifcrudeoilandnaturalgas
pricesdoubled
suddenly
in
2020.
InTable2D,wetranslatetheabovebenefitstothehouseholdlevelbydividingtheCalifornia
DepartmentofFinanceforecasted2020population(44.1millionpeople)byforecasted
households(14.4million),whichyieldsanaveragehouseholdcompositionof3.07people.These
arebroadstrokenumbersthatdonotreflectsectorspecificenergydemand,butareinformative
forcomparison,anddoshowexpenditureincreasesofupto$670perhome.Thisisthesame
magnitudeofhouseholdcoststhatseveralstudiespredictofCaliforniaandfederalclimate
policies,asdiscussedinAppendixA.
Table2D:
Average
Household
AB
32
Savings
from
Reduced
Expenditures
in
Price
Shocks
TheaverageCaliforniahouseholdwillsave$332inamoderateshockwithhighdemandresponse,
and$670inalargeshockwithlowdemandresponse.
(Source:SHOCKCA)
PriceElasticityofDemand($2007)
FuelPriceScenario Low Mid High
LargeShock $670 $626 $561
ModerateShock
$362
$350
$332
Ourresultsindicatethelargestsavingswillberealizedbyusersofnaturalgas,gasoline,anddiesel
fuel.ThisisnotsurprisingsincethesearethreeofthefourmostconsumedfuelsinCalifornia(see
Figure2B).Aviationfuelisnotincludedinthestudysincetheaviationindustryisnotregulated
underAB32.Benefitsfromavoidednaturalgasuserangefrom$1.3$1.6billion,whereas
gasolinesavingsarelarger,rangingfrom$2.3$5.5billioninthemoderateandhighpricecases.
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ThejumpinnaturalgaspricesinthelargepriceshockscenarioissmallerbecausetheAEOhigh
priceforecastfornaturalgasisnotmuchhigherthanthereferencepriceforecast,unlikethecase
ofcrudeoil,wheretheAEOhighpriceforecastisalmost50%higherthanthereferenceprice.
Figure
2
B:
AB
32
Savings
by
Fuel
Type
from
Reduced
Expenditures
in
Price
Shocks
($2007billions)
Thetotalreductioninexpendituresformoderateandlargepriceshockinyear2020willbe
reducedbyAB32measures.Thesereducedexpenditurescanbeattributedtospecificfueltypes.
(Source:SHOCKCA)
Lowest
Estimate
(Moderate
Price
shock)
Highest
Estimate(Large
Priceshock)
Gasoline 2.3 5.5
Diesel 0.7 1.6
Propane 0.1 0.1
OtherOils 0.1 0.3
AviationFuel 0.2 0.4
NaturalGas 1.3 1.6
0.0
2.0
4.0
6.08.0
10.0
12.0
Billions($2007)
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c. ConservativelyLowFindingsThefindingsofthisreportshouldbeconsideredconservativelylow.Estimatedsavingsareforonly
aoneyeardoublingusingAEOpriceforecasts,whichmayunderestimatethedurationand
magnitudeoffuturepriceshocks.Also,theAEOhighpriceforecastseemsrelativelylowinlightof
recentprices.Furthermore,thehistoryofpriceshockssuggeststhat,whilepricesarenotlikelyto
doubleinstantaneously(aswehaveassumedforanalyticalsimplicity),theyhavedoubledduring
thecourseofayear,andthendoubledagaininthesecondyear.The1999priceshockinvolveda
doublingofcrudeoilpriceswithinsevenmonths,andpricescontinuedtoriseuntiltheypeakedat
over350%ofthestartingprice23monthsintotheshock.Similarly,boththe1979and2003price
shocksinvolvedpricesthatwerestillrisingafter24months.
Therearesomeargumentstoconsiderthataresuggestiveoflowernetbenefitsthanwe
estimate.Forexample,likeCARB,wedonotconsiderneartermevents,suchasaprolonged
recessionorapotentialpriceshockeventbefore2020.Bothwouldlowerenergydemand(withor
withoutAB32implementation)andthusreducethemagnitudeofbenefitwecalculate.Also,we
donotconsiderapossiblereversalinthetrendofdecliningproductioninCaliforniaduetosome
newtechnicalinnovation.Wedonotrepresentasuddenlargeincreaseinfossilfuelsupplies
outsideof
California
due
to
an
unexpected
engineering
innovation
or
new
discovery.
We
do
not
representanyreboundwherebyproducersrespondtohighenergypricesbyincreasing
production,oversupplyingandthuscausingenergypricestodrop,briefly,belowlongterm
averageprices.Onlyoneofsixpriceshockeventsthatwestudiedhadpricesattheendof24
monthsthatwerelowerthaninitialprices(seeFigure1B).Last,wedonotconsidertheeffectsof
federallegislation.Theparticularswouldbedifferent,butfederalpolicywoulditselfofferenergy
economicsecuritybenefitsofthetypeweexplorehere.
