In January, state Sen. Scott Wiener reintroduced legislation that would require companies with revenues exceeding $1 billion to disclose their greenhouse gas emissions. The San Francisco Democrat frames his proposal as a transparency issue.
It’s not, of course. If enacted, his proposal would worsen the state’s business climate and increase costs on Californians.
At first glance, this logic appears reasonable. Global climate change is a problem and greater transparency seems to provide important benefits. It helps investors better understand any potential litigation risks and customers better understand the impact on emissions from their consumption choices.
Dig deeper, and it becomes clear that the legislation does not promote the transparency Wiener and the bill’s supporters seek. Including the financial costs, this proposal would be a net negative for Californians.
If enacted, companies must provide detailed carbon accounting reports that include emissions from their direct operations, their electricity purchased and the emissions generated by the company’s supply chain and indirect activities.
Unlike financial reports that are based on a rigorous and widely accepted methodology, carbon accounting reports are neither precise nor accurate. The further away from a company’s direct operations, the more inaccurate the carbon accounting exercise becomes. How does a company know which power generator provided the electricity they used? More troubling, how can they possibly know the emissions of distant suppliers?
They can’t. Consequently, companies will rely on proxy information that is just as likely to provide misinformation as information.
Comparing the emissions across companies will also be problematic. Differences could be due to actual emissions, but could also result from measurement assumptions.
Then there are the problems of double counting emission reductions, where multiple organizations take credit for the same emissions reduction, which is another inherent problem of carbon accounting.
While the reports will provide information of dubious value, conducting the carbon accounting audits will be costly. Complying with the legislation will require companies to devote additional financial resources, which will add to their costs. Like any cost increase, California consumers will bear these costs, in whole or part. Therefore, the mandates will add to the affordability problems that too many California families are already struggling to overcome.
The costs from the proposal will increase over time because fundamental business considerations such as choosing the supplier that produces the right inputs, at the right price, that meet the necessary delivery schedule, will receive less emphasis. By disincentivizing the creation of the most efficient supply chain possible, the mandate will have harmful impacts on corporate costs. Once again, these costs will be passed onto consumers.
The mandate is also troubling because there are better policy options. The costs of global climate change can be addressed without making California’s families poorer if policies focus on incentivizing the necessary technological innovations rather than imposing higher costs on families already struggling to make ends meet.
There are many exciting innovations in development that include next generation nuclear plants, enhanced battery storage, carbon capture and storage processes, technologies that significantly improve fuel efficiency, and the development of hydrogen and alternative power sources.
Whether any, or several, of these technologies will ultimately pan out is unknown. Continued investment into these (and other lesser-known innovations) is necessary to encourage the emergence of the next-generation energy sources. Policies that focus on reducing the cost of innovation through tax and depreciation preferences are better positioned to harness the private sector’s innovation to cost-effectively reduce emissions.
A policy that provides no benefits but increases costs on families and businesses imposes net costs on Californians.
In the last legislative session, the Assembly justifiably rejected the prior version of the bill. For the sake of California’s families, let’s hope they do so again this year.
Wayne Winegarden is a senior fellow in business and economics at the Pacific Research Institute. The author wrote this for CalMatters, a public interest journalism venture committed to explaining how California’s Capitol works and why it matters.