Why California's Green Regulations Fuel Growth

With the global economy in a deep recession, there's a predictable debate going on: can we still afford to fight climate change and invest in a greener economy? Nowhere is this debate more active than in California, which has a long history of enacting strict environmental regulations. While some see California's path toward a greener economy as extreme or overzealous, I'd describe it more simply: smart.

Californians are already among the cleanest users of energy on the planet—without crimping their suburban, car-based lifestyle. To generate each dollar of GDP, the state emits 20 percent fewer greenhouse gases than some of the world's greenest countries, like Germany or Denmark. The state's per-capita electricity use has stayed flat since the 1970s, despite a vast build-out of the suburbs, ever-larger homes and an almost doubling of the state's economy; meanwhile, consumption has jumped by more than 50 percent in the rest of the U.S. Had its energy use tracked the rest of the U.S. since 1973, California's consumers and companies would be spending $6 billion per year more for electricity.

California has led the way in demonstrating how market-savvy regulation, instead of stifling growth, can jump-start innovation. For instance, the state has revolutionized the way utilities are regulated: instead of making profits by building more power plants, the California Public Utilities Commission links utility profits to efficiency gains—and leaves it up to the utilities to decide how to do it most cost-effectively. Pacific Gas & Electric, for example, has helped customers weatherize homes and upgrade appliances. As a result, PG&E makes more money, customers save on their bills and jobs in local service industries go up. According to a 2008 study by Berkeley University economist David Roland-Holst, California's energy-efficiency measures have helped create 1.5 million new jobs in the state since 1973.

Regulation has also been a boon for California's clean-energy startups, which have continued to attract capital despite the economic crisis. The state's renewable-energy mandates—similar to programs in Europe and Japan—almost overnight created a market with the critical scale to spur innovation and bring down costs. Today, it's German, Spanish and Danish companies that dominate the global solar and wind industries, thanks to those countries' earlier policies. But U.S. companies are fast advancing in next-generation technologies, such as smart electrical grids and thin-film photovoltaics. It's hard to imagine this having happened without the regulatory push to open these markets.

Twenty-six U.S. states have joined California in adopting "renewable portfolio standards"—the requirement that utilities get a share of their power from renewable sources by a certain deadline. That policy is behind the boom in green power generation (and jobs) all across the U.S. California's tough new vehicle emissions standards, for which Barack Obama has cleared the way after years of blockade by the Bush administration, will raise the effective mileage of passenger cars to about 43mpg by 2020; 13 states have announced they will copy it. California has also joined with six neighboring states and four Canadian provinces in a project called the Western Climate Initiative, which seeks to introduce carbon trading across the region in 2012; it is likely that any future nationwide program to curb greenhouse emissions will be modeled on this plan.

The debate over green versus growth will only grow louder as the recession continues. But California offers a great example of why the supposed conflict between these two imperatives isn't as profound as cynics suggest.