CARB Scoping Plan Ignores High Price Tag of Climate Change Law

The high price tag of California’s Global Warming Solutions Act of 2006, or AB 32, is largely ignored in a draft-scoping plan presented today by the California Air Resources Board (CARB). Californians could expect higher energy costs, millions of dollars in lost Gross State Product and widespread job loss under the new law, according to Dr. Margo Thorning, Senior Vice President and Chief Economist for the American Council for Capital Formation. Thorning testified on AB 32 during the hearing process two years ago and presented a wide body of economic forecasts in a special report prepared on the arbitrary, California-only cap proposal.

“The facts remain as relevant today as they did two years ago, AB 32 will result in a lot of economic pain for Californians,” Dr. Thorning said. “The cap and trade system will cause ‘leakage’ of industry to states and countries with no mandatory emission caps resulting in job losses and higher energy prices. This is a high price tag to pay for no net reduction in greenhouse gases.”

Further compounding the problems of AB 32 is the economic downturn gripping the nation. California faces very tough challenges given the fact that real Gross State Product has grown significantly more slowly than that of its neighboring states in recent years. California’s real GSP grew at an average annual rate of only 2.7 percent from 2001 to 2007, compared to 4.4 percent in Arizona, 5.0 percent in Nevada, and 3.6 percent in both Oregon and Idaho. California’s AB 32 will make it that much more difficult to retain industry and jobs and to increase real income in the state.

“Further, we must question any claims by proponents of the California emissions cap that it will not hurt all California residents and its industries, including manufacturing. AB 32 limits energy choices for families, making gasoline and electricity more expensive through these concealed taxes, and forces electric utilities to change their plans for obtaining electricity,” Thorning continued.

An ACCF analysis of AB 32 includes the following findings:

Effects of a Mandatory California-Only Emissions Cap

-A major stumbling block to reducing California’s emissions to the AB 32 target (1990 emission levels by 2020) is the fact that its own forecasts show a sharp increase in baseline GHG emissions, resulting in a 41 percent “gap” in 2020 between the AB 32 target and the baseline forecast. In addition, California’s population will increase from 37 million people in 2004 to 44 million in 2020. Population growth further compounds the difficulty of reducing emissions because more people increase energy demand for home heating, industry and transportation. Over the entire 1990-2000 period per capita emissions in California fell by only 2.9 percent. Meeting the AB 32 target would require a 30 percent drop in per capita emissions between 2000 and 2020. The technologies simply do not exist to reduce total (and per capita emissions) over the next 14 years by the amounts mandated in AB 32 — to say nothing of the time and expense required to replace existing energy using equipment — without severely reducing the growth in California’s Gross State Product (GSP) and in employment.

-While California hopes that its membership in the Western Climate Initiative (WCI) will reduce the cost of AB 32, the other ten states and Canadian provinces in WCI are also faced with growing GHG emissions and increases in population. For example, Arizona’s GHG emissions are projected to rise by 80 percent over the 2000-2020 period and its population will rise by 63 percent over the same period. Thus, the price of a ton of CO2 is likely to be high if the other WCI members adopt similar mandatory GHG reduction targets to those of California.

-An analysis by the American Council for Capital Formation and the National Association of Manufacturers shows that if the U.S. had adopted the federal Lieberman/Warner bill (S.2191 with its target of reducing GHGs by 15 percent below 2005 levels by 2020 and by 70 percent by 2050), California would have lost income and jobs. The ACCF/NAM Analysis shows that rising energy prices would reduce real Gross State Product in California by $20 to $30 billion by 2020, income would fall by as much as $4,032 per family of four (in 2007 dollars) and there would be as many as 195,528 fewer jobs (even after taking account of more jobs in “green industries”). In addition, the state hospitals and schools would face increases in their energy budgets of 20 to 24 percent by 2020 and 64 to 84 percent by 2030. The AB 32 GHG reduction targets are tighter than those in the Lieberman/Warner bill, especially when California’s renewable energy targets are factored in (33 percent renewable energy by 2020). Thus the results of the ACCF/NAM analysis understate the economic impact of AB 32 on California, particularly when you consider that California will be “going it alone” and thus subject to more leakage of jobs than would have occurred under a mandatory nationwide emission reduction scheme.

Climate Change Draft Scoping Plan Pursuant to AB 32: Specific Issues and Concerns

-The economic analysis in Scoping Plan’s Economic Analysis Supplement underestimates the costs of the recommended GHG reduction measures. For example, the discount rate used in the Scoping Plan for evaluating whether a new capital equipment purchase will pay for itself in an acceptable time period is only 5 percent. Most businesses and households use a much higher discount rate (15 to 20 percent) when evaluating whether to invest in new appliances or capital equipment. Thus, use of an inappropriately low discount rate overestimates the cost savings from the measures CARB recommends to reduce GHGs. The CARB’s own analysis shows that the cost of meeting various provisions, including the Renewable Portfolio Standards will be quite high (even with the too low 5 percent discount rate). For example, the 33 percent RPS will cost $84 per ton of dollars per million tons of CO2 equivalent; CARB expects the RPS to account for about 16 percent of the CO2 reductions identified in their report. Electricity costs in California will surge and households and businesses already pay among the highest electricity cost per kilowatt-hour in the U.S.

-Overall the CARB economic modeling appears to reflect a “forced-march” toward renewables, alternative energy and manufacturing technologies based on inappropriate assumptions and a flawed understanding of consumer behavior and business investment decisions. In addition, the CARB report is essentially recommending to policymakers that the state move forward with various GHG reduction strategies without a detailed, peer-reviewed economic analysis.

“Energy use and economic growth go hand in hand, so helping the developing world improve access to cleaner, more abundant energy should be our focus. Reducing emissions in the developed countries should not take priority over maintaining the strong economic growth necessary to keeping California one of the key engines for global economic growth,” concluded Thorning.