A Framework for Evaluating State-Level Green Stimulus Proposals

A Framework for Evaluating State-Level Green Stimulus Proposals GABRIEL PETEK LEGISLATIVE ANALYST JANUARY 2021 analysis full gutter AN LAO REPORT LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Executive Summary Green Stimulus Intended to Achieve Both Economic and Policy Goals. During economic downturns such as the one California and the United States are currently experiencing, governments often seek to help the economy recover through various initiatives referred to as economic stimulus, such as spending on public infrastructure projects and grants for programs. When such economic initiatives also have an environmental benefit, they are sometimes labeled as “green stimulus.” Examples of activities that have been proposed as green stimulus include electricity grid modernization, renewable energy innovation, and climate adaptation activities such as forest management and coastal habitat restoration. Likely to Be Increased Interest in Green Stimulus Proposals. Given the state’s economic condition and its numerous climate and environmental goals, the Legislature is likely to consider green stimulus proposals in the coming months and years. When reviewing such proposals, the Legislature faces two basic questions to evaluate whether they are worth pursuing: (1) what effects is the proposal likely to have on short-term economic conditions, such as employment and economic output, and (2) what short- and long-term environmental benefits could the proposal achieve? Key Considerations for Evaluating Green Stimulus Proposals State’s Ability to Adopt Large-Scale Stimulus Is Constrained. While federally funded green stimulus projects could have notable positive economic effects for the state, we find that the potential for state-funded efforts to have meaningful stimulative impacts is likely limited by budget constraints. This is primarily because the State Constitution requires that the state budget be balanced annually, meaning an increase in funding in one area of the budget generally means that money is not available for other state programs. It is difficult to be confident that any boost in economic activity from increasing funding for one program would not be more than offset by a corresponding decrease in economic activity from less funding for another program. Additional funding through new taxes or fees is also unlikely to provide significant net benefits, because the higher tax or fee likely would reduce private sector spending in the short term. While there could be stimulative benefits from new bond funds—which allow the state to spend more in the near term than it otherwise would—the magnitude of the effects on statewide economic conditions likely would be relatively minor since state bonds typically are small compared to the overall size of the California economy. Given these constraints, we find it unlikely that state-funded green stimulus would have large effects on overall short-term economic conditions. Potential Stimulus Effects of Different Programs Are Difficult to Compare. A major challenge to designing effective state stimulus is the significant uncertainty that exists regarding the degree to which different programs and projects might vary in their stimulative effects. Estimated effects produced by economic models are uncertain because of limited information about both the reliability of the models and the accuracy of assumptions used to prepare those estimates. Additionally, because the pandemic and public health conditions continue to evolve, it continues to be difficult to predict how they ultimately will affect various industries and households. These uncertainties create challenges in identifying which types of proposals would provide the most effective economic stimulus. For example, the overall stimulative effects of different environmental projects are difficult to compare to other types of spending—such www.lao.ca.gov 1 analysis full gutter AN LAO REPORT as spending on education, broadband infrastructure, or financial relief for households and businesses. Furthermore, when trying to compare different types of environmental projects, it is challenging to estimate which ones might provide the largest stimulus effect. Environmental Programs Have Potential to Yield Other Important Benefits. Green stimulus proposals have the potential to provide significant environmental benefits by assisting the state in (1) addressing current and future impacts of climate change, (2) reducing greenhouse gas emissions, and (3) supporting other initiatives to improve natural resources and reduce pollution. Moreover, some of these projects—particularly climate adaptation projects—could help to avoid future damages and costs, which might bring significant longer-term economic benefits for certain regions and the state compared to if they were not undertaken. These could include taking action to mitigate the threat of future wildfires or flooding from sea-level rise. Projects could also be targeted at addressing environmental justice and social equity concerns by remediating conditions that disproportionately affect communities with residents who earn low incomes. Such activities could include cleaning up contaminated lands, improving air and water quality, and building new parks in urban areas. Recommendations Focus More on Environmental Merits of Proposals Than Short-Term Economic Stimulus. We recommend the Legislature limit the amount of emphasis it places on potential economic stimulus benefits when evaluating state-funded green stimulus proposals. Instead, we recommend that the Legislature base its funding decisions primarily on the potential environmental merits, including the long-term economic benefits from reducing future damages related to climate change. We identify several key questions the Legislature will want to consider when assessing the potential fiscal and environmental effects of pursuing green stimulus proposals: • How significant are the climate or environmental benefits, and do they outweigh the costs? • How much long-term economic benefit will be created for the state? • What is the most cost-effective way to achieve a specified policy goal? • How equitable is the distribution of benefits? • What are the highest priorities for state-level funding? In order to better inform future efforts, we also recommend the Legislature invest some time and resources in articulating specific climate goals, collecting additional data, and evaluating the effectiveness of existing programs. 