It’s common wisdom that sustainability is an environmental imperative. What’s less universally held is the notion that sustainability is also an economic imperative. Governor Schwarzenegger embraces both assertions and has made sustainable economic growth a central theme in his administration.
In his view, transformation to sustainable economies will occur only if and when market participants find it in their own economic interests to engage in such activity. The governor’s policies are directed towards that outcome.
Unfortunately, few past government actions offer much promise in this regard. For example, for four decades now the federal government has failed to solve our country’s unsustainable dependency on oil. President Nixon tried conservation. President Carter subsidized synthetic fuels. Others subsidized corn ethanol or employed military force to protect distant oil fields. Yet today the United States remains 97 percent dependent on oil for transportation.
But in the governor’s view there are two causes for optimism.
First, since 1980 and as a result of policies that decoupled utility returns from sales, provided incentives for efficiency and established performance standards for appliances and buildings, California has nearly tripled its gross state product (GSP) per kilowatt-hour of electricity (KWH). These steps cut emissions and costs, thereby boosting productivity and economic growth while improving the environment.
Second, to address growing “acid rain” emissions, in 1990 President George H.W. Bush signed into law innovative legislation that established performance standards but permitted flexible forms of compliance, including trading. The net result was a dramatic reduction in emissions at a fraction of expected cost.
To the governor, these examples illustrate the transformation and growth that is possible with scalable policies that successfully harness market forces.
In January 2007, the governor illustrated his approach when he established the world’s first Low Carbon Fuel Standard (LCFS) for passenger vehicles. Transportation is central to California’s economic growth, and with cars accounting for 41 percent of California’s greenhouse gases (GHG), California must reduce transportation related emissions if it’s to succeed in achieving the strict GHG limits the governor signed into law in 2006. The LCFS does this by setting a GHG life cycle performance standard for automotive fuels and allowing suppliers to trade credits when they have exceeded or fallen short of the standard.
By its first target date of 2020, and without any new government spending, the LCFS is expected to displace nearly 20 percent of California’s gasoline consumption, increase the size of the state’s alternative fuels market by three to five times, and boost to 7 million the number of advanced technology vehicles on our roads. And that’s just the start.
The governor sees the LCFS as a market-oriented “change agent” that induces technological change without limiting choice, providing subsidy, picking winners or unleashing costs. The LCFS also addresses the principal reason why alternative fuels haven’t already captured more of the market.
Because oil prices fluctuate, there has been no certainty of lasting demand for alternatives and, as a result, insufficient capital has been deployed into alternative-fuel distribution infrastructures that can successfully compete with gasoline. As a result, consumers can’t get convenient access to alternatives and carmakers are leery of producing products that run on those hard-to-get alternatives.
The LCFS changes this dynamic. Now everyone knows that, regardless of oil prices, in California there will be sustainable demand for alternatives.
The policy is already transforming our fuels market. The Wall Street Journal recently wrote about the new “gold rush” in California as well-capitalized fuel makers and distributors compete to penetrate our market with new or improved technologies that will attract consumers and carmakers. Not surprisingly, many of those technologies are being designed and developed in California. Were the LCFS to be adopted nationwide, energy companies would be looking at a half-trillion dollar marketplace. Worldwide it’s a trillion dollar market. Just imagine the innovation and competition as the world’s finest enterprises and minds competed to win — and transform into something sustainable — such a massive market.
So far 11 U.S. senators from both sides of the political aisle have called for a national LCFS modeled on Gov. Schwarzenegger’s standard, as has the European Commission and 10 governors from the newly formed Midwest Regional Greenhouse Gas Reduction Accord.
California is under no illusion that it can make the world sustainable on its own. We emit just one percent of the world’s GHG pollutants, and we know that billions of our fellow world citizens are just now emerging from poverty and presumably have little or no interest in adopting measures that might slow down their growth. That’s why Gov. Schwarzenegger believes that strong economic growth is essential to success in the world’s battle against warming and that California’s most important role may well be in setting an example for how to successfully transform to a sustainable economy while maintaining robust growth.
David Crane is special advisor for jobs and economic growth to Gov. Arnold Schwarzenegger.