Shock Proofing Society

8/8/2019 Shock Proofing Society

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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.

2 SHOCKPROOFINGSOCIETY SEPTEMBER2010


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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.

http://www.hubbertpeak.com/hubbert/Bibliography.htmhttp://www.hubbertpeak.com/hubbert/Bibliography.htmhttp://www.hubbertpeak.com/hubbert/Bibliography.htm


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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.

http://climateprogress.org/2010/07/09/edf-video-climate-and-clean-energy/http://climateprogress.org/2010/07/09/edf-video-climate-and-clean-energy/http://climateprogress.org/2010/07/09/edf-video-climate-and-clean-energy/http://climateprogress.org/2010/07/09/edf-video-climate-and-clean-energy/http://climateprogress.org/2010/07/09/edf-video-climate-and-clean-energy/http://climateprogress.org/2010/07/09/edf-video-climate-and-clean-energy/http://climateprogress.org/2010/07/09/edf-video-climate-and-clean-energy/http://climateprogress.org/2010/07/09/edf-video-climate-and-clean-energy/http://climateprogress.org/2010/07/09/edf-video-climate-and-clean-energy/http://climateprogress.org/2010/07/09/edf-video-climate-and-clean-energy/http://climateprogress.org/2010/07/09/edf-video-climate-and-clean-energy/http://climateprogress.org/2010/07/09/edf-video-climate-and-clean-energy/http://climateprogress.org/2010/07/09/edf-video-climate-and-clean-energy/


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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%



15/60

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.



16/60

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.



17/60

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



18/60

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).



19/60

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.



20/60

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.



21/60

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)



22/60

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



23/60

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



24/60

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).



25/60

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



26/60

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.



27/60

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



28/60

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.



29/60

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.



30/60

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).

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


31/60

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.



32/60

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



33/60

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.



34/60

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.



35/60

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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



38/60

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

Shock Proofing Society

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Transcript of Shock Proofing Society