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT INTRODUCTION During economic downturns such as the one provide significant (1) economic stimulus and California and the United States are currently (2) environmental benefits. We conclude with experiencing, governments often seek to help recommendations for the Legislature on how to the economy recover through various initiatives— evaluate the merits of green stimulus proposals, such as targeted expenditures—referred to as along with steps that might be taken to collect economic stimulus. When such initiatives also additional information that could aid such have an environmental benefit, they sometimes assessments. are labeled as “green stimulus.” Given the state’s This report is submitted pursuant to economic condition and its numerous climate Chapter 135 of 2017 (AB 398, E. Garcia), which and environmental goals, the Legislature likely requires our office to report annually on the will be presented with green stimulus proposals economic impacts and benefits of the state’s to consider in the coming months and years. greenhouse gas (GHG) emissions targets. This report is intended to provide guidance for Consistent with the statutory direction, this report the Legislature on how to evaluate the merits of assesses the potential economic impacts and state-funded green stimulus proposals. benefits of GHG reduction strategies that could be We begin by describing past economic stimulus included in green stimulus proposals. However, the initiatives, as well as providing examples of such scope of the report is broader than GHG reduction efforts that have been focused on environmental strategies because it also assesses the potential benefits. Next, we identify key considerations for effects of other environmental-related projects, evaluating state-funded green stimulus proposals, such as climate adaptation activities. including the degree to which they are likely to GREEN STIMULUS PROPOSALS INTENDED TO ACHIEVE BOTH ECONOMIC AND POLICY GOALS The coronavirus disease 2019 consisting of policies and programs designed to (COVID-19) pandemic has severely disrupted stimulate the economy through measures that the economy at the global, national, state, and also provide environmental benefits. This section local levels. To reduce spread of the disease, provides a definition of economic stimulus and what governments, businesses, and households have characteristics make certain stimulus proposals taken measures to limit in-person interactions. As a garner the green label. result, businesses reduced their capacities, workers What Is Economic Stimulus? Economic and consumers stayed at home, and schools and stimulus refers to government actions intended colleges transitioned to remote learning. These to encourage short-term economic activity. In measures have led to an economic downturn, this report, we primarily discuss fiscal stimulus, resulting in higher unemployment and decreased which is designed to support the overall demand economic activity, particularly for workers earning for goods and services through increases in lower wages and with lower levels of educational government spending or decreases in taxes. Such attainment. We anticipate the Legislature will be government interventions are intended to provide asked to consider economic stimulus proposals economic relief, get people employed, increase in response, to provide relief to those affected by consumer spending, and spur businesses to the recession and to help rebuild the economy. Of invest. Historically, the federal government has these proposals, some will purport to be “green,” utilized economic stimulus during recessions to www.lao.ca.gov 3 analysis full gutter AN LAO REPORT diminish the severity of the economic downturn federal government’s ability to run a budget deficit. and to help support a more rapid economic Whereas state and local governments are required recovery. Some examples of fiscal stimulus that to pass balanced budgets—meaning they cannot the federal government has undertaken in the spend more than they collect in revenue—the past include spending on public infrastructure federal government can spend more by borrowing projects, unemployment benefits, direct payments funds, providing it greater capacity to undertake to businesses, tax credits for households and large spending initiatives even during a recession. businesses, and grants for programs. Therefore, the most notable example of green Stimulus could also refer to other government stimulus was included in the federal American actions that do not involve increases in spending Recovery and Reinvestment Act of 2009 (ARRA). or decreases in taxes. Regulatory changes could Among its green stimulus allocations, ARRA be a type of stimulus, increasing the overall included over $90 billion nationwide for clean demand for goods and services by incentivizing energy projects and tax incentives aimed at both private sector spending through regulations. For supporting the economic recovery and meeting example, streamlining the permitting and inspection environmental goals, such as reducing GHG processes for solar panel installations could emissions. The clean energy spending in ARRA decrease the costs of solar energy projects and included energy efficiency improvements, such as may incentivize private sector spending. While the weatherization and retrofits; grid modernization; Legislature also could consider such non-fiscal mass transit, high-speed rail, and zero-emission measures to support the economic recovery, vehicles; carbon capture and storage technologies; because they are less common they are not the and clean energy innovation, manufacturing, focus of this report. and job training. Although this package included some tax incentives, such as tax decreases for What Is Green Stimulus? A subset of economic households’ investments in energy efficiency stimulus proposals might be presented as being improvements, most of the measures involved green stimulus. In this report, we use this term to increased government spending. describe proposals aimed at providing economic stimulus while also achieving other environmental As the current economic downturn continues, policy goals, such as climate mitigation, climate the President recently signed into law adaptation, or other natural resources and legislation providing an additional $900 billion environmental protection objectives like reducing for COVID-19 relief, as well as $1.4 billion for pollution and preserving ecosystems. Generally, federal government spending. This legislation most green stimulus proposals are designed to included increased support for clean energy and support economic recovery through increased environmental programs, including for research government spending on infrastructure projects to improve Figure 1 environmental resiliency and Examples of Activities That Have Been Proposed as reduce pollution, management of Green Stimulus natural resources, and grants for environmental programs. Figure 1 • Carbon capture and storage technologies. describes examples of activities • Climate adaptation activities. • Coastal habitat restoration. that have been proposed as being • Electricity grid modernization. green