Next Thursday the California Air Resources Board (CARB) will achieve a milestone in environmental regulation when it will likely adopt a Final Scoping Plan to implement the Global Warming Solutions Act of 2006. Perhaps the most far-reaching regulatory effort ever undertaken by a governmental agency, this plan will touch every aspect of Californians’ lives and the economy. But lost in the ceremony surrounding the plan – adopted even as California tumbles into the worst recession in a quarter century – is an honest assessment of its effect on Californians and our economy.
The Board has proposed an exhaustive list of measures to achieve a 30 percent reduction in California’s greenhouse gas emissions by 2020 – from what would have been a “business as usual” pace, or an absolute 15 percent reduction from today’s levels. This will require enormous investments in renewable energy technologies, smaller and more fuel efficient automobiles, and pervasive, expensive energy efficiency measures, as well as reduced driving and other energy-intensive economic activities.
Nonetheless, per AB 32, the ARB conducted its own economic analysis, and concluded that full implementation by 2020 will actually increase the gross state product, increase overall and per capita personal income, and increase jobs – albeit all by trivial amounts. In fact, the ARB characterizes this effort as “a magnificent opportunity to transform California’s economy into one that runs on clean and sustainable technologies, so that all Californians are able to enjoy their rights to the future to clean air, clean water, and a healthy and safe environment.”
Sounds too good to be true? Well, it is.
Over the last several months at least four studies from prominent economists or analysts have debunked the Board’s economic analysis, all of which imply or outright state that the economic impact on California will be harmful.
Most damning is a set of comments from peer reviewers recruited by the California Environmental Protection Agency itself. Two reviewers from the Pew Center on Global Climate Change, Janet Peace and Liwayway Adkins, said, "Unfortunately, the Economic Analysis Supplement, in its current form, gives the appearance of justifying the chosen package of regulatory measures rather than evaluating it or looking at policy options." Prof. Robert Stavins from Harvard University said that, because the state did not compare the chosen course of action to alternatives, "it is absolutely impossible to use the present economic analysis to determine whether CARB’s Scoping Plan represents a truly cost-effective means of reducing California’s contribution to greenhouse gas concentrations in the atmosphere."
Prof. Matthew Kahn of UCLA took issue with, among other things, the effect – or absence – of federal climate legislation. "Put simply, if California unilaterally regulates carbon while the rest of the nation does nothing, do the optimistic ‘negative cost’ results stand up? What firms will leave California? What new firms who would have moved to California in the absence of AB 32, will now choose to locate in a state without carbon regulation?"
And that is only one set of economic experts.
The Legislative Analyst, the highly respected, nonpartisan adviser to the Legislature, found that the Scoping Plan’s "evaluation of the costs and savings of some of the recommended measures is inconsistent and incomplete. The plan does not reflect the costs and savings of all of the emissions reduction measures that it recommends. This is because, in some cases, ARB has intentionally excluded the costs and savings of certain measures…has yet to develop the costs and savings associated with its measures …or acknowledges that the assumptions behind its estimates of costs and savings are weak at present…"
The Analyst was also one of the only commenters who has pointed out the obvious: "It appears that ARB selected measures for inclusion in the scoping plan and then conducted its economic analysis of the plan as a whole after the fact. Selection of particular measures and the mix of measures appear not to have been directly influenced by cost-effectiveness considerations or macroeconomic analysis. In fact, ARB deemed all measures included in the plan “cost-effective” simply because they reduce GHG emissions, whatever the cost."
The LA County Economic Development Corporation, while satisfied with the economic model, criticized the analysis’ assumptions, such as ignoring likely future behavioral changes by the public in the absence of these regulations. More telling is their criticism that in concluding that new energy efficiency technologies will overcome the inevitable higher prices for electricity and natural gas, "CARB’s analysis overlooks several important factors: cost, uncertainties, upfront investment, and distributional considerations." In other words, the CARB analysis did not adequately explain how sufficient efficiencies could be incorporated by 2020 to effect a net reduction in overall electricity costs to the consumer.
Finally, the Analysis Group, a private consulting firm that prepared comments on behalf of an industry organization, concluded that the analysis cannot be used to determine whether the Scoping Plan reflects the most cost-effective means of reducing greenhouse gases. "CARB analyzes the Scoping Plan’s impact relative to a baseline scenario that is arbitrarily defined and internally inconsistent. As a result, while CARB recognizes that some of the Scoping Plan’s policies will significantly increase energy prices (for example, an 11% increase in electricity prices and an 8% increase in natural gas prices) and will impose costs on the order of billions of dollars per year, CARB’s analysis offsets these clear economic impacts by giving the Scoping Plan credit for various cost-saving energy-efficiency improvements. Yet, if the opportunities for these cost-saving energy-efficiency improvements are in fact real, many of them likely will occur even without the Scoping Plan’s implementation (i.e., they will occur even in the baseline). CARB has not made any serious effort to distinguish which of these cost-saving energy-efficiency opportunities should truly be attributed to the Scoping Plan, and which would occur even in the Plan’s absence. Thus, it cannot credibly claim that the Scoping Plan’s significant costs and impacts on energy prices will be offset by the energy-efficiency improvements that it believes are only possible through the Scoping Plan. This renders CARB’s analysis unreliable and unsound as an assessment of the Scoping Plan’s true incremental impact on California’s economy."
Californians – through their elected officials and as reflected in opinion polls – have decided they want the state to reduce greenhouse gases. The CARB has presented a comprehensive program to accomplish this. The policy decisions have already been made; the least the regulators can do is come clean with the public about the true costs and trade-offs for these monumental decisions. Anything less is an insult to the voters, taxpayers and elected officials who made the decisions in the first place.