Wedonotattempttoforecastthecauseofthefuturepriceshockinthisstudy.Certainly,anyof
myriadeventsmightunfold:localizedrefineryaccidents,oilextractiondisasters(liketheBPoil
spillintheGulfofMexico),regionalorinternationalsupplyripples,hostilities(andwar)in
petroleumproducingnations,orOPECcollusion.Wechoosenottoattempttodevelopahighly
complicatedmethodtopredictfutureoilandgaspricesandhowtheseandotherfactorscouldaffectfutureenergypricesinCalifornia.
Insteadofpredictingfuturecausesofpriceshocks,welookathistoricaldataandseethatoilprice
shockshaveoccurred.Similarly,werecognizethatnaturalgaspricedynamicsarecomplicated,
butthatnaturalgaspriceshaveattimesmovedinsimilarwaystocrudeoilprices.Oursimplified
approachistoexploreadoublingofbothcrudeoilandnaturalgasprices.Wediscussthecomplex
relationshipbetweenoilandnaturalgaspricesfurtherinAppendixB.
Wedonotattempttopredictthelikelihoodofeitherpricespike,nordowesuggestthattheprice
rangeweuserepresentsastatisticalconfidenceinterval.Criticalreviewersmightarguethe
likelihood
of
a
sudden
price
doubling
is
lower
when
reference
prices
are
high.
At
first
brush,
this
observationsuggeststhatthehighendofourestimatedrangeislesslikelythanthelowend.
However,theAEOpricerangesarenotascribedwithprobabilities,sothereisnoreasonto
assumethat(a)themidpriceisamedian,or(b)theuncertaintyisbestdescribedasanormal
distribution.Whenconsideringgrowingenergydemandinotherverylargenations,notablyChina
andIndia,lackofrecentdiscoveriesofmajornewconventionalfuelreserves,andtheongoing
prospectofproductionandrefininginterruptionsduetobadweatherorpoliticalconflict,we
believethattherealizedcrudeoilpricein2020ismorelikelytobeakintotheAEOhighprice
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forecastthantheAEOreferencepriceforecast,adisputablebutnonresolvableviewpointthat
suggeststhehigheravoidedcostsestimatesaremorelikely.
3.IMPORTATIONEFFECTS
Californiaisendowedwithvastanduniquenaturalresources,includingsomeofthemost
significantenergyresourcesinthecountry.Yettheyarenotenoughtomeetthestate'senormous
demand,leavingCaliforniadependentonbothoilandnaturalgasimports.In2006,California
usedtheenergyequivalentof593millionbarrelsofoiltopoweritscars,trucks,buildings,planes,
andindustry,15buttheoffshoreoilrigsandonshorewellsonlyproducedabout265million
barrelslessthanhalfofwhatwasconsumed.16Thedependenceonimportednaturalgasiseven
greater:around87%ofthenaturalgasusedinCaliforniaisimported.17
Inthischapter,weexaminetheimpactAB32willhaveonCaliforniasdependenceonimported
energy,usingtheequationshowninFigure3A.
Figure3A:CaliforniaEnergyBalance
(Source:J.Kravitz,imagesfromFlickrCreativeCommons)
ThischaptercalculatestheamountlessthatCaliforniawillpayforimportedfuelasaresultofAB
32,baseduponpredictedshiftsindemandandinstatefuelproduction.
UsingtheAEOmoderatepriceforecast,wefindthattheAB32ScopingPlanmeasures
implementedby2020willenableCaliforniatoavoidspendinganestimated$10billiononoiland
gasimportstomakeupthedifferencebetweendemandandsupply.Moresignificantly,under
moderateandlargepriceshockscenarios,thevalueofavoidedoilandgasimportsincreasesto
$18.8billion
and
$29.6
billion,
respectively.
During
aprice
shock
without
AB
32
measures,
the
15ForconsistencywithAB32ScopingPlanprojections,thischapterusesthe2006energydatafromtheAB32ScopingPlanto
representcurrentconditions.Wesumtheprimaryenergyuseforgasoline,diesel,aviationfuel,propane,andotheroiluses,
(expressedinBTUs)andconvertittooilbarrelBTUequivalency,torepresentCaliforniaoilbasedenergydemand.Inthisanalysis,
propaneisassumedtobeentirelysourcedfromoilproducts.16
EIA,PetroleumProductiondata,19812010(figureincludesstateandfederaloffshoreproduction)17
CEC,2009a,IEPR,page131
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statesimportbillcouldbewellover$112billioniftheAEOforecastedreferencepricedoubles
duringtheshock.Inthehighpriceshockscenario,Californiawouldspend$182.7billiontoimport
energyin2020,ornearly$13,000perhouseholdonaverage.WithAB32,Californiawouldspend
$153billiontoimportenergyinthehighpriceshocksituationasavingsofnearly$30billion
comparedtothescenariowithoutAB32implementation.