stimulus. • Energy efficiency improvements. Federal Examples of Green • Forestry management and wildfire prevention. Stimulus. Historically, most • Mass transit, rail, and active transportation infrastructure. economic stimulus initiatives • Recycling infrastructure. have come from the federal • Renewable energy innovation, manufacturing, and job training. government, not state and local • Water supply and treatment infrastructure. • Zero-emission vehicle rebates and infrastructure. governments. This is due to the 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT and development of clean energy, such as solar, proposals have recently been discussed, both wind, geothermal, hydropower, and nuclear by the Legislature and advocacy groups. For energy; energy storage technology; as well as example, several state legislators put forward carbon capture and storage. In addition, the economic stimulus ideas that included a number of legislation provided funding for water resources green stimulus elements during the last legislative projects, environmental cleanup, and public lands session, such as increased spending on wildfire management. Similar to ARRA, this legislation also prevention, climate adaptation, water and recycling includes some tax incentives, such as extending infrastructure, clean transportation, and energy the tax credits for renewable energy production. efficiency. The proposals would have funded these State Examples of Green Stimulus. Because activities through bond acceleration, securitization stimulus typically comes from the federal of revenue streams (including cap-and-trade government, California historically has not enacted auction revenues), and issuance of tax vouchers. If many stimulus initiatives, including green stimulus. our economy remains in a downturn, we anticipate However, several state-level green stimulus there will be increased interest in additional green stimulus proposals in the next legislative session. KEY CONSIDERATIONS FOR EVALUATING GREEN STIMULUS PROPOSALS When presented with potential green stimulus • What Are the Environmental Benefits? This proposals, the Legislature faces two basic evaluation focuses on the effects a proposal questions to evaluate whether they are worth is likely to have on a wide variety of different pursuing: environmental and economic outcomes, including both short-term and long-term • What Are the Short-Term Economic benefits. Stimulus Benefits? This evaluation focuses on the effects a proposal is likely to have on In this section, we discuss key information and certain short-term economic conditions, such considerations related to both questions. Figure 2 as employment and economic output. summarizes our main findings. Figure 2 Major Findings Related to State-Funded Green Stimulus 9 State’s Ability to Adopt Large-Scale Stimulus Is Constrained • Federal funding has potential for largest positive effect. • Shifting state budget expenditures unlikely to have significant benefits. • Additional funding through new taxes or fees also unlikely to provide significant benefits. • New state bonds could have some benefits, but effects likely would be small. 9 Potential Stimulus Effects of Different Programs Are Difficult to Compare • Information about the reliability of economic outcome models is limited. • Status of pandemic and economic conditions in flux. 9 Environmental Programs Have Potential to Yield Other Important Benefits • Lessen future damages and costs resulting from climate change. • Reduce greenhouse gas emissions to help mitigate climate impacts. • Improve environmental conditions, such as enhancing ecosystems and reducing pollution. www.lao.ca.gov 5 analysis full gutter AN LAO REPORT State’s Ability to Adopt Large-Scale might want to prioritize spending based, in part, Stimulus Is Constrained on how effectively programs provide economic stimulus. Proposals are more likely to be effective Among the most important factors in determining stimulus if they target (1) projects that can be the potential stimulative effects of a proposal is implemented relatively quickly, (2) economic the source of funding—federal funds, state bond activities that would not have otherwise occurred, funds, or state budget allocations from the General (3) projects that mainly use in-state labor and Fund or special funds. At a high level, the net supplies, and (4) industries or workers most stimulus effects of each fund source are determined affected by the recession. (See the box on page 8 by two offsetting factors: (1) the positive for more details on these criteria.) In general, the short-term economic benefits from the additional degree to which environmental proposals meet spending and (2) potential negative effects of any these criteria will likely vary from project to project. budget-balancing actions the state would need to As we discuss in more detail below, although these take, such as spending reductions in other areas criteria can serve as helpful guidance, significant and/or increased taxes. uncertainty remains about which projects might Federal Funding Has Potential for Largest provide the greatest stimulative benefits. Positive Effect. Proposals that are funded with Shifting State Budget Expenditures Unlikely additional federal funds—such as through another to Have Significant Benefits. In general, the federal stimulus package—likely would have the state’s ability to use its own budgetary resources to largest positive economic effects for the state. provide economic stimulus is very limited because This is because California receives the short-term the state Constitution requires that the state budget economic benefits associated with the additional be balanced annually. An increase in funding in one spending without any immediate offsetting state area of the budget generally means that money trade-offs—such as higher state debt service is not available for other state programs. (This payments, reduced spending in other areas of the applies to shifts in annual budget expenditures, as state budget, or higher state taxes. The magnitude well as decisions about the allocation of increased of the stimulative effect depends on how much revenues from existing fees and taxes.) For federal money is provided, and a large amount of example, spending a greater share of the General federal funding could have a significant positive Fund budget on environmental projects means less stimulative effect. For example, we estimate that, money is available for other state priorities, such as of November 1, 2020, more than $250 billion in as education, health care, or adding to reserves. federal funding has been allocated to California’s This is also true for the use of state special funds. state and local governments, households, For example, spending more cap-and-trade businesses, and other entities in response to auction revenue on certain environmental