California’s Climate Credit is Worth Watching

, April 2014

 

This month, many Californians will see something new on their electricity bills: The first bi-annual Climate Credit, a payout to customers of investor-owned utilities like PG&E and SCE through California’s Cap and Trade program. The Climate Credit is worth around $30-$40 and will recur every April and October for most customers. However, for customers of some small utilities it will reach nearly $200, while certain small businesses, schools, and hospitals will receive their credit every month.

National and international climate communities are already keeping a close eye on California’s AB32 Global Warming Solutions Act, which includes the Cap and Trade Program as part of a package of policies aimed at cost-effectively reducing California’s emissions. The impact of the Climate Credit — the first of its kind — is worth watching to determine if similar mechanisms could be used successfully elsewhere. In particular, the Credit’s impact on both energy efficiency and public support for the Cap and Trade program will be especially interesting to follow.

ENERGY EFFICIENCY

One of the seven policy objectives of the Climate Credit is to encourage appropriate investment in carbon mitigation activities and technologies, such as energy efficiency. As a result, a mandated consumer education and outreach program is underway, in tandem with the Climate Credit roll out, to encourage consumers to put that extra $70 per year towards energy efficiency measures that will further lower their utility bills and climate impact. Since the size of their Climate Credit does not depend on how much energy they use, residents will gain if they cut back their energy usage. Clean-air regulators hope that a significant number of Californians will follow this advice.

Here at CPI, our past and upcoming work on energy efficiency (for example, our analysis of the use of Proposition 39 money for schools) indicates the importance of education and outreach in promoting energy efficiency. It will be interesting to see, a few years down the road, how much impact this credit and outreach has. A future study on this topic could be a very useful source of information, especially because the data available on the effectiveness of various energy efficiency policies is limited.

Of course, had the California Public Utilities Commission wanted to promote energy efficiency directly they could have simply put the money towards rebates on efficient products and other energy efficiency programs, instead of handing it over to utilities’ customers and encouraging them to put it towards efficiency improvements. What is different about this money?

PUBLIC SUPPORT

In returning this money directly to California residents, the CPUC is working towards another one of its seven policy objectives: an acknowledgment that everyone has a stake in climate change, and thus a right to the value of revenues from a climate program. This right-to-value approach takes its precedent from the Alaska Permanent Fund, which pays dividends to all Alaskan residents from the revenue generated by state oil leases. These direct payments will hopefully encourage public support for the Cap and Trade program.

The Climate Credit also seeks, as part of its policy objectives, to reduce adverse impacts on low-income households and to maintain the carbon price signal in electricity prices. In order to address these goals, the Credit is structured so that every customer of a given investor-owned utility receives the same size Climate Credit, regardless of their electricity consumption. The value of the credit depends roughly on how many free allocations of GHG emissions allowances the utility receives. Free allocations, in turn, are based on how carbon intensive a utility is, as well as utilities’ progress in energy efficiency and renewable energies. This dependence on carbon intensity is why the Climate Credits for customers of Pacific Power, a small utility heavily reliant on GHG-intensive generation, are nearly $200. The Credit value also depends on the market price of the GHG allowances, which you can view at CPI’s California Carbon Dashboard.

The cost of GHG allowances, and compliance with Cap and Trade, will still be reflected in the electricity rates on consumers’ bills, ensuring that the carbon price signal is included in consumers’ decisions. The Climate Credit protects consumers from this increase, and its flat rate ensures that lower-income consumers are most protected from electricity price increases, which is important because they spend a larger share of their income on electricity, although their total spending may be smaller; for these consumers, especially, the Climate Credit may make the difference in their support for Cap and Trade.

Hopefully, the Climate Credit will help maintain public support for the program and new climate policies in the years ahead. The value of the Climate Credit gives the public an economic reason to support the program, and the publicity provided by the line item on customer’s bills will raise awareness about the Cap and Trade program.

 

 

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