Weemphasize
that
these
estimates
of
the
economic
value
of
avoided
oil
and
natural
gas
imports
arebasedonthesameenergysavingsestimatedbyCARBduetoAB32measuresandusedin
Chapter2.Thischapteroffersadifferentperspectiveonthesamebenefitsinvestigatedin
Chapter2.
a. OilImportExposureCrudeoilimportscometoCaliforniafromtwosources:Alaska,viapipeline,andoverseas,by
tankersbringingoiltorefineriesnearports.TheCaliforniaoilpictureissomewhatcomplicatedby
thefactthattheserefineriesprocessmoreoilthanCaliforniauses.Neighboringstatesthatlacka
coastlinedependonCaliforniarefineriesforgasoline,diesel,andjetfuel.Californiaisthesole
supplierofrefinedcrudeoilandgasproducts,suchasgasolineanddieselfuel,forNevada,anda
majorsupplier
to
Arizona
via
dedicated
pipelines;
some
refined
products
also
go
to
Oregon.
Californiaalsoimportssomefinishedproductstomakeuptheexactmixofdiesel,jetfuel,and
gasolineblendstocksindifferentregionsofCalifornia.18Theseexchangeswithneighboringstates
donotmaskthefactthatCaliforniausesfarmorecrudeoilthanitproduces.
Californiasenergyimbalanceisgrowingthegapbetweeninstatedemandandinstatesupplyis
growing.AsshowninFigure3B,California'soilproductionhasbeenonasteadydeclinesinceits
peakaround450millionbarrelsinthemid1980s.19WhileAlaskanoilinitiallymadeupthe
differenceforCaliforniabasedrefiners,Alaskanproductionhasfallenevenfurther,andthese
trendsareexpectedtocontinue.Inalllikelihood,barringanysignificantnewdomesticdiscoveries
ofoil,futureCaliforniaimportswillcomeincreasinglyfromforeigncountries.
18CEC,2009b,p.145
19NotetheseEIAfiguresincludeproductionfrombothstateandfederalwaters,andthereissomediscrepancywithIEPR2009figures,
whichgraphicallyshowapeakof400,andrefertoapeakof426mb/year(CEC,2009b,IEPRtransportationsupplement,page122).
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Figure3B:CaliforniaPetroleumProduction,19812009
Californiasinstateoilproductionhasbeenindeclinesincethemid1980s.
(Source:EIA,PetroleumProductiondata,19812010)
0
50
100
150
200
250
300
350
400
450
500
MillionBarrels
CAfieldproduction
CAoffshoreproduction(fed&
state)
ApartfromAB32,Californiaalreadyhasstandardsinplacetoreduceoiluse,suchasprogramsto
requirecleanervehicles,andtodevelopalternativefuelsandalternativefueledvehicles.
Consequently,thedemandforgasoline,diesel,propane,andjetfuelisexpectedtoriseatalower
ratethaninpastdecades.Nevertheless,continuedpopulationgrowthwillmeanCaliforniasoil
demandalsowillcontinuetogrow,especiallyifAB32implementationisabandoned.By2020,the
totaloilbasedenergyuseforaviationfuels(mostlyjetfuel),diesel,gasoline,propane,andother
oilusesisexpectedtobetheequivalentof614mb/y,upfrom576mb/yprojectedfor2012inthe
absenceofAB32implementation.20Givendeclininginstateoilproduction,netimportsofoilinto
Californiawillcontinuetorise.
Itmightbearguedthatreducingtheimportationoffuelcouldalsobeaccomplishedthrough
greaterinstateoilproduction.Therearetworeasonswhywedonotconsiderthisscenario
seriously.First,theCaliforniaEnergyCommission(CEC)concludesinthe2009IntegratedEnergy
PolicyReport(IEPR)thatanysignificantincreaseinCaliforniasoffshoreoilproductionisatleasta
decadeaway,puttingitoutoftherangeofourcurrentanalysis.21Moreimportantly,although
increasingsupply
would
reduce
the
importation
effect,
it
would
not
reduce
the
retail
effect,
since
Californiaconsumerswouldstillpaythehighpricesfromanoilshockregardlessofthesourceof
theoil.Onlyareductioninoildemandcanreduceourexposuretooilpriceshocks.Switchingto
localsuppliesdoesnotprovideprotection.
20CARB,2010,Primaryenergyuse,Case1(referencecase).
21CEC,2009b,p.147
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TheamountthatCaliforniapaystoimportitsoilissignificant.In2006,Californiaimportedabout
329millionbarrelsofoiltobalanceenergydemandwiththeshortfallinitsownproduction.22At
thecurrentpriceofabout$75perbarrel,thisisequivalenttospendingabout$25billionon
importedfuelinasingleyear.23
By2020,Californiasoilimportbillwillbegreaterstill,asillustratedinFigure3C.Thevalueof
energyimportsdependsontwofactors:(a)thepriceforenergy(crudeoilandwholesalenatural
gas),and(b)instatefuelproduction.IfoilpricesareattheAEOforecastreferenceprice($114.50
perbarrel),andCaliforniaoilproductiondeclinesattherateexperiencedover20062008(2.17%
peryear),withoutanyAB32measurestheimportbillwouldbe$49.2billionin2020.24
Figure3C:Valueofoilimportsin2020,underAEOreferencepriceandshockscenarios
($2007dollars)
Ayear2020priceshockwouldleadtosignificantincreasesinhowmuchCalifornianspayfor
importedoil.
