Costing Out California’s Global Warming Solutions Act

On Sept. 17, the California Air Resources Board released an economic analysis of their own implementation scheme for AB 32, the Global Warming Solutions Act of 2006.

The analysis said, “not only will the economy grow by a similar amount as we move toward 2020, but it will grow at a slightly higher rate. Increased economic growth is anticipated primarily because the investments… result in substantial energy savings that more than pay back the cost of the investments at expected future energy prices.”

Independent studies, however, suggest that the outlook is more painful than CARB wants Californians to think.

Charles River Associates International did the first economic study of AB 32 for the Electric Power Research Institute, a nonprofit research center. Science Applications International Corporation performed a similar study for the American Council on Capital Formation and the National Association of Manufacturers. They differ because so much about the detailed structure of the economy continues to change.

CRAI estimates that AB 32 will reduce gross state product by $32 billion in 2020, while SAIC finds a loss of $24 billion. Accepting these estimates for the moment, they tell us that AB 32 could result in the loss of a year of overall economic growth. CRAI’s results suggest that the decline in California economic activity is partially countered by increases in other western states. Changes to California’s productivity resulting from carbon policy will affect our competitiveness with other states and nations.

In SAIC’s two scenarios the average household will lose either $1,244 or $4,032 of its 2020 disposable income. CRAI’s base scenario shows a seemingly smaller $1,170 drop in household consumption. That difference may simply acknowledge that consumption accounts for only a part of disposable income.

SAIC also predicts that in 2020 California’s low-income families will spend 14-to-16 percent of their incomes on energy instead of today’s 12 percent. This is quite possibly an understatement because higher energy costs also raise the prices of other goods (like food) they buy.

CARB offers a different scenario because of misguided trust in computer models. The point of modeling, however, is not to predict but to highlight key questions and contingencies. The conflicting outcomes suggest that we need to investigate more closely the current state of research on low-carbon fuels to judge how soon new technologies might be commercialized, or what reasonable policy might accelerate that.

Should $10 million be taken from other researchers and given to those working on low-carbon fuels? If so, what other research areas appear to be the least promising?

Models are often run under different “scenarios” that represent different policies, such as cap and trade versus a fuel tax, or how quickly sequestration technology might develop. Different scenarios can mean different ranges of lower-level estimates, as when SAIC forecasts inflation-adjusted residential electricity prices in 2030 to be 38-to-49 percent higher than today, and gasoline prices 72-to-151 percent higher.

The implementation schedule for AB 32 is short and the complexity of carbon policy is breathtaking. Because AB 32 will affect every part of the economy, it is time to suspend the law’s interim deadlines so that all parties can better understand what is known, and what is unknown, and plan accordingly.

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.

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