May 17, 2006 - From the May, 2006 issue

Redefining Progress Urges Policymakers to Use Market Incentives to Promote Sustainability

The numbers on accountants' ledgers do not always reflect the true costs of doing business. Inconvenient externalities abound, and many of them harm public health, degrade the landscape, and decimate public coffers. To compel California companies to take responsibility for pollution and other environmental harms, Michel Gelobter, executive director of Redefining Progress, promotes a system by which market mechanisms provide meaningful incentives to both protect the environment and turn a profit.

Michel Gelobter

You recently addressed an LAEDC conference on the State Public Utility Commission's role in both responding to climate change and promoting economic development. What policies did you share?

A lot of people talk about how hard it's going to be to take action on climate change. Our work for over a decade has shown that that's probably not going to be the case.

The majority of economists contend that it's going to be good for the U.S. economy and good for the California economy in particular. That insight is crystallized by President Bush's insight that we are addicted to oil. You can see the light when you can say, "Hey, isn't it good to break an addiction?" At the macro-economic level, breaking that addiction means hundreds of billions of dollars flowing to things that our economy is better at than using fossil fuels.

It's very hard to argue that breaking our oil addiction and starting to address energy independence and climate change seriously through market mechanisms is going to be bad for us. The fear people have is that it represents change, and change scares people. But as a colleague of ours Bob Epstien, one of the founders of Sybase, says, "It's not a worse economy. It's just different." And our research over the years has shown that it's also likely to be a little better.

Elaborate on what you shared with the PUC regarding what their role and the state's role in addressing climate change might be, as opposed to the federal government's.

One of the big questions is, should California act first and should it act alone? The biggest reason to do so is that California is already a clean energy state. There is no way that any legislation or regulation at the federal level will be better for California than the regulations and legislation is hashes out for itself. The lowest common denominators at the national level are states that consume 30 to 40 percent more energy with probably 50 to 75 percent more pollution than California does per capita. So any deal brokered at the federal level is unlikely to play to our strengths.

Looking at California's clean air standards, initially it's a chicken-or-egg situation. In the 1960s and ‘70s California took leadership because we had the will and desire to be a cleaner, greener state, and now we can capitalize on that history to make sure that we build an energy system and a pollution system that plays to our strengths. California is the leader in the country, and one of the leaders in the world, on clean energy, and our indigenous system is going to work better.

We have many wonderful reasons to do this. Any measure we take to reduce our climate emissions is going to increase our energy independence, keep more capital in the state, reduce our vulnerability to very volatile energy price markets; California is one of the most volatile energy price markets in the country, and anything we do to lessen that volatility is good for business and consumers.

Another reason is that we have a track record of making hay out of these opportunities. California per capita energy consumption has remained flat since 1974. That means today compared to households in other states the average California family saves over $1000 per year because of the energy conservation measures put in place in the mid-1970s. Last but not least, Pacific Rim nations are expected to spend $280 billion per year on energy infrastructure for the foreseeable future. California's leadership on clean energy and the post-carbon economy could position us as a huge leader in that market. We're the closest industrialized nation to that market, and it could be a huge advantage for California's economy and trade.

In response to your presentation, PUC Commissioner Bohn responded that he wasn't quite persuaded yet. What must you do to win over commissioners like Bohn?

The gap is in engagement by the business community and regulatory community in designing a win-win system. One of the fun things about my job is that because we see this issue from an economic perspective; we don't come into it saying that it's going to be hard or damaging. You have to sit down and ask how we can optimize our energy independence and our action on climate change so that it's not just good for the environment or our security but also good for our economy and our jobs.

If you persist in dealing with these issues in silos, as if climate change stands on its own as an issue, then you're very likely to get into a deal-making situation with the major polluters. If we pay attention to the fact that we are all part of the fossil fuel economy, and take a market-based, comprehensive approach, we can have a better economy. It's important to step out of the silo, and this is why I use energy independence, energy policy, and climate change interchangeably-they really are one and the same. Taking that comprehensive approach seriously is probably the best way to start addressing the commissioner's concerns. If we cast the issue as a shift in California's economy towards a cleaner, more efficient, more energy-independent future that's something the PUC has been working on for the past 20 or 30 years, and any PUC Commissioner will embrace.

The commissioner, though, might object to the unintended consequences of that shift. How do you respond?

We have to focus on not seeing it as a balkanized issue and instead see the market-wide and economy-wide approaches that are going to work best. We can also avert risks by taking the right approaches. If you project the potential for disruption, our dependence on foreign oil is far worse. If you look at OPEC from 1972 to 1974, a 20 percent drop in oil supply in 1973 led to $100 billion in additional expenditures in the U.S. on oil. The recession that resulted from that tightened supply cost our economy $750 billion. If we don't take action to pursue a market-based approach to climate change and energy independence, we have a very high risk of oil price shocks and security risks.

Elaborate on market mechanisms and market forces for those environmentalists and Democrats who don't know what that concept means.