(Source:SHOCKCA)
24.7
49.2
82.0
157.2
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
ReferencePrice ModerateShock LargeShock
2006 2020
BillionDo
llarsaYear
22Asstatedabove,thisimportfigure,basedonprimaryenergyusage,isanestimateofCaliforniaimports.Actualphysicalimportsare
greater,tomeettheneedsforneighboringstates.23
WenotethataportionofthisvaluemayreturntoCaliforniaintheformofprofitsforCaliforniaheadquarteredoilcompanies,
namelyChevron.Thesearenotincludedintheabovefigures.24
Wedonotpresentdatafor2020projectionunderAEOhighpricescenariosastherewouldbenocorrespondingresultsforChapter
2andthiscouldinduceconfusion.However,notethatwithpricesattheAEOforecasthighprice($181.18perbarrel)andCalifornia
productiondecliningatthehigherrate(3.23%)seenoverthe19982008period,theimportbillwouldbe$82.0billionin2020.
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Predictably,thisalreadysizablenumberbecomesevenlargerinthepriceshockscenarios
analyzed.IfCaliforniaweretoexperienceapriceshockinwhichtheworldoilpricewereto
doubleforoneyear,Californiawould,intheabsenceoftheAB32ScopingPlanmeasures,spend
between$86.1billionand$157.2billionin2020foritsoilshortfall.Inthesamewaywefactorin
thepriceelasticityofdemandinChapter2,thesefigurestakeintoaccountthereduced
consumptionthatwouldbeexpectedinresponsetothepriceshock.Clearly,underboth
anticipatedandunanticipatedpriceshocksituations,Californiawillbepayinganenormousamountofmoneyforoilimportsin2020.
b. NaturalGasImportExposureCaliforniameetsitsnaturalgasneedspartlythroughlocalproduction,butthevastmajorityof
naturalgas(nearly90%)comesfromoutsidethestate,deliveredthroughpipelinesfromthe
Southwest,theRockyMountains,andCanada.25Naturalgasimportsduringthepastdecadeare
showninFigure3D.
WhileoverallU.S.naturalgasproductionhasriseninrecentyears,California'sproductionhas
beendecliningslowly,resultinginanincreasingrelianceonimportednaturalgasandexposureto
naturalgas
price
shocks.
The
CEC
projects
this
downward
trend
in
production
to
continue
through
2020,from825MMcf/din2006to700MMcf/dby2020.26Figure3Eshowstherecentand
forecasteddeclineininstateproductionofnaturalgas.
Figure3D:California'sNaturalGasImports
MostofthenaturalgasCaliforniausesisimportedfromneighboringstates.
(SourceEIANaturalGasSummary)
0
1000
2000
3000
4000
5000
6000
7000
8000
2001 2002 2003 2004 2005 2006 2007 2008
MM
cubicft/day
ImportedGas CANaturalGasProduction
25CEC,2009a,IEPR,p.132.
26CEC,2009a,IEPR,p.132
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Figure3E:CaliforniasNaturalGasProduction
Californiasnaturalgasproductionhasdeclinedandisforecastedtocontinueitsdecline.
(SourceEIANaturalGasSummary)
0
200
400
600
800
1000
1200
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
MM
CubicFeet/day
CAProduction
EstimatedProduction
Whileinstateproductionofnaturalgascontinuestodecline,demandisexpectedtorisethrough
2020.Theresult,aswithoil,isawideninggapbetweensupplyanddemand,andincreased
dependenceonimportednaturalgas.CurrentCaliforniaimportsarecloseto6,000MMcf/d.At
currentpricesofnaturalgas,thisrepresentsanannualpaymenttootherstatesandcountriesofabout$9.7billion.27
Lookingtotheyear2020,weestimatethegasimportbillwithoutimplementationoftheAB32
ScopingPlanmeasures.Asinthescenariosforoil,weuseAEOforecastsfornaturalgas,whichare
$7.43perMMbtuforthereferencepriceand$7.80perMMbtuforthehighprice.28The2020
naturalgasdemandisbasedontheScopingPlananalysis.29
Asintheoilcase,wedevelopaboundedestimatebyconsideringrangesforbothnaturalgasprice
andinstateproduction.TodeveloparangeestimateofCalifornia'sexpectedinstatenaturalgas
production,weusetheIEPRprojectionof700MMcf/dofCaliforniaproductionby2020forboth
scenarios.
