Wednesday, December 10, 2008

California's AB32: One More Time

Starting in 2006, California has defied standard "free-rider" logic and has ambitiously pursued a sharp unilateral reduction in its greenhouse gas emissions. Free rider logic would say that this makes no sense. Self regulation is costly and given that greenhouse gas emissions are a world public bad that the private benefits to California from reducing its emissions will be tiny. Consider this arithmetic. If the USA produces 25% of the world's GHG emissions and if California produces 25% of the nation's emissions (this is too large a share); then California currently produces 1/16 of the world's emissions. If we reduce our emissions by 50%, then global emissions decline by 1/8 = 12%. That's a "medium sized" global reduction but India's and China's growth will soon swamp that. Only if AB32 causes new technological advance that wouldn't have happened in the absence of regulation can one truly make the claim that AB32 will achieve its global goals of slowing climate change.

Californians (including myself) have supported AB32. As I have stated before, California has always been an environmental leader/"Guinea Pig". The state's population is not typical of the country. There are more environmentalists here than in other states. I'm worried that if we don't get the details right in designing AB32 that there will be a political backlash against this policy (perhaps 5 years from now) when its true costs from being poorly designed become apparent.

Recently, I have been asked to comment on a series of economic models that have been used to predict AB32's likely effects on the California Economy. To keep this blog post short, these models optimistically predict that AB32 is a riskless "free lunch" with negative net-costs that will help the local economy grow.

For a lot of details please read these;

Sacramento Bee Story on Climate Change Mitigation's Likely Economic Effects in California

Six External Reviews Including Mine

Here is the crux of the issue. Take a random Joe the Plummer. If I approach him and say that I'm offering him a "free lunch", he has no incentive to think hard about the choice that I offer him. When we know that a specific policy (such as AB32) offers benefits but involves costs, we have the right incentives to think hard as voters and policy analysts to get the details right, the implementation issues to help to minimize the costs of the given policy. In the case of AB32, there are many of such details. How much to rely on the Renewable Portfolio Standard? How to design the coming "cap and trade" program for emissions trading? Whether AB32 is a "good policy" hinges on these micro policy design issues. Realistic expectations of the challenges we are committing ourselves to under AB32 helps to put our "feet to the fire" to think things through and to get the details right.