State's economic reanalysis of its climate law finds similarly benign results

California's second analysis of its climate change law, A.B. 32, has again found that the economy will be largely unaffected on a macro level, although emissions will be significantly lower as a result of the economic downturn.

The updated analysis comes as California officials are seeking to calm industry opposition to A.B. 32, including a ballot initiative that would suspend it until unemployment falls to 5.5 percent from its current level of 12.2 percent (Greenwire, March 19).

The state expects A.B. 32 to have no effect on total employment, predicting a net increase of 2 million jobs by 2020, in line with business-as-usual projections. Gross state product and personal income are expected to stay on their projected track of 2.4 percent growth per year, as well. Fuel expenditures are expected to be about 5 percent lower in 2020 as a result of increased energy efficiency and cleaner fuels, for a total savings of $3.8 billion.

The California Air Resources Board's original analysis, released in September 2008, found a slight net increase in gross state product and individual earnings. It was pilloried by peer reviewers, who said the projected increases were too insignificant to state positive effects with any certainty (ClimateWire, Dec. 2, 2008).

Cost impacts of complementary measures are debated


The new report, three times as long as the original, takes the current economic downturn into account and also leaves out the effects of some complementary policies that aren't part of A.B. 32 itself.

It finds that the number of jobs could decrease by as much as 2 percent overall. Mining, construction and utilities would be the hardest-hit sectors, but estimates vary wildly according to various scenarios. Overall losses in gross state product are estimated to be between 0.2 and 1.4 percent.

Anita Mangels, spokeswoman for the ballot initiative to suspend A.B. 32, said she hadn't had time to look at the report closely but that she still believed the law would be bad for the economy.

"This is a very broad overview of A.B. 32, but it really doesn't get into the costs of the individual programs, and once those regulations begin to be really vetted ... I think we're going to have a much stronger picture of what the impacts will be," she said. "The economy being what it is, the economy can't stand much of that."

Also yesterday, consulting firm Charles River Associates released a complementary analysis that found the cost per household in 2020 would range from $600 to $1400 per household, or 0.5 to 1.1 percent of income.

It also found that California's complementary measures, such as the low-carbon fuel standard and vehicular emissions standards, would increase compliance costs by about 50 percent compared to a cap-and-trade-only program. The ARB's analysis found a net cost savings from complementary measures. And in the event of the establishment of a national cap-and-trade program, California's complementary programs would prevent it from realizing as many savings, CRA found.

The effect of the economic recession makes a significant difference in both of yesterday's analyses. By using the California Energy Commission's projections from last year instead of 2008, CRA reduced its estimate of 2020 allowance prices from $100 per ton to $50 per ton. The ARB estimated that greenhouse gas emissions would grow 0.6 percent per year from 2007 to 2020, down significantly from the 1.4 percent annual increase it predicted in 2008.

Some critics are pleased

Only one of the six economists who reviewed the original analysis was available for comment on the new version. University of California, Los Angeles, professor Matthew Kahn was vocal in his praise for the authors of the new analysis, if not the foundations of the analysis itself.

As far as macroeconomic analyses go, the new version is top-rate, he said. But Kahn is convinced that the real economic measure of a policy can best be taken by bottom-up, microeconomic modeling.

"I believe those numbers in the short run, but not for the reasons these models claim," he said of the ARB's estimates. "You need data from each electric utility to model how it'll respond to the new incentives it'll face under A.B. 32, and then you add those up to get at the macro economy." The law's incentives and regulations should spur innovation enough to create a net increase in jobs and income, he said.

The value of yesterday's analysis, he said, lies in its "dream team" of economists, led by Larry Goulder of Stanford University. "The main difference I see is getting blue-chip economists who they're regularly talking to by phone," he said. "That raises my confidence."

Environmentalists also made the point that economic modeling can't capture technological leaps. "Keep in mind that these modeling studies are conservative because they can't predict the range of breakthrough innovations that the proposed policies will inspire," said Jamie Fine, an economist with the Environmental Defense Fund.

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