As
in
the
oil
analysis,
the
price
shock
scenarios
use
the
lower
and
upper
ranges
of
price
27ImportestimatebasedonEIA2008data,showing6,711MMcf/dusage,and774MMcf/dCAproduction,foranetimportof5,937
MMcf/d.PriceusediscurrentHenryHubpriceof$4.30perMMBtu.28
PleaseseeAppendixAforadiscussionontheseforecasts.29
NotethattheScopingPlannaturalgasdemandprojection,thoughdirectionallysimilar,donotexactlymatchtheEIAdatausedinFigure4C.Forthepurposesofthecurrentanalysis,however,all2020naturalgascalculationsarebasedontheenergydemand
reportedintheScopingPlan.
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elasticitytoreflectthepossiblerangeofconsumerdemandresponsetoadoublingofnaturalgas
prices.
AsshowninFigure3F,growingdependenceonimportednaturalgaswillmeanCaliforniais
significantlyexposedtopriceshockrisks.Thepossibilityofpayingupto$27billionfornaturalgas
importsisveryreal.Thisnaturalgasimportbilladdstothepreviousdiscussionofapotentialoil
importbill
of
up
to
$157.2
billion
during
aprice
shock.
Figure3F:ValueofNaturalGasImportsin2020,UnderPriceShockScenarios
Californianswillpaysignificantlymorefornaturalgasinthefaceofanoilshockin2020.(Source:SHOCKCA)
9.711.6
25.4
26.8
0
5
10
15
20
25
30
ReferencePrice Moderate
Shock Large
Shock
2006 2020
BillionDollarsaYear
c. ImportSavingsfromAB32Asshownabove,Californiaisreliantonbothoilandnaturalgasimports.Figure3Gshowsthe
combinedexposuretofossilfuelimportprices.Californiacurrentlypaysaround$34billion
annuallyforfossilfuelimports,andby2020thiswillgrowto$60.9billioninanAEOreference
pricescenario.Duringapriceshock,absentAB32measures,Californiasimportbillcouldbeupto
$168billioninoneyear.
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Figure3G:TotalExpenditureonOil&NaturalGasImports,WithoutAB32($2007)
WithoutAB32,asharpincreaseinpricesfornaturalgasandoilin2020wouldmeanCalifornians
couldpayupto$182billiontoimportenergyfromoutsidethestate.
(Source:SHOCKCA)
$24.7
$49.2
$86.1
$157.2
$9.7
$11.6
$26.8
$25.4
0
20
40
60
80
100
120
140
160
180
200
ReferenceAEOPrice ModerateShock LargeShock
2006 2020
BillionDollarsaYear
OilImports GasImports
Byreducingenergydemand,theAB32ScopingPlanmeasurescanlessenCaliforniasdependence
onimportedfuels,andtherebyreducetheadverseimpactsofoilandnaturalgaspriceshocks.
Intermsofoil,AB32measureswouldhelpreduceCaliforniasnetoilimportsbyreducingdemand
foroilproducts.ThemodelingconductedforAB32indicatesthatAB32measureswillstabilize
oilbaseddemandafter2015.Figure3HshowstheresultsoftheEnergy2020modeling
conductedforAB3230combinedwiththeCaliforniaoilproductionforecastsfromtheCEC's2009
IEPR.Without
the
AB
32
measures,
demand
for
oil
continues
to
rise,
and
if
Californias
in
state
oil
productioncontinuestodeclineatratessimilartothelast10years,theshortfallby2020willbe
ashighas453millionbarrelsandgrowing.However,byreducingoildemandthroughtheAB32
measures,importswillstabilizeat378millionbarrelsby2020.Inshort,effortstofightclimate
changethroughAB32implementationwillreduceoilimportsbyabout75billionbarrelsofoilper
30ThismodelingworkbyCARBisdiscussedinthecontextofsimilaranalysesinAppendixBandprovidestheinputdataforChapters2
and3.SeeCARBswebsiteathttp://www.arb.ca.gov/cc/scopingplan/economicssp/models/models.htm(lastvisitedJune7,2010).
30 SHOCKPROOFINGSOCIETY SEPTEMBER2010
http://www.arb.ca.gov/cc/scopingplan/economics-sp/models/models.htmhttp://www.arb.ca.gov/cc/scopingplan/economics-sp/models/models.htmhttp://www.arb.ca.gov/cc/scopingplan/economics-sp/models/models.htmhttp://www.arb.ca.gov/cc/scopingplan/economics-sp/models/models.htmhttp://www.arb.ca.gov/cc/scopingplan/economics-sp/models/models.htm -
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yearby2020.Fornaturalgas,theresultsaresimilar.TheimplementationoftheAB32Scoping
Planreducestheprojecteddemandfornaturalgasin2020from1,828TBtuperyearto1,639
TBtuperyear,anapproximately10%reduction.
Figure
3
H:
California
Net
Oil
Imports
(to
meet
California
demand
for
refined
products)
AdoptingAB32willleadtoreducedtotaldemandforoilinCaliforniaandthebenefitswillincrease
overtime.
