Op-Ed: Keep California oil in the ground? The goal is good, but the policy doesn’t pencil out

California has made significant strides against climate change except when it comes to transportation. Since 2012, per capita greenhouse gas emissions from cars, trucks and airplanes have been rising by about 1.5% a year.

One policy response got a boost earlier this year from a report by the Stockholm Environment Institute: Curtail California oil production by banning new drilling or by gradually phasing out all in-state oil production.

California produces only about 0.5% of the world’s oil, so you might ask what this “keep it in the ground” idea has to do with reducing transportation emissions. Its proponents calculate that cutting California oil production would slightly reduce world oil supply, which would slightly increase the world price of oil. The price effect would be small, but it would apply to the entire world market — not just California’s 1.7% share of consumption — so it could noticeably reduce oil consumption and the associated greenhouse gases.

The SEI report estimates that for every barrel of oil California doesn’t extract and process, the price increase would cause world consumption to drop by somewhere between 0.2 and 0.6 barrels. If that sounds like a wide range of uncertainty, it’s because it is very difficult to know the cost of oil production in the future because we don’t know what technologies will be in use five, 10 or 30 years from now. Nor do we know exactly what alternatives to oil consumers will have in the future.

I agree with the environmentalists advocating for this policy that California must lead the US climate change fight. But I don’t think this is the way to do it.

First, California would take a large economic hit for a small reduction in emissions. The SEI report calculates that for each ton of reduced emissions, income to California oil producers would fall by $110 to $330. That is 7 to 22 times higher than the value that the state’s cap and trade program puts on cutting emissions, and 2 to 6 times greater than the most recent scientific estimates of the “social cost of carbon,” the incremental damages from releasing an additional ton of greenhouse gases.

Advocates of banning oil production argue that it is in the same cost-effectiveness range as other California emissions policies, such as the low carbon fuel standard or supporting early-stage technologies for generating carbon-free electricity. But there is a big difference: Those programs are also intended to create new knowledge through R&D (research and development) and technology breakthroughs. Raising the world price of oil has no such benefit.

There is a second important downside to the policy: It will cause a huge transfer of wealth from consumers to producers. Remember, the way that the policy reduces emissions is by raising the price of oil, which means all consumers pay more and all producers (except for those curtailed in California) make more money.

The same approach that SEI used to estimate the drop in oil production shows that for each ton of reduced worldwide greenhouse gas emissions, consumers would pay about an additional $500 to producers. (The details of this calculation are posted on the Haas Energy Institute blog.) That is, every ton of emissions abatement brought about by this policy would be associated with not just an economic loss to California producers of $110 to $330, but also a payment of $500 from the world’s oil consumers to the world’s oil producers.

Who are the producers that would get this windfall in the coming decades? According to 2017 numbers from the Energy Information Administration, the country with the largest oil reserves is Venezuela, followed in descending order by Saudi Arabia, Canada, Iran, Iraq, United Arab Emirates, Russia, Libya and Nigeria. (The United States is one of the top producers today, but it is 11th in reserves.)

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In other words, the vast majority of future oil production is likely to come from autocratic regimes with abysmal human rights records, countries where most oil profits go to wealthy oligarchs, officials, royalty and other insiders.

The additional payments would come from people across the income spectrum, including millions of individuals in developing countries (think China, India and much of Africa) where vehicle ownership is just beginning to take off.

Overall, this is not a wealth transfer that’s easy to get behind.

Proponents of keeping oil in the ground argue that by doing so, California would demonstrate leadership for a policy that could spread across oil-producing regions. But there’s no evidence that the oil-rich countries on the above list have any interest in following California down this path.

With the daily reminders that Washington is now committed to a head-in-the-sand climate strategy, it is certainly important to think broadly and creatively about ways in which states and local governments can help cut emissions. But it is also important to think through all of the ramifications.

Instead of in effect taxing the world’s oil consumers and handing most of that money to a small group of rich and anti-democratic leaders, California should be focused on developing alternatives that make it easier for consumers to break their oil dependence. A good place to start would be with the state’s own growing addiction.

Severin Borenstein is a professor at UC Berkeley’s Haas School of Business and faculty director of the Energy Institute at Haas. A longer version of this argument appears on the institute’s blog.

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