activities COVID-19 and the ensuing economic impacts. This leaves less funding available to support other funding has likely provided substantial short-term types of projects and programs. It is difficult to be economic benefits for the state. For context, the confident that any increase in economic activity overall state General Fund budget for 2020-21 is from increased funding to one program would not $134 billion. be more than offset by the corresponding decrease The recent federal stimulus package included in economic activity from less funding to another funding for some environmental activities. However, program. In most cases, such shifts in how funding very little of this funding is provided directly to is allocated in the annual budget likely will not result states and, as a result, the state has limited in meaningful economic stimulus. (There might be influence over how the money will be spent. If the some short-term stimulative benefits associated federal government provides additional stimulus with spending additional money from one of the funds that can be used for environmental projects state’s budget reserve accounts, but constitutional and provides states with some discretion over requirements likely limit the Legislature’s ability to specific spending decisions, then the Legislature spend those funds on most environmental projects.) 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Additional Funding Through New Taxes $3.1 trillion—equivalent to about 15 percent of or Fees Also Unlikely to Provide Significant national Gross Domestic Product. To match the Benefits. Some stimulus proposals might overall scale of this effort, a state bond raising a include increased taxes or fees to support higher similar amount—in terms of Gross State Product— government spending. The overall stimulative would have to be nearly $500 billion. Most state effects of such proposals are likely to be small bonds approved by voters have not exceeded and could be negative depending on how they are several billion dollars, and the largest bond structured. This is because the higher tax would approved in the last few decades was a $20 billion reduce private sector spending in the short term. transportation bond (Proposition 1B of 2006). This negative economic effect could be offset— Potential Stimulus Effects of Different partially or fully—by the benefits associated with an increase in government spending. However, there is Programs Are Difficult to Compare often a lag between when the tax is collected and A major challenge to designing effective state when the money is spent. As a result, the economic stimulus is the significant uncertainty that exists effects from collecting the tax might be negative regarding the degree to which different programs in the short term, even if the net economic effects and projects might vary in their stimulative effects. over the longer term are more uncertain. It is worth In other words, it is often unclear whether funding noting that although such proposals are likely not certain activities is likely to produce more jobs an effective way to provide near-term economic and economic activity in the state than alternative stimulus, there could be other fiscal or policy spending options in the current economic climate. rationales for such proposals that make them worth Some of the key reasons for this uncertainty are: considering. New State Bonds Could Have Some • Challenges Estimating Statewide Economic Benefits, but Effects Likely Would Be Small. Outcomes. Various economic models can The state funding source most likely to have a be used to estimate the effects of different positive stimulative effect is bonds—either general stimulus proposals on economic outcomes, obligation bonds, revenue bonds, or some other such as employment and Gross State similar financing arrangement (such as securitizing Product. The economic estimates produced future revenue streams to achieve one-time funding by these models are uncertain because of in the near term). Issuing bonds to raise money limited information about the reliability of the for new projects would have a positive stimulative models and the accuracy of assumptions effect in the short term by increasing spending used to prepare those estimates. For in the economy more than would otherwise have example, the actual economic benefits and occurred. From a budget perspective, bonds are costs of stimulus programs depend in part on similar to taking out a loan that is paid back in factors that are uncertain, such as future labor future years with interest. If interest rates remain market conditions and behavioral responses low—as is currently the case—these borrowing by affected businesses. As a result, the costs could be relatively low. However, the benefits and costs of new stimulus programs long-term costs associated with debt payments may be less than or greater than expected if would reduce the amount of funding available to the initial assumptions turn out to have been spend on other programs in future years. inaccurate. While there could be stimulative benefits from • Evolving Pandemic and Economic new bond funds, the magnitude of the effects on Conditions. The pandemic and the state’s statewide economic conditions likely would be public health response continues to evolve. relatively minor. This is because the size of state For example, it is still unclear how the overall bonds is typically small compared to the overall number of infection cases will change in the size of the California economy. For context, federal coming months, how different entities and stimulus actions taken in 2020 totaled about individuals will respond to future public health www.lao.ca.gov 7 analysis full gutter AN LAO REPORT Key Criteria for Identifying Effective Uses of Potential Federal Green Stimulus Funds If the federal government allocates additional green stimulus funding and provides states with some discretion over specific spending decisions, the Legislature might want to target the funds in a way that maximizes the stimulative effects. Below, we discuss key criteria that might help the Legislature identify the most effective efforts, as well as how they might apply to different green projects. It is worth noting that these criteria apply broadly to stimulus proposals, including non-environmental proposals. Can Be Implemented Quickly. In general, projects that can be implemented more quickly will be more effective at promoting near-term economic recovery. While projects ideally should be implemented during the “recession window”—when the recession is still ongoing—many economists believe stimulus could be effective after the recession technically ends, but before economic conditions (such as employment) have fully recovered. The unique nature of the current pandemic-driven recession makes it especially difficult to predict how long the