(Source:SHOCKCA)
0
50
100
150
200
250
300
350
400
450
500
2012 2015 2020
MillionBarrelsperYear
WithoutAB32
WithAB32demandreductions*
*DemandreductionfromAB32Scopingplan,Case1with$21/tco2.
BothprojectionsbasedonCAcrudepricedeclineof3.23%,thetenyearaverage.
d. ImportSavingsfromAB32inPriceShocksThesavingsfromAB32aresignificantinandofthemselves.Butevenmoresignificant,ashas
beenhighlightedbytheanalysisofthisreport,ishowAB32,bydecreasingCaliforniasrelianceon
fossilfuels,lowerstherisksofsignificanteconomicimpactsfromfossilfuelpriceshocks.
ExpendituresonimportedoilandnaturalgaswithandwithoutAB32aresummarizedinFigure3
I.ReduceddemandforenergyasabenefitofAB32measureswouldlowerCaliforniasimportbill
by$10billionintheAEO2020referenceforecasts.Inourmoderateandlargepriceshock
scenarios,inwhichbothoilandnaturalgaspricesdoubleforoneyear,Californiawouldavoid
$18.8billionand$29.7billioninenergyimports,respectively,byimplementingtheAB32Scoping
Planmeasures.
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Figure3I:AB32AvoidedExpendituresforOilandNaturalGasImportsinPriceShocks
($2007)
TheamountthatCaliforniawouldsaveonenergyimportsbyimplementingAB32isshownfor
threesituationsinyear2020:AEOreferenceprice,moderatepriceshock,andlargepriceshock.
(Source:SHOCK
CA)
$10.0
$18.8
$29.6
$0
$20
$40
$60
$80
$100
$120
$140
$160
$180
$200
Without
AB32
With AB32 Without
Ab32
With
AB32
Without
AB32
With
AB32
ReferencePrice ModerateShock LargeShock
BillionDo
llarsayear
AB32Avoided
Expenditures
With AB32
WithoutAB32
4.CONCLUSIONS
Duringthistimeofeconomicchallenges,theeconomicimplicationsofclimatepolicyareofgreat
importancetopolicymakersplanningacleanenergyfuture.Throughthisstudy,weprovide
insightsintoavaluablebenefitofAB32thathasheretoforenotbeenquantified,whichwedefine
asenergyeconomicsecurity.AB32willhelpCaliforniareduceitsrelianceonimportedfuels,
likecrudeoilandnaturalgas.Therefore,AB32willprovideadegreeofinsulationagainsttherisks
ofprice
spikes
associated
with
these
commodities.
This
value
has
been
left
out
of
macroeconomic
studies,whichareoftentreatedinappropriatelyasholisticcostbenefitanalyses.
Mostmacroeconomicmodels,includingtheonesthathavebeenusedtoanalyzeAB32,consider
emissionsabatementcostsandthesinglebenefitofavoidedenergyexpendituresfromefficiency
investments,buttheydonotconsiderseveralimportantbenefits,includingreducedvulnerability
ofCaliforniaseconomytooilandnaturalgaspriceshocks,orimprovedenergyeconomicsecurity.
WhileCaliforniawillremaintiedtotheglobaleconomyalinkagethatprovidesclearbenefits
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cleanenergypolicywillhelptosafeguardCaliforniaseconomythroughincreaseddiversification,
independence,andefficiency.Todate,nomacroeconomicstudieshaveputavalueonthis
intuitivelyimportantbenefitofcleanenergypolicy.
Wehaveinvestigatedtwodifferentperspectivesonthesinglebenefitofenergyeconomic
security.WeexploredhowAB32wouldresultindirectsavingstoCaliforniaenergyconsumers
shouldaprice
shock
occur
(the
retail
effect),
and
we
estimated
the
reduction
in
import
expendituresforoilandnaturalgas(theimportationeffect).
Theresultsofourpriceshockanalysesindicateavoidedcoststoconsumersandbusinessescould
beintherangeof$4.8billionto$9.6billionin2020.Thesesavingsareinadditiontothe$7.5
billioninreducedenergyexpendituresthatCARBestimatesasaresultofAB32implementation,
whichisthevalueofavoidedenergyusebasedonthepricesintheAEOreferenceforecast.
Wealsohavecalculatedbenefitsfromanotherperspectiveinourimportationeffectsanalysis.
Cautionisrequiredwheninterpretingtheseresults.Ourestimatesrelatedtoavoidedoiland
naturalgasimportsarederivedfromthesamedataonchangesinenergyusethatunderliethe
retaileffect.Therefore,theretailandimportationeffectsshouldnotbesummedforatotal
energyeconomicsecuritybenefit.Thereadershouldapproachthesetwosetsofbenefits
separately.Moreover,eachestimateshouldbeconsideredinconjunctionwiththeparticularset
ofinitialprices,priceincreases,anddemandresponsesuponwhichtheyarebased.
