What is the real cost of the AB32 Scoping Plan?

Russ Steele

Assemblyman Dan Logue, District 3, ask the Legislative Analysis Office to take a look at the economic cost of implementing CARB's AB32 Scoping Plan, especially if other states do not have similar greenhouse gas regulations and restrictions.  The LAO has responded with a detailed analysis which is summarized in the key findings below:

Overall:

• In the short run, California’s economy will be hurt by implementing climate-related policies that are not adopted anywhere else.
• We can definitely expect higher energy prices because of increased costs in using alternative fuels (reducing carbon etc.)
  
• The state’s energy prices (such as electricity) will rise significantly when compared to other states.
• Most of these negative effects will be due to “economic leakage” when the economy slows down because of relocation (businesses etc. moving where costs are lower).
• Businesses may be forced to increase investments in updated technology to meet requirements, or pay for emission allowances.

Significance of Economic Leakage:

• California has a large economy so negative impacts may be modest in comparison.
• However, because California competes openly in the world market (w/other states and nations) our economy is fairly “mobile” (meaning it can all easily be outsourced and replaced by our competitors).
• Most businesses that compete in bigger markets are “price takers” meaning they can do little to pass on the additional costs. They will likely move or shut down when profits drop. They have a huge incentive to move where costs are lower.
• Even when businesses are able to “shift” or pass their costs on, the negative price increase will still be felt by consumers.
• The ARB has done a poor job of analyzing the economic leakage that will be caused by AB 32. The model they used does not look at how individual industries and sub industries will be affected.

How Much Leakage?

• Industries that are active in interstate and international trade will be especially vulnerable, because they are more sensitive to prices and the different geographical areas of businesses (meaning if they don’t have a specialized product with little competition- they are in trouble).
• Industries that use a lot of energy for production are also going to be especially effected as energy prices go up and they can no longer keep production costs competitive.
• The greater the differences between CA climate policies and those elsewhere, the greater the economic leakage (meaning if everyone else is going to implement a 10 percent reduction and we implement 100 percent- we will be affected that much more).
• If the ARB does not take active steps to resolve these possible issues and contain “leakage” by using price caps and phase-in plans, consumers and businesses will feel the negative effects even more.

What will this mean for CA:

• California is mainly made up of a service based economy, and a lower number of industries that are dependent on trade and energy. This would only mean that instead of seeing overwhelming leakage we could instead be facing inflation throughout the state’s economy.
• Although we may not see a large exodus of all CA based companies (many cannot move) we will certainly see increased costs for goods and services throughout the economy.
• Overall, CA climate policies are the most aggressive and most wide ranging, which will result in a greater leakage.
• The ARB can take steps to lessen the negative effects (by adopting phase-in plans or price caps etc.) however this will not eliminate the leakage.

While I find the LAO analysis interesting, it deals primarily with the impact of business leakage, as the CARB models does not address this issue. They see leakage as only having a modest impact due to the overall size of the economy.

However, if we accept the LAO analysis that AB32 Scoping Plan implementation will only have a modest economic impact, one has to wonder about the other modest impacts resulting from going green.  All these modest impacts could accumulate into some sever economic impacts as Spain is find out.

California’s economy is diversified and complex, removing some of the economic segments or replacing them with green alternatives my have long term unintended consequences.  We know from Spain’s experience that focusing on green jobs has resulted in the loss of multiple non-related jobs.  For every green job created, 2.2+ non-green jobs were lost to Spain’s economy. 

There is more analysis needed to determine the real cost of AB32.  Stay Tuned.

Full Report to Assemblyman Logue: Download LAO Ltr to Logue