current recession will last and how long it will take to reach full economic recovery. If it takes a relatively long time to reach economic recovery, projects with somewhat longer time lines to begin implementation— such as a couple of years—still could have stimulative effects. The ability to implement environmental projects quickly can vary. Some environmental programs could be implemented within months, particularly when additional funding is provided for existing grant programs. For example, the state probably could quickly disperse additional federal funding for programs that provide financial incentives to adopt cleaner heavy-duty vehicles where there is currently a waiting list. In other cases, large-scale infrastructure projects— such as building new water recycling plants or relocating coastal highways at risk of flooding from sea-level rise—could take several years to plan and implement. Encourage New Economic Activity. Proposals are more stimulative if they encourage new economic activities, rather than funding activities that would have been undertaken anyway or using workers that would otherwise already be employed elsewhere. The degree to which green stimulus spending would encourage new activities depends on the specific details of each program. For example, electric vehicles are still a small portion of the overall vehicle market and, as a result, many private property owners—such as apartment building owners—do not have a strong financial incentive to install vehicle chargers. Government funding that supports new charging stations could encourage these property owners to install chargers that would not have otherwise been funded. In contrast, some programs might simply pay for activities that would have occurred anyway. For example, studies evaluating a past federal program that paid households to retire their older high-polluting vehicles and purchase new cleaner vehicles—also known as “Cash for Clunkers”— found that the program had limited stimulative effects. This is because most households receiving the subsidies either (1) would have purchased a new vehicle anyway or (2) simply shifted their vehicle purchase forward by a few months to access the temporary incentive. As a result, the net effect on overall economic activity during the recovery period was relatively minor. Use In-State Labor and Supplies. Stimulus proposals are more effective if most of the money goes to workers and businesses in the region that it is intended to benefit. Therefore, projects that use a lot of in-state labor and products manufactured in California likely are more stimulative for the state than those that result in the purchase of goods manufactured out-of-state. The 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT degree to which environmental projects spend money on in-state labor and materials varies. Most projects result in a mix of in-state and out-of-state spending. For example, a proposal to subsidize solar energy likely would result in spending on in-state labor for installation but the purchase of solar panels manufactured out-of-state. Benefit Groups Most Affected by Recession. Since the current economic downturn began, employment in many parts of the economy has largely recovered, including environment-related industries, such as energy efficiency and renewable energy. However, the most affected industries—such as leisure and hospitality—might not directly benefit from environmental projects. Leisure and hospitality employment in October 2020 was 25 percent lower than February 2020, while construction and utility jobs were only down by a few percent. While focusing stimulus efforts on environmental projects could have some positive effects, in many cases, these efforts could be less effective than targeting stimulus towards other industries that employ workers who have been more greatly affected and therefore would not address the uneven economic effects of the recession. conditions, and when a vaccine will be widely other initiatives to improve natural resources and available. This uncertainty makes it more reduce pollution. difficult to predict the effects of the pandemic Climate Adaptation Benefits. Researchers on various industries and households. predict that climate change will have myriad consequential effects throughout California. The uncertainty caused by these two factors Changing conditions will include higher sea levels, creates challenges in identifying which types increased risk of inland flooding, more severe heat of proposals would provide the most effective days, more frequent and prolonged droughts, and economic stimulus. For example, the overall more widespread and intense wildfires. These stimulative effects of different environmental climate change effects have the potential to projects are difficult to compare to other types adversely affect human health, damage property of spending—such as spending on education, and infrastructure, disrupt regional economies, and broadband infrastructure, or financial relief for impair natural habitats. For example, our August households and businesses. Furthermore, when 2020 report, What Threat Does Sea-Level Rise trying to compare different types of environmental Pose to California, describes numerous negative projects, it is challenging to estimate which ones impacts that encroaching seas and waves could might provide the largest stimulus effect. cause along California’s coast due not only from Environmental Programs Have increased flooding, but also through erosion of beaches and cliffs and raised coastal groundwater Potential to Yield Other Important levels. Moreover, climate adaptation projects that Benefits help to avoid future damages and costs could bring While the state’s ability to increase spending significant longer-term economic benefits for certain to dramatically increase economic activity is regions and the state compared to if they were not limited and the relative stimulative effects of undertaken. Therefore, projects that are focused different programs are uncertain, green stimulus on improving California’s ability to moderate these proposals have the potential to provide significant impacts could have widespread benefits. environmental benefits. Specifically, green stimulus For example, the 2020 wildfire season took lives, proposals could assist the state in (1) addressing leveled homes, destroyed habitats, and worsened current and future impacts of climate change, air quality throughout the state. Moreover, current (2) reducing GHG emissions, and (3) supporting estimates suggest the state’s wildfire protection costs will reach at least $3.1 billion in 2020-21. www.lao.ca.gov 9 analysis full gutter AN LAO REPORT Projects that improve the health of the state’s technological innovation that might reduce the forests—such as by employing mechanical thinning future cost of these technologies. As a result, and