Theimportationeffectiscalculatedfromadoublingofcrudeoilandnaturalgasprices,whereas
theresultsofourregressionbasedestimationprocedureleadtomuchsmallerretaileffects.For
example,inourmoderatepricespikescenario,crudeoilpricesdouble,butgasolinepricesonly
increasefrom$3.42to$4.51pergallon.Inourlargepricespikescenario,crudeoilpricesnearly
triple(comparedtotheAEOreferencepriceforecast)butgasolineretailpricesincreaseonlyby
about50%to$5.77pergallon.Thoughthisrelationshipmaybequestionable,ourintentionhas
notbeentoexplorethemechanismsbywhichpricesaresetinCalifornia,butrathertoexplore
theeffects
of
oil
and
natural
gas
price
shocks.
Notwithstandingcaveats,wedofindalargevaluetoreducedrelianceonimportedoilandnatural
gasfromAB32implementation.MeasuresimplementedunderAB32willavoidabout75million
barrelsofoiluse(intheformofgasoline,diesel,etc.)in2020.Dependingoncrudeoilpricesin
2020,thistranslatestosavingsfromavoidedimportsworth$10$30billion;mostlyfromavoided
crudeoilimports,butavoidednaturalgas(ofwhichCaliforniaimportsnearly90%)amountsto
about$1.5billion.
Ourretaileffectsanalysisconsidersthedirectcostsofnaturalgastoindustrialenergyusers,
includingnaturalgasuseforelectricitygeneration,butwedonotexplorehowelectricity
consumerswouldbeaffectedorhowpriceshocksindirectlyresultinhigherpricesforconsumer
goodsother
than
energy.
Our
energy
economic
security
estimates
also
do
not
include
the
indirect
macroeconomiceffectsthatwouldfollowfromfuturepriceshocks.Ourestimatesarepartialand
donotcapturethefullrangeofbenefitsthatcomefromreduceddependenceonimportedoil
andnaturalgasandreducedexposuretopricespikes.
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ThevalueofbeinglessdependentonfossilfuelstopowerCaliforniaseconomygoesbeyondthe
sheermagnitudeofavoidedpaymentstoenergycompanies.AllofAmericaspriceshocksinthe
past40yearshaveplayedaroleineconomicrecessions.31Aneconomywithmorediversified
energysupply,lessdependenceonconventionalcrudeoil,andlessenergyintensityperunitof
outputismoresustainableandmoreresilienttonaturalandhumandisruptions.Whileamore
diverseenergysupplyportfoliowillexposeCaliforniatonewrisksandopportunities,itwillreduce
exposuretoconventionalfuelpriceshocksthathistoryhasshowntobebothcommon,associatedwithcrudeoilandnaturalgasprices,andhighlyinfluencedbyeventssuchaswarsandhurricanes.
Whilerealoilscarcitymayormaynotbefeltwithincurrentgenerations,frequentspikesinprices
highlighttheneedforenergyeconomicsecuritythroughdecreaseddependenceonoutofstate
sourcesandincreasedsupplydiversity.Theenergyindustryhasmanagedtoavoidsupplydeclines
todate,butitisunclearhowlongnewtechnologyandmoreintensiveexplorationwillbeableto
staveoffexistingtrendsinproductiondecline.Onthedemandside,thereisnoquestionthatthe
stronggrowthofmajoremergingeconomiesasChinaandIndiawillputupwardpressureonthe
internationalpriceofcrudeoilandrelatedpetroleumproducts.
Thisreport
is
acautionary
tale
of
what
would
happen
should
California
experience
energy
price
spikes,anditestimatesthesignificantvaluethatAB32willprovideintheeventofsuchevents.
Themacroeconomicanalysesthatdominatethediscussionofeconomicimpactsignorethe
vulnerabilitiesimposedbyCaliforniasdependenceonimportedoilandnaturalgas.These
macroeconomicmodelsarebasedonasmoothpriceforecast,whilehistoryhasshownthereis
highlikelihoodoffuturepriceshocks.OurresearchshowsthatAB32willdeliversignificant
savingswhenthenextpriceshockoccurs.
31Scholarshavedebatedtheroleofenergypriceshocksincausingeconomicrecessions.Whilesome(e.g.,Bernankeetal,1997)have
suggestedthatcontractionarymonetarypolicyresponseshavehadmoreinfluenceoneconomicoutputthanpriceshocksthemselves,
others(e.g.,Hamilton&Herrara(2000),Leduc&Sill,(2004))havefoundthatmonetarypoliciesdonotoffsettherecessionary
consequencesofoilpriceshocks.Stillothersobservethattheeconomicconsequencesofpriceshockshavebeendeclining;Kubarych
(2005,pg.32)observedthatthelatestsurgeinoilpriceshasbeenlargelytakeninstridewithinthefinancialmarkets,incontrastto
pastresponses.
