California as a model for climate policy

San Francisco, CA – California, long America’s environmental trendsetter, is once again pushing the envelope. This month, the state required large insurance companies to provide detailed information about the financial risks that climate change poses, not only to the companies themselves but also to their customers and investors.

The insurance industry is the biggest in the world; globally, its companies control an estimated US $16 trillion worth of assets, a sum greater than the gross domestic product of the United States. Nevertheless, California has managed to get 300 of the industry’s leading firms to respond to a list of questions that will reveal much about their role both in encouraging climate change (through their investments in fossil fuel development) and in responding to its impacts.

Among the questions California regulators asked the companies are: “How do you account for climate change in your risk management?”. And: “Has the company altered its investment strategy in response to [climate change]?” The companies’ replies are being tabulated now. Once that process is completed, the results will be posted on the California Insurance Commission’s website for all to see, including regulators from all 50 states and overseas.

This exercise “will inevitably cause the [insurance] industry to do things differently,” says Andrew Logan, an analyst with CERES, a group of investors and NGOs that helped state officials develop the survey. “What [insurance companies] choose to cover and not to cover, and what they invest in, has great influence over individual and corporate behaviour. I expect this information will change how they model and price risk, what new products they might develop – for example, to incentivise low-carbon behaviour… and how they operate in the public sphere, including government lobbying.”

Of course, the information might also lead officials in California, and elsewhere, to change how they regulate insurance companies.

California can get away with making such demands of a powerful industry because California is the ninth largest economy in the world (when measured separately from the rest of the US). Companies want access to that market. So even though they grumble about it, they accept the state’s requirements. 

Confronting climate change

The insurance initiative is only the latest example of California’s far-reaching policies to confront climate change. On August 15, the state will sponsor its first auction of emissions allowances, as mandated by the Global Warming Solutions Act the state legislature passed in 2006. Often referred to as AB 32 (for Assembly Bill 32), the law commits California to reduce its greenhouse gas emissions to 1990 levels by 2020 and to cut them 80 per cent by 2050, the amount scientists say is necessary for humanity to have a reasonable chance of limiting global warming to 2 degrees Celsius above pre-industrial levels.

To achieve these reductions, the law relies largely on the cap-and-trade mechanism. California’s law caps the amount of greenhouse gases a given economic sector may emit at 90 per cent of the previous year’s emissions. Companies bid for emissions allowances, with the price established by electronic auction. Companies that subsequently cut emissions by more than required can trade their excess allowances to companies that do not cut enough. The auction in August will include power plants, refineries and cement plants, which must begin cutting emissions in 2013. Manufacturers of transportation fuels begin in 2015.

The state’s goal, says David Clegern of the California Air Resources Board, which administers the program, is not only to reduce emissions but also to foster an economy where sustainability is profitable. Ken Alex, a senior policy adviser to governor Jerry Brown, argues that such an economy is already taking shape in California, and Alex is happy to share credit with Brown’s predecessor, Republican Arnold Schwarzenegger. A “Million Solar Roofs” program, which began under Schwarzenegger but will “reach completion” under Brown, has reduced the price of photovoltaic solar power units by 30 to 60 per cent, says Alex, who adds, “and the companies installing them are the fastest growing in the state.”

California has the most aggressive Renewable Portfolio Standard in the US; it requires 33 per cent of the state’s electricity to be generated from renewable sources by 2020. California is ahead of schedule to meet that target, Alex says, adding that governor Brown “has said 33 per cent should be a floor, not a ceiling, and we need to think about how we get to 40 per cent and even 50 per cent.”

California’s ripple effect

Even environmental groups seem pleased with California’s progress. “Solar power has tripled in the last two years in some of our biggest cities, including Los Angeles and Sacramento, and doubled in all the other big cities,” says Bernadette del Chiaro, the head of climate policy for Environment California.

California is also poised to transform its vehicle fleet, which in turn promises to bring greener cars and trucks to America as a whole. As directed by AB 32, the Air Resources Board has required automakers to increase the amount of so-called Zero Emission Vehicles – electric cars, hybrids, hybrid-electrics and hydrogen-fueled vehicles – sold in California by 15 per cent by 2025.

If history is any guide, California’s vehicle policies will have a powerful ripple effect. Seatbelts, unleaded gasoline and hybrid vehicles are but some of the vehicle innovations that spread throughout America after being introduced in California.

In the 1960s, choking under the worst smog in the nation, California got approval from the federal government to set its own, tougher clean air standards. Automakers fought California’s efforts to require cleaner technology but eventually surrendered and even added the technology to all the cars they produced. Why? Again, the largeness of the California economy. California was the single largest auto market in the US, accounting for 10 per cent of new vehicle sales. The logic of efficient manufacturing dictated that, “You can’t make one car for California and another car for Washington, DC,” Eron Shosteck, a spokesman for the Alliance of Automobile Manufacturers, has explained.

Of course, economic size alone is insufficient. The other reason California has unusually strong environmental policies is that state officials have insisted upon them, despite industry resistance.

Shared goals

Many Californians, including policymakers, came to the state in the first place “because of its natural beauty and resources,” explains Matt Rodriquez, the state’s Secretary for Environmental Protection. So it only makes sense that they want them protected. The continuity between the climate policies of governors Brown and Schwarzenegger illustrates how the environment is less of a partisan issue in California than elsewhere in the United States, especially Washington. Republican and Democratic politicians alike understand that California’s voters value green policies more than party labels.

“Even though there may be a variety of political viewpoints, we share the goal of preserving our agricultural land, our forest lands, maintaining a good quality of water and preserving the California way of life,” says Rodriquez.  If the rest of the United States – in particular, the federal government – had done what California has done over the past 40 years, the world could be well on the way to stopping climate change. In that case, the US would be consuming the same amount of electricity today that it did 40 years ago, because, like California in the 1970s, it would have invested in energy efficiency and regulated its markets to encourage it.

And, like California, the US would be preparing to build high-speed rail and hydrogen vehicle infrastructure. What’s more, the global community might well have reached a deal at the Copenhagen climate conference of 2009 (if not before), because the US would have embraced rather than shunned the goal of 80 per cent emissions reductions by 2050 and its entrepreneurs would have welcomed the chance to profit from the resulting new markets.

In the years since global warming emerged on the international agenda in the 1980s, it has often been said that this problem is too hard for human institutions to tackle: the entrenched interests are too powerful, the politicians are too short-sighted, the public is too confused. The example of California refutes that argument.

California’s record of climate action is a lesson in the big things that government policy can achieve when it is animated by genuine public spiritedness and backed by economic muscle. As such, California remains a place to watch and learn from.

Mark Hertsgaard (www.markhertsgaard.com) is a Fellow of the New American Foundation and the author of six books, including HOT: Living Through the Next Fifty Years on Earth, just released in paperback.