Thursday, July 16, 2009

The Ongoing Fight Over Estimating the Cost of Anti-Carbon Regulation

Varshney & Associates have issued a new consulting report available here that presents new cost numbers on what California's AB32 (carbon mitigation) regulation will cost the average household and the average small business. The authors report enormous cost numbers. According to this report, the average household will face an annual cost of $3,857 per year. That's pretty serious and represents a number more than 4 times larger than the CBO cost estimate evaluating the likely impact of the Waxman/Markey anti-carbon bill past in the House in June 2009.

Here is a brief comment I wrote about their report. In a nutshell, I don't believe their analysis. Read through my numerical examples to get a sense of my points.

The bigger issue here is what role do economists play in ex-ante policy circles as we attempt to inform decision making in Sacramento and in Washington DC? I believe that a key issue here is being honest about what we do know and what we don't know about key behavioral effects. For example, the optimism that learning my doing for green product producers such as makers of solar panels is implicit in the Air Resources Board documents. But, what is the evidence in favor of strong learning by doing effects? Ideally, economists should be consulted about this before regulation is written. I am eager to talk to my friends in Sacramento and offer my informed opinions on helping them to design effective policies for improving California's quality of life that are also cost-effective and improve the incentives of polluters to encourage them to "go green".