Prop 23 Would Increase Vulnerability to Fossil Fuel Price Shocks

By Chris Busch

Proposition 23 is the California ballot initiative that would suspend implementation of the state’s landmark clean energy and climate law, Assembly Bill 32 (AB 32).  One of the many reasons to vote against Proposition 23 is that it would increase the vulnerability of the California economy to crude oil and gasoline price spikes.  Through increased energy efficiency and greater use of clean energy, AB 32 will reduce our reliance on fossil fuels.  This serves to reduce the state’s risk of damage from volatile crude oil prices, a fact not reflected in previous studies of AB 32’s economic impacts.  Jamie Fine, Remy Garderet, and I investigate the issue in our recently released report, Shockproofing Society.

How quickly we forget.  Two years ago, the California economy was hit by record high crude oil and gasoline prices.  Yet discussions of climate policy in California are based on economic studies that assume much lower prices in 2020 than we saw during the last price spike when a gallon of gas topped $4.50.  The economic studies of the impacts of California’s landmark climate law, including the most recent one done by the California Air Resources Board (CARB), have gasoline at $3.42 per gallon in 2020 (all monetary values in 2007 dollar terms).  Assumptions about future energy prices are crucial.  Low fossil fuel price assumptions mean that the benefits of climate policy are being underestimated.  The monetary value of energy saved is the main benefit of climate and clean energy policies taken into account by economic studies.  This is a problem mainly because policymakers and the public often think these studies are more comprehensive than they really are.  Public health benefits are not considered, for example.  

Even at the fairly low prices in CARB’s study and others, the value of savings on energy are significant.  CARB estimates savings on energy due to AB 32 to be worth $7.5 billion in 2020.  In Shockproofing Society, we investigate how much larger the value of energy savings would be if California experienced crude oil and gasoline price spikes like those that have occurred periodically over recent decades.  We examine price jumps of roughly 25% and 50%, which we refer to as moderate and large price shock scenarios.  These imply 2020 prices for gasoline of $4.51 and $5.77. 

We find that AB 32 would save California consumers an extra $4.8 to $9.6 billion in 2020 (under moderate and large price shocks, respectively) or about $330 to $670 in additional savings per household.   

We also calculate that AB 32 would lessen California’s dependence on imported crude oil by 75 million barrels per year, a decrease of 18%, due to lower consumption of gasoline and diesel transportation fuels.  California’s production of oil has been falling steadily since 1985.  Today California represents 2% of world demand for gasoline, but possesses only about 0.2 of world supply of oil.   We are not going to drill our way out of this problem.  AB 32 gets us moving in the right direction.  It will diversify our energy supplies, lead to smarter energy use, more clean energy, and less dependence on unsafe, dirty 20th century fuels.

A vote for Proposition 23 is a vote for continued dependence on imported oil and increased vulnerability to wild swings in crude oil and gasoline prices. 

Chris Busch, Ph.D., is the Policy Director at the Center for Resource Solutions.  He is a member of the Economic and Technology Advancement Advisory Committee, one of two advisory bodies explicitly created under AB 32.  Chris holds a Ph.D. in environmental economics from the University of California, Berkeley.

Our series on Proposition 23, sponsored by EOS Climate continues next week!

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