Low-income Californians feel the pinch when gasoline, electricity and natural gas prices increase. And it’s logical to think that the state’s cap-and-trade program might add to those expenses. But this program is generating billions of dollars to provide an array of benefits to Californians, especially those living in disadvantaged communities.
Now, a first-of-its-kind study by the UCLA Luskin Center for Innovation has found that cap-and-trade has produced another very positive result. The study, “Protecting the Most Vulnerable: A Financial Analysis of Cap-and-Trade’s Impact on Households in Disadvantaged Communities across California,” revealed that the state has very effectively put in place measures to mitigate any disproportionate impact that might fall on low-income households.
According to the researchers, protective measures implemented by the state could more than offset cap-and-trade compliance costs that are passed on to electricity, natural gas and gasoline consumers.
“As consumers of these three industries, we asked what are the cap-and-trade compliance costs for these industries,” said J.R. DeShazo, director of the Luskin Center for Innovation and principal investigator on the project. “What is the cost pass-through from the regulated industries to consumers and what are the strategies to reduce those cost pass-throughs from cap-and-trade? And, finally, what is the net financial impact?”
Cap-and-trade was created in 2012 to reduce greenhouse gas emissions. It requires that the biggest producers of greenhouse gas — including electricity utilities, natural gas utilities and fuel distributors — purchase carbon allowances. The costs of these carbon allowances create price signals that communicate to consumers the amount of greenhouse gas emissions associated with electricity, natural gas and gasoline consumption. “They have to pay to pollute, or they have an incentive to reduce their emissions,” Callahan said.
“It’s a complicated program, but it’s an important one,” she added. “It’s affecting the lives of us Californians. And it’s generating billions — with a B — of dollars and will continue to do so.”
Low-income households inevitably are going to bear a stronger burden from regulation because they pay a higher percentage of their income to electricity and natural gas bills as well as to gasoline. But, according to the study, the state has effectively put in place measures to protect low-income Californians as we transition to a cleaner, lower-carbon economy.
“We actually see that, once you factor in those direct and indirect measures, low-income Californians receive a small but still measureable potential benefit,” said Colleen Callahan, deputy director of the Luskin Center and co-author of the report. “We found that electric utility customers could actually gain $200-250 during our study period, which is the length of the cap- and-trade program, through 2020.”
The study also found that low-income households could receive an estimated positive impact of between $44 and $83 as natural gas utility customers.
“And for gasoline customers we are predicting a bigger net benefit,” Callahan said. “We estimate that our representative households could receive a cumulated, indirect benefit of approximately $350 to $700 by 2020.”
“I think it’s been a success because of the way they are implementing various price increase mitigation strategies for consumers, and low-income households especially, along with the cap-and-trade program,” Julien Gattaciecca, lead author of the study and a Luskin Center researcher, said. “It is very well made and very well thought-out, and gives the rest of the world a leading path to follow.”
The state’s portion of the cap-and-trade proceeds are deposited in the Greenhouse Gas Reduction Fund, which are used to make climate investments that further the goals of the Global Warming Solutions Act of 2006. Those climate investments provide tangible benefits — energy efficiency and weatherization upgrades for homes, clean vehicle incentives, tree planting and more — in communities across Californians.
Another portion of the cap-and-trade proceeds are being directly returned to the millions of Californians who are residential customers of an investor-owned utility, such as Pacific Gas and Electric and Southern California Edison. Customers of those utilities respectively received $50 to $60 in climate credits on their electricity bills in 2015.
The Luskin report assessed how the provision of climate credits directed to households would mitigate cap-and-trade related costs. The study also assessed two other types of strategies that indirectly mitigate these costs. As such, Gattaciecca factored in low-income rate assistance programs, which although unrelated to the cap-and-trade program, can reduce households’ budgetary burden associated with electricity and natural gas consumption.
Gattaciecca also factored in state and industry predicted trends for electricity, natural gas and gasoline consumption, which are affected by climate investments and other efficiency, fuel switching, and vehicle-miles reducing programs and policies that help households lower their use of energy and fuels. Because these policies and programs can help lower energy and gasoline bills, they indirectly lower any cap-and-trade compliance cost passed on to customers.
The Luskin report utilized a case study approach. The state developed a tool, called the CalEnviroScreen, to identify disadvantaged communities that have elevated environmental health and socioeconomic risks, including poverty and pollution. Using CalEnviroScreen, the Luskin researchers chose four California communities for their study.
Gattaciecca also examined American Consumer Survey data and other databases to learn about common characteristics of households within those four case study communities. He then constructed hypothetical but representative profiles of households in each of the case study communities.
“We looked at four households in California,” Gattaciecca said. “We didn’t do that randomly. We took one in Oakland, one in Traver in Tulare County, one in Los Angeles and one in San Bernardino to collectively have a diverse set of case study communities. All four present different patterns when it comes to transportation, racial composition, housing types, family structure, climate and more. That’s the beauty of the report. We cover four very different locations. It’s not just policy and crunching numbers. There’s a human story here.”
“Real households benefits from climate investments deposited into the Greenhouse Gas Reduction Fund,” Callahan said. Senate Bill 535 requires that a minimum of 25 percent of the monies in this fund go to projects that benefit disadvantaged communities in California, and a minimum of 10 percent go to projects located in these communities. “I went to Washington, D.C., last year and presented at a national environmental justice conference. This is seen as one of the most significant environmental justice victories of the past decade.”
The results of their study left Callahan and the other researchers impressed.
“The California Air Resources Board is the lead agency on the cap-and-trade program and has a lead role in implementing climate investments,” Callahan said. “They’ve done a very thoughtful, thorough job. There’s more that can be done, but we commend them.”