California, long America’s environmental trendsetter, is about to push the envelope once again. On May 1, the state will hear from some of the nation’s largest insurance companies about the financial risks climate change poses, not only to the companies but also to their customers and investors. Some 300 firms, representing the vast majority of the U.S. insurance industry, are expected to reply to a survey that includes such questions as “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 will then be posted on the California Insurance Commission’s website for all to see, including regulators from all 50 states and overseas.
“What all of us will learn is the extent to which companies are incorporating climate risk as they make investment decisions, underwriting decisions and business operations decisions,” Dave Jones, the California insurance commissioner, told Yale Environment 360.
Jones emphasized that the survey is “not prescriptive.” But analysts predicted the exercise “will inevitably cause the [insurance] industry to do things differently,” in the words of Andrew Logan of Ceres, a group of investors and NGOs that helped 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 behavior.”
The insurance initiative is but the latest example of California’s far-reaching policies to confront climate change. On Aug. 15, the state will sponsor its first auction of emissions allowances, as mandated by the Global Warming Solutions Act 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 percent by 2050, the amount scientists say is necessary for there to be a reasonable chance of limiting global warming to 2 degrees Celsius above pre-industrial levels.
To achieve these reductions, AB 32 relies largely on cap-and-trade, the same mechanism Republicans in Congress derided as “cap-and-tax” when they rejected President Obama’s climate legislation in 2010. California’s law caps the amount of greenhouse gases a given economic sector may emit at 90 percent of the previous year’s emissions. Companies then bid for emissions allowances, with the price established by an electronic auction. Those companies that subsequently cut emissions by more than required can trade their excess allowances to those that do not cut enough. The auction, scheduled for August, will include power plants, refineries, and cement plants, which must begin cutting emissions in 2013. Emissions cuts for manufacturers of transportation fuels begin in 2015.
California Governor Jerry Brown, a Democrat, is counting on the auctions to raise $500 million a year — welcome funds for a state government in chronic budget deficit. But the California Air Resources Board, which administers the cap-and-trade program, projects that revenues could easily be twice as large. “We project $550 to $1 billion during the 2012-2013 fiscal year, and that’s on the basis of a price of $10 per share, which is very conservative,” said David Clegern, a board spokesman. “The futures market is currently at $18 per share.”
The state’s goal, Clegern said, is not only to reduce emissions but to foster an economy where sustainability is profitable. Ken Alex, a senior policy adviser to Governor Brown, argues that such an economy is already taking shape in California, in part due to the policies of Brown’s predecessor, Republican Arnold Schwarzenegger. The “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 percent, said Alex, who noted that “the companies installing them are the fastest growing in the state.”
California already has the most aggressive renewable portfolio standard in the U.S.; it requires 33 percent of the state’s electricity to be generated from renewable sources by 2020. California is ahead of schedule to meet that target, Alex asserted, thanks not only to the Million Solar Roofs program but also the installation of 4,242 megawatts of large-scale solar plants in the deserts in the southern part of the state. Governor Brown “has said 33 percent should be a floor, not a ceiling, and we need to think about how we get to 40 percent and even 50 percent,” according to Alex.
California is also poised to transform its vehicle fleet, which in turn promises to bring greener cars and trucks to the U.S. 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 [ZEVs] — electric cars, hybrids, hybrid-electrics and hydrogen-fueled vehicles — sold in California by 15 percent by 2025, as board chair Mary Nichols explained in an interview with Yale Environment 360. This policy is projected to reduce greenhouse gas emissions by 52 million tons a year by 2025, the equivalent of taking 10 million cars off the road. Clegern emphasized that the new regulations were adopted after close consultation with the world’s automakers. “After years of fighting us about our regulations, [automakers] are coming to realize there’s a big market [for ZEVs],” said Clegern.
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 federal approval to start setting its own, tougher clean air standards. Automakers fought California’s efforts to require catalytic converters and other cleaner technology on cars sold in the state, but they eventually surrendered and even added the technology to all the cars they produced.
Why? Because California was, and remains, the single largest auto market in the U.S., accounting for 10 percent of new vehicle sales. The logic of efficient manufacturing dictated that “you can’t make one car for California and another car for Washington, D.C.,” Eron Shosteck, a spokesman for the Alliance of Automobile Manufacturers, pointed out.
California’s decision this year to require insurance companies to disclose climate risks promises to have a similarly out-sized impact, especially since New York is joining California in the initiative. “Most insurers operating in the United States are operating in those two markets, and therefore need licenses from us,” commissioner Jones explained. Washington state is also requiring insurance companies to disclose these risks.
“I expect,” said Ceres’ Logan, “this information will change how [companies] model and price risk, what new products they might develop — for example, to incentivize low-carbon behavior — what kinds of investments they will make and not make, and how they operate in the public sphere, including government lobbying.”
What is it about California that enables it to do so much more about climate change than the other 49 states, not to mention the federal government? Being the ninth-largest economy in the world helps. As the zero-emission-vehicle and insurance cases illustrate, California’s market is so sought-after that companies accept more stringent regulations to access it. But what else explains why the rules in California are tougher than elsewhere?
Matt Rodriquez, the state’s Secretary for Environmental Protection, said he believed it is partly because many Californians, including policymakers, came to the state in the first place “because of its natural beauty and resources” and thus 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; Republican and Democratic politicians alike understand that 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,” explained Rodriquez.
In fact, if the rest of the United States had done what California has over the past 40 years, the world might be well on the way to slowing climate change. For in that case, the U.S. today, like California, might be consuming the same amount of energy as it did 40 years ago. And, like California, the U.S. might now be preparing to build major high-speed rail and hydrogen-vehicle infrastructure. What’s more, the international community might have had a better chance of reaching a deal at the Copenhagen climate conference in 2009, because the U.S. might have embraced rather than shunned the goal of 80 percent emissions reductions by 2050.
But the policies of the rest of the U.S. and of the global community worked out differently, and even California is not immune to the consequences: The Golden State is going to get hit very hard by climate change. Scientists project that California will inevitably lose much of the snowpack atop the Sierra Nevada — the source of one-third of the state’s fresh water — by 2050 because of rising temperatures. California will also face at least 1 meter of sea level rise by 2100 (and perhaps much sooner) — enough to put underwater the San Francisco and Oakland airports, as well as the Port of Long Beach, unless adaptation measures are undertaken.
California is not yet ready for these and other climate impacts, Secretary Rodriquez noted, but it is getting ready. Already, California has published the most advanced climate adaptation plan of any state in the nation. Released in 2009, the plan outlines the projected impacts in considerable detail and urges planners, businesses, and ordinary citizens to begin preparing now. The next step, coming this spring, is the release of adaptation policy guidelines — state reports that will give advice on what specific changes should be considered for water supply, land use, infrastructure, and other policy areas.
How much it will cost California to adapt to climate change is unknown. “There is no single budget for adaptation,” said Ken Alex, of the governor’s office. “Part of adaptation is insuring that as we build out our 21st century infrastructure, we make sure that adaptation is built into everything state does — from high-speed rail to water systems to coastal planning to emergency services to, well, everything.”