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Table8basedonHaiglerBailly,1999.TDMEncyclopedia.www.vtpi.org/tdm/tdm11.htmLastvisitedSept.1,2010.
36 SHOCKPROOFINGSOCIETY SEPTEMBER2010
http://www.arb.ca.gov/cc/scopingplan/economics-sp/matthew_kahn.pdfhttp://www.arb.ca.gov/cc/scopingplan/economics-sp/matthew_kahn.pdfhttp://www.arb.ca.gov/cc/scopingplan/economics-sp/matthew_kahn.pdfhttp://www.arb.ca.gov/cc/scopingplan/economics-sp/matthew_kahn.pdfhttp://are.berkeley.edu/~dwrh/CERES_Web/Docs/ARBScoping_BEAR100419.pdfhttp://are.berkeley.edu/~dwrh/CERES_Web/Docs/ARBScoping_BEAR100419.pdfhttp://www.arb.ca.gov/cc/scopingplan/economics-sp/matthew_kahn.pdf -
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APPENDIXA:METHODS
ThisappendixprovidesadetaileddescriptionofthemethodologyusedinChapter2.A
spreadsheetshowingalldata,formulas,andcalculationsisavailableuponrequest.Wecallthat
spreadsheettheSHOCKCA(StatewideHolisticOilCostKalculatorforCalifornia)model.Attheend
ofthis
appendix,
our
calculations
of
oil
and
gas
import
benefits
from
AB
32
are
described
briefly;
thesecalculationsareasubmoduleofSHOCKCA.Wewelcomesuggestionsonwaystoimprove
thisanalysis.
a. PriceShockAnalysisOurmethodsinvolvedfivemajorstepsthatarediscussedindetailbelow:
1. AB32inducedchangesinenergyuse:ObtainCARBsestimatedchangesinenergyuse
inducedbythemeasuresintheAB32ScopingPlan.
2. Developretailpricerelationships:Developrelationshipsbetweentheretailenergyprices
andcrudeoilorwholesalenaturalgasprices.
3. Develop
price
spike
scenarios:
Review
historical
prices
to
determine
if
a
one
year
doublingofwholesalepricesforcrudeoilandnaturalgasisareasonablescenariofor
analysis,andobtain2020fuelpriceforecastsofpredoublingprices.
4. Incorporatepriceelasticityofdemand:Adjustenergydemandtoreflectpotential
responsestopricespikes.
5. Calculatebenefitasenergysaved,multipliedbypricespikeincrements:Usingchanges
inprices(pricespikes)andchangesinenergyconsumedduetoAB32(afterincorporating
apriceelasticityofdemandresponse),estimatesavingsinfuelexpendituresattributable
toAB32shouldpricespikesoccur.
1.AB32InducedChangesinEnergyUse
Thestartingpointfortheanalysisarethechangesinenergyuseforecasttoresultfrom
implementationof
the
AB
32
Scoping
Plan
measures.
These
estimates
are
published
in
arecently
updatedeconomicanalysisdevelopedbyCARB(2010).CARBsanalysiscoupledamacroeconomic
modelwithadetailedmodelofenergysupplyanddemand.Themacroeconomicmodelisa
computablegeneralequilibriumtypeknownastheEnvironmentalDynamicRevenueAssessment
Model(EDRAM).Theenergymodel,Energy2020,representsenergysupply(includingtechnology
andlocationspecificdetailsforelectricitygeneration)andthespecificendusesthatdrive
demandforenergy.
Usingthismodelingframework,CARBfirstdevelopedareferencecaseforecastofwhatthe
economywouldlooklikeintheyear2020intheabsenceofAB32implementation.CARBs
forecastusedasinputscrudeoilandnaturalgaspricesforecastthrough2020bytheDOEEIA(U.S.
DepartmentofEnergysEnergyInformationAgency),whicheveryyearpublishesanAnnual
EnergyOutlook(AEO)thatpredictsamultitudeoffutureprice,production,andconsumption
variables.TheparticularpriceinputsCARBusedaretheAEO2009referencecase(themostlikely
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forecastoffutureenergytrends).Inourstudy,weusedtheAEO2009Updatedforecast;the
differenceis$2perbarrelofcrudeoilinthe2020midvaluereferencepriceforecast.32
Havingdevelopeditsreferencecaseforecastoffutureeconomicgrowth(includingenergy
productionanduse),CARBcompareditsownanalysistoanumberofpolicyscenariosthatreflect
differentassumptionsaboutthetypeandeffectivenessofpoliciesimplementedtoachieveAB32.
Wefocus
on
CARBs
Case
1,
which
reflects
the
policy
instruments
included
in
CARBs
proposed
blueprintforachievingtheAB32emissionreductions(AB32slegislativelanguagereferstothis
astheScopingPlan),andCARBsbestestimatesofthecostsandenergysavingsassociatedwith
eachofthesepolicies.WerefertoCARBsCase1andassociatedeconomicandenergy
impl