California’s Prop 23: The Anti-Job Killer

California’s Prop 23: The Anti-Job Killer

If approved by the California electorate in two weeks, Proposition 23 would suspend the implementation of the California Global Warming Solutions Act of 2006 (“AB32”) until the state unemployment rate declines to 5.5% or less for four consecutive quarters.

AB32 mandates a reduction in California greenhouse gas emissions to 1990 levels by 2020, or about 25% to 30%. That goal can be achieved only by reducing aggregate energy consumption in the state, and to a small extent by substituting “green” power in place of fossil fuels.

All government regulation creates economic effects, whether the regulations are beneficial on net or not. One central impact of AB32 will be on employment. If that impact is small, then the argument in favor of Proposition 23 would be weakened. If the employment effect is large, then the opposite would be true.

A new statistical analysis published by the Pacific Research Institute casts considerable light on this question. In brief: Implementation of AB32 would reduce annual employment growth by 1 percentage point between 2010 and 2020, and the employment loss in 2020 would equal about 5% of the working-age population.

By suspending the implementation of AB32, Proposition 23 would yield increases in aggregate California employment of a bit less than 150,000 in 2011, rising to over a half million in 2012, and about 1.3 million in 2020.

Like all geographic entities, California has certain long-term characteristics, among them climate, available resources, geographic location, trading partners, population attributes and so on. These determine in substantial part the central comparative advantages of the state in terms of economic activities and specialization.

Economic evolution — large shifts in the basic characteristics of an economy — tends to proceed slowly, and mainly as a response to long-term shifts in aggregate market conditions shaped by the consumption and investment decisions of hundreds of millions of people.

Important among those features of the California economy is the relationship between employment and total energy consumption. That relationship — a high degree of complementarity — over the past three decades has been increasing, more slowly since the mid-1980s than before, but never declining.

In short, because AB32, however it is implemented, would reduce California energy consumption, it is analogous to a tax on energy use. This is recognized explicitly by the California Air Resources Board: Its internal analyses calculate for each of its implementation alternatives an implicit tax per ton of carbon dioxide-equivalent.

If we take the average of the least- and most-stringent implementation paths, CARB calculates that this implicit tax would reduce California energy consumption by 4.5% in 2012, rising steadily to 9.4% in 2020.

Because energy consumption and employment are complements — energy use increases labor productivity — a reduction in the former will have the inevitable effect of exerting downward pressure on employment and wages. How big is the employment effect? The statistical findings show that a 10% reduction in energy use yields an 8% reduction in employment.

That finding is highly plausible. Energy prices would have to increase by at least 25% to drive energy consumption down by 10%. Can anyone believe that such an increase in energy prices, whether implicit or explicit, would not impose significant employment losses?

There exists no evidence upon which to predict a fundamental change in the employment/energy relationship for the state.

Yes, more energy-efficient capital can make a difference; but it is not free, and a replacement of “only” 10% of the state’s fixed nonresidential capital would cost over $200 billion.

It is possible that the historical relationship between California employment and energy consumption will change. Technological advances are certain to occur, and the California economy may evolve over time in ways yielding important changes in the relative sizes of industries and sectors.

But the prospective nature and effects of those shifts are difficult to predict, and the direction of the attendant shifts in energy use and employment is ambiguous.

There is no basis in sound economic analysis upon which to conclude that the employment effects of the implementation of AB32 would be positive. Instead, they are likely to be very large. That is a hard reality relevant to the choices now facing public officials and the electorate in California.

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Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.