The key to market mechanisms is to take the market seriously at every level of implementation. A range of so-called market mechanisms was used in Southern California around air pollution, including Reclaim, which was the mis-begotten effort to control nitrogen oxide. That program was not sufficiently transparent or accountable. It created credits that weren't market-based and a market based on credits that were often called ‘hot air.'


We have to get a price signal through the whole system, and that signal can come in the form of permits, for which polluters would pay. Or it could be an auction of permits, like cell phone bandwidths. The key is to capture the value of the climate pollution up-front and then recycle that value into the places in the economy that need to make a transition, whether it's mass transit, auto efficiency, small business credits, etc.

If we don't do that, and instead grandfather the emissions of present-day polluters-say, this year you emitted ten tons, this year please emit 9.5 tons, and here's 9.5 tons of permits for free – then you've given the polluters a huge form of corporate welfare. Those permits are valuable; they're almost as valuable as the fuel they're burning. So it's important for people to pay up-front for their activities, and then to create market mechanisms that help them make the transition. A number of our studies at the national and state level have shown that you only need to give away about 2 percent of the permits for free, most polluters break even and stay as profitable before they were regulated as they do after.

When, in a term-limited world, do the eyes of elected officials glaze over when they listen to this presentation?

We have found that it takes a while. Fran Pavley put out AB 1493 on the car side; she now has AB 32 with Speaker Nuñez. I think the level of crisis has a lot of our elected officials very focused. The question really is how to communicate it to stakeholders, including businesses and consumers. But it's really quite simple to explain that we need to use the market. We have to put a price on the things we want to stop, and we have to invest in the things we want to encourage.

Everybody understands that, and the nuts and bolts can be worked out by wonks like me and the people in government who do get it. You can talk to people at Cal-EPA – decision-makers get excited about this stuff after they've been briefed on it – but to the public it's very simple: we're going to stop a problem by getting the polluters to pay for it and by helping everyone else wean themselves from this addiction.

Redefining Progress has published reports and tried to advocate a couple concepts, including "ecological footprint" and your community indicators program. Elaborate on those programs.

We're the leading policy institute in the United States for smart economics -policies that help people, protect the environment, and grow the economy. Globally, that movement is known as sustainability, and a set of policies surrounds the "triple bottom line." A community like Los Angeles is aware of the tensions between these issues of equity, economic growth, and the environment. A lot of great work has been done to maximize all three – to avoid a race to the bottom and encourage a race to the top, to improve the quality of our life, the strength of our economy, and the equity we have in our society.

Redefining Progress works on policies across all three of those boundaries at once, and we do it on the national level and in a number of states, including California. These days states and local governments are the incubators for the best ideas.

We do a lot of work with indicators – the ecological footprint, the genuine progress indicator, which is a replacement for the GDP; we've used it on the gross regional product for the Bay Area, and we're working on one for Los Angeles. What matters is what you count, and when you look at things like the gross regional product, there's a lot in there that none of us think of as progress. The Genuine Progress Indicator is the GDP minus heart attacks, prison terms, and clear-cut forests. All of those things supposedly grow our economy, but nobody would consider them to be progress. If we take those out and add things like volunteerism, time spent with family, we can capture things like the commute time in Los Angeles and how that impacts the real economy.

We also have a program on sustainable economics, which works on climate policies, particularly in states as I've outlined in the first part of this interview. Finally, we host a program called the Environmental Justice and Climate Change Initiative, which for the last six years has been the place where low-income communities and communities of color have come together to deal with energy independence and climate change.

One of your most extensive local studies was a study of Santa Monica's ecological footprint over the period of 1990 to 2000. What did the study conclude, and how has Santa Monica incorporated these conclusions into its policies?

Santa Monica has stabilized its ecological footprint over the last couple years largely as a result of a visionary planning and environmental department, which has created a wide range of incentives, not just for citizens, but for the business community to come together to maximize the environmental health and minimize the environmental impact of that community. We started working with them about eight years ago and have periodically given them updates on their ecological footprint, and they have created an indicators process within the city that drives them towards a lower consumption/higher saving approach.

They're a real model for the country, and we hope that they're going to be a good anchor for activities more broadly in Southern California. I know Mayor Villaraigosa is looking closely at some of the exciting stuff they're doing. We've been thrilled to work with them, and in one of the areas best known for sprawl and spread, they've been able to find a way to stabilize their overall impact on the planet.

The Legislature just agreed to a $37 billion package of infrastructure bonds for education, open space, levees, roads, and goods movement. When those bonds pass through your office for review, what will you be looking for?

I haven't seen the final package yet. I think we're most interested in the financing mechanisms. And we hope that in the next couple of years we can build in financing mechanisms that align the state's fiscal heath with its social, economic, and environmental heath. We have to try to reduce the number of counties that depend on malls for their revenue. We have to stop the economic dynamics that push us towards more unsustainable lifestyles. Second, we want to know whether these bonds are targeting the state's most critical needs and that they're built in a way that doesn't require more borrowing in the future. The governor originally talked about over $200 billion of needs. $37 billion seems more fiscally prudent, but that can be a real multiplier if it's applied the right way.


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