prescribed burning techniques to reduce tree these technologies might be adopted more density and combustible fuels—could decrease widely in other jurisdictions and result in a more the intensity and spread of future wildfire ignitions significant reduction in global emissions. Also, and could mitigate the types of negative impacts many GHG reduction programs can have significant the state experienced this past year. Specifically, co-benefits, such as by also reducing other to the degree that forest health activities prevent pollutants that negatively affect local and regional extreme wildfire conditions from developing, they air quality. have the potential to lessen public health impacts Other Environmental and Natural Resource (from both smoke and fire), disaster recovery costs Benefits. Some projects are not specifically (from property damage), disruptions to regional designed to respond to climate change but, economies (from effects on business activities and instead, could provide other types of environmental tourism), and environmental harm (from impairment benefits. Such activities might focus on preserving to habitats, ecosystems, and natural watershed or restoring fish and wildlife habitats, enhancing functions). ecosystem functions, or expanding public access Climate Mitigation Benefits. Climate mitigation to natural resources. These types of activities to projects that reduce GHG emissions can help benefit “public trust” resources have been funded the state achieve its emissions limit of at least and conducted by the state for decades, frequently 40 percent below 1990 levels by 2030, as required supported by voter-approved general obligation by Chapter 249 of 2016 (SB 32, Pavley). This limit bonds. Some projects may also be specifically was established, in part, based on a recognition targeted at addressing environmental justice and that GHGs contribute to climate change and social equity concerns by remediating conditions result in the many different types of economic that disproportionately affect communities with and environmental damages discussed above. residents who earn low incomes. Such activities Reducing GHGs in California consistent with the could include cleaning up contaminated lands, targets established by the Legislature would help improving air and water quality, or building new reduce future global climate damages. In addition, parks in urban areas. The Legislature has also since California emits only about 1 percent of global provided funding specifically for “disadvantaged GHGs, some of the most significant benefits from communities” that may not have a comparable state climate mitigation activities might be related amount of local resources to undertake necessary to their indirect effects. For instance, policies that initiatives, such as water supply and treatment promote newer low-GHG technologies—such as projects. heavy-duty electric vehicles—could encourage LAO RECOMMENDATIONS Based on our research and above findings, we goals, collecting additional data, and evaluating the recommend that when evaluating state-funded effectiveness of existing programs. green stimulus proposals, the Legislature focus Place Limited Emphasis on Stimulus primarily on expected environmental policy merits—including long-term economic benefits When Evaluating Green Stimulus from reducing future damages related to climate Proposals change—rather than potential short-term economic We recommend the Legislature limit the amount effects. In order to better inform future efforts, of emphasis it places on potential economic we also recommend the Legislature invest some stimulus benefits when evaluating state-funded time and resources in articulating specific climate 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT green stimulus proposals. In our view, although Legislature to evaluate is the degree to which a there could be some stimulative benefits associated proposal will help the state meet its climate or other with certain proposals, state budget constraints environmental goals, weighed against its associated make it very unlikely that state-funded green costs. This environmental cost-benefit analysis stimulus proposals will have large effects on overall should include assessment of both direct benefits, economic conditions. Moreover, there is significant as well as potential co-benefits. For instance, many uncertainty about which state projects are likely to programs that reduce GHG emissions—such as have the greatest stimulative effects. Consequently, incentives to replace older diesel engines with it would be very difficult for the Legislature to newer technologies—have other benefits, such as select among environmental proposals based on reducing criteria pollutants (such as nitrous oxides) their potential stimulus benefits. Therefore, as we and toxic air pollutants (such as diesel particulate discuss next, a more effective approach would be matter). Reducing these co-pollutants yields public for the Legislature to make its decisions based health benefits by improving local and regional air primarily on other types of benefits about which it quality. might have more confidence. The Legislature should also consider how those costs and benefits compare to those of Base Allocation Decisions on Fiscal alternative ways of spending state funds to achieve and Policy Merits of Environmental other policy goals and priorities. That is, the Proposals Legislature would want to consider the benefits of the environmental proposals against what We find that the prospective climate and might be achieved by spending a like amount of environmental benefits of green stimulus proposals money elsewhere. For example, alternative uses of are likely to be easier to identify than potential stimulus funds might include spending on various short-term economic effects. We therefore priorities related to the COVID-19 pandemic or recommend that if the Legislature considers construction of other types of infrastructure, each future state green stimulus proposals, it base of which would provide different potential benefits its funding decisions primarily on their climate in the near and longer terms. and environmental merits. These benefits might How Much Long-Term Economic Benefit Will occur in the short or longer terms and could Be Created for the State? While state funding accrue in the areas of climate adaptation, climate for environmental projects is unlikely to yield mitigation, or other environmental and natural significant short-term economic impacts, certain resources goals. When assessing the potential advantages of pursuing green stimulus proposals, the Legislature Figure 3 will want to consider several key Key Questions to Assess Environmental Merits of questions about the potential fiscal Green Stimulus Proposals and environmental effects. We highlight some of these questions 9 How Significant Are the Climate or Environmental Benefits, and in Figure 3 and discuss them Do They Outweigh the Costs? below. (In general, these evaluative 9 questions would apply to the How Much Long-Term Economic Benefit Will Be Created for the review of environmental proposals State? regardless of the state’s fiscal 9 What Is the Most Cost-Effective Way to Achieve a Specified condition.) Policy Goal? How Significant Are the 9 Climate or Environmental How Equitable Is the Distribution of Benefits? Benefits, and Do They Outweigh 9 the Costs? Among the most What Are the Highest Priorities for State-Level Funding? important questions for the www.lao.ca.gov 11 analysis full gutter AN LAO REPORT green stimulus projects might provide a substantial reduce emissions at very different costs, ranging economic benefit for California over the longer from $9 per ton to nearly $5,000 per ton. If the term, such as spending on infrastructure projects. Legislature’s primary goal is to reduce GHGs in the In particular, climate adaptation projects that help near term, it might want to target limited funds to the state to lessen future damage and disruption activities that do so at the lowest cost per ton. could ultimately result in avoided costs, thereby Another example relates to initiatives the yielding savings for both private property owners Legislature might want to pursue to prepare and the state and local governments compared jurisdictions for future droughts and the risk of to if the project was not undertaken. For example, water shortages. Different strategies for increasing restoring coastal wetlands in certain areas could water supplies—either through capturing more help buffer the impacts of rising seas and protect water for use or conserving the amount already nearby communities from flooding—at least for available—vary greatly in costs. For instance, a the coming decades. This, in turn, could prevent recent report by the Pacific Institute found that damage to property and infrastructure—and building a new seawater desalination plant has associated costs—as well as economic disruption a median cost of over $2,000 per acre-foot of to businesses and tourism. water, compared to $590 per acre-foot for a In evaluating green stimulus proposals, the new stormwater capture system. Investments in Legislature will want to assess whether the water conservation activities—such as grants or long-term benefits—including avoided future rebates for water efficient appliances, turf removal, costs—exceed the near-term costs. Research and water efficient outdoor landscaping, or to suggests that investing in up-front mitigation can implement more efficient agricultural practices— yield substantial savings from subsequent natural typically are comparatively less costly, and can disasters. Specifically, a national study found that even result in net savings based on reduced energy, for every $1 the federal government invested in wastewater, or maintenance costs. For example, natural hazard mitigation grants from 1993 to the Pacific Institute researchers estimated that 2016, society saved an average of $6 from avoided replacing showerheads with more water-efficient costs associated with property damage, sheltering models could have a “negative cost”—that is, displaced households, business disruption, and net savings over the appliances’ lifetime after loss of life and injuries (including mental health accounting for implementation costs—of up to impacts). $3,000 per acre-foot. Water conservation activities What Is the Most Cost-Effective Way to typically yield less overall water than large water Achieve a Specified Policy Goal? Even if the supply projects. However, if funds are limited, the Legislature has evidence that a green stimulus Legislature may want to prioritize funding for more proposal will yield benefits, it also will be important cost-effective drought preparation projects. to consider whether the proposal does so in a more How Equitable Is the Distribution of Benefits? cost-effective manner than alternative approaches As it considers the potential merits of specific to achieving the same goal. If not, this would proposals, the Legislature will also want to weigh suggest that there is a less expensive way to whether associated benefits meet its goals for achieve the same benefit, or that a greater level of equity and fairness. Certain communities across benefit could be achieved for the same expenditure the state are burdened by higher levels of pollution level. For example, the state’s cap-and-trade and other negative environmental impacts than auction revenues are typically allocated to dozens others, and many of these communities are of different programs intended to reduce GHG disproportionately home to large populations of emissions, including transit-related projects, people of color and Californians earning lower subsidies for electric vehicles and equipment, incomes. For example, some research has found forest management projects, and dairy digester that African Americans, Hispanics, and people projects that reduce methane. Based on estimates earning lower incomes are disproportionately from the administration, these different projects burdened by particulate matter pollution. Similarly, 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT despite federal and state water quality standards, development stages. This is because, even over one million Californians currently lack access with the carbon price established by the state’s to safe drinking water, and many of these problems cap-and-trade program, private firms will generally are centered in Latino, rural, and lower-income underinvest in research and development activities communities. Given these disparities, pollution for low carbon technologies. On the other hand, the reduction efforts would be more equitable if Legislature might want to limit its financial support designed to benefit households from the most for projects that already receive substantial support affected communities. from other regulatory programs. For example, Evidence also shows that certain groups are also the state’s Low Carbon Fuel Standard already more vulnerable to the effects of climate change. provides subsidies to low carbon transportation These include communities of color, communities fuel producers, such as ethanol, biodiesel, and with lower incomes, and people with limited English renewable diesel. (These subsidies are provided proficiency. For example, research suggests that through the sale of regulatory credits earned by African Americans in Los Angeles are nearly twice low carbon fuel suppliers.) As such, the Legislature as likely to die from a heat wave than other Los might want to target its limited financial resources Angeles residents, and families living below the on priority activities that do not already receive poverty line are unlikely to have access to air substantial state support. conditioning or cars that allow them to escape Consider Additional Goal-Setting and extreme heat. Therefore, the Legislature may want Program Evaluation to focus climate adaptation spending on assisting populations and communities who face higher Answering the questions posed in Figure 3 vulnerability and likely would have less capacity to will help the Legislature weigh the potential prepare without state assistance. environmental merits of any green stimulus What Are the Highest Priorities for proposals it is considering in the coming year. State-Level Funding? While myriad actions However, the state still lacks some key information could be implemented to address climate and that would help to further guide its spending other environmental concerns, not all of them are decisions and overall climate change response the state’s primary responsibility. For example, strategy in future years. Specifically, articulating the Legislature likely will want to focus state specific climate goals and collecting additional data climate adaptation funding on projects that could clarify the trade-offs associated with different protect state-owned infrastructure, public trust proposals and help the state target funding more natural resources, and public health and safety. effectively. In contrast, projects that primarily protect private Establishing More Explicit Policy Goals Could property might be more appropriately funded Help Inform Spending Priorities. Investing some by the residents and businesses that own those time and resources in articulating specific climate assets. For example, in response to sea-level rise goals and collecting additional data would help the Legislature might prioritize funding a dune the Legislature clarify the trade-offs associated restoration project that will mitigate erosion at with different proposals and target state funding a public beach, rather than supporting a similar more effectively in the future. The state has project in a location that might instead primarily established clear goals for some categories of protect private coastal homes. environmental and climate policy. For example, Moreover, if the Legislature uses green stimulus SB 32—and its predecessor legislation, the Global funding for climate mitigation programs, it will Warming Solutions Act of 2006 or Chapter 488 want to consider how these programs fit within the (AB 32,Núñez)—set explicit goals and time lines for suite of existing GHG regulations. For example, reducing statewide GHG emissions. Similarly, in the there might be a strong rationale for additional California Forest Carbon Plan, the state established state programs that support new low-carbon a goal of conducting forest restoration and fuels technologies that are still in the research and treatment activities on 35,000 acres of forest lands www.lao.ca.gov 13 analysis full gutter AN LAO REPORT per year by 2020, increasing to 60,000 acres per of different programs. Accordingly, additional year by 2030. State law also has set explicit goals research of program costs and benefits would for water conservation, as well as waste reduction assist the Legislature in identifying which programs and recycling. In contrast, the state has established achieve its various environmental policy goals very few long-term goals for climate adaptation. For most cost-effectively and, therefore, how to target example, while Governor Newsom’s administration future funds. For example, a recent report from has developed high-level “principles” for making the California Council on Science and Technology California’s coast resilient to sea-level rise, it has found that the state lacks information about the not defined what specifically “resilience” looks cost-effectiveness of many of its catastrophic like, such as exactly how much public access wildfire risk reduction strategies. Similarly, in prior to beaches it wants to ensure is preserved from reports, we have found that the state lacks reliable erosion. information about the cost-effectiveness of many of Being more specific about intended climate its GHG mitigation programs. While expecting that adaptation outcomes would include establishing all uncertainty can be eliminated is not reasonable, explicit objectives to be accomplished by additional work evaluating the most cost-effective established deadlines—such as acres of coastal strategies to achieve various state goals would be wetlands to be restored to mitigate flooding or helpful to inform future decisions. For instance, percent of asphalt streets to be converted to “cool” the Legislature could require agencies to use an pavements to reduce heat. Not only would this independent expert review panel to comment on provide the state with a strategic direction for its the estimated costs and benefits of programs response to various climate challenges, articulating before they are adopted. It could also require explicit goals also would help the Legislature to departments to conduct retrospective evaluations perform oversight and evaluate the degree to which of major programs after they are implemented. the state is making progress on preparing for the As part of this process, the Legislature might also impacts of climate change via accomplishment of want to require state agencies to establish plans for those goals. such retrospective evaluations before programs are implemented. These additional evaluation activities Additional Evaluation of Programs Could Help would likely result in additional state costs, but Inform Spending Decisions. In many cases, the could improve the available information on the state lacks robust data on the costs and benefits effects of these programs. CONCLUSION The Legislature is likely to consider proposals Legislature should reject all of the green stimulus to fund green stimulus initiatives that attempt to proposals that it might consider. Environmental both help the state’s economy recover and make programs could provide significant benefits to the progress towards its climate and environmental state over both the short and long terms, including policy goals. As we discuss, the potential for such the potential to avoid future economic harm by efforts to have meaningful stimulative impacts reducing negative impacts associated with climate is likely limited by state budget constraints, and change. Therefore, their potential policy benefits there is a lack of clarity around which types of might merit legislative consideration of future green projects might most effectively boost the economy. stimulus proposals. These shortcomings, however, do not mean the 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT LAO PUBLICATIONS This report was prepared by Ross Brown, Rachel Ehlers, and Eunice Roh, and reviewed by Brian Brown and Anthony Simbol. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 15 LEGISLATIVE ANALYST’S OFFICE