A California Republican State Assemblyman named Dan Logue seeks to delay the implementation of the 2006 AB32 law until the California recession is over. Is this wise public policy? The NY Times “Green Inc Blog” mentioned
his proposed initiative but didn’t bother to delve into the nitty gritty economic issues concerning whether his proposal has any merits.
Before I provide my answer, I should put my cards on the table. The Chair of the Air Resources Board (Mary Nichols) was the Director of my Institute when I joined the UCLA faculty in January 2007. She resigned as Director in July 2007. I also serve on the Air Resources Board’s Research Screening Committee. Some of my recent research has been funded by the Air Resources Board. Most importantly, in fall 2008 I published a critique of the economic analysis predicting the likely consequences of AB32. A copy of my comments can be found here
Put yourself in the shoes of Assemblyman Logue. I have never met him but I doubt that he is a fan of global warming. He must be worried about the standard of living of his constituents. It is certainly a reasonable question to ask how this ambitious complex legislation will affect the economic standard of living of his constituents.
At the heart of AB32 are provisions that will;
1. sharply increase the fuel efficiency of new vehicles driven in California
2. Require new buildings to be much more energy efficient
3. Require electric utilities to produce 33% of their power using renewables (the RPS).
4. Introduction of cap and trade for greenhouse gas emissions;
The WCI cap-and-trade program will cover emissions of the six main greenhouse gases (carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, and sulfur hexafluoride) from the following sectors of the economy:
Electricity generation, including imported electricity
Industrial and commercial fossil fuel combustion
Industrial process emissions
Gas and diesel consumption for transportation
Residential fuel useHere is the Source for the Previous paragraph
I doubt that #1 and #2 will have any impact on the economic livelihood of any of Mr Logue’s district. Hummer drivers will not have the same menu of muscle cars to choose from due to the Pavley Standards. I discuss their "suffering" in my review. In the middle of a recession, there are no new buildings being built.
The more serious issue is how #3 and #4 will affect the California economy in the short term. First, I would like to know what is the penalty that the ARB will impose on electric utilities who fail to meet this target? If PGE or SCE sincerely “try their best” but fail to meet the target, will they be sued for $1 or $1 billion? Who will decide if they did indeed “try their best”?
How are households affected by the 33% RPS in the short run? I would like to ask each of the California major electric utilities what expenditures they will need to make to meet the 33% RPS target. What does their “supply curve” look like? Facing this constraint, what price hikes will they ask the PUC for? If electricity prices will go up, by how much? What economic model is good enough to be used to predict this?
Now, the political challenge here is that by the definition of a recession, people feel that their real income is low. If the 33% RPS does lead to higher electricity prices then this further makes lower middle class households a little bit poorer as the purchasing power of $ declines. There will be diversity. A household who loves its plasma tv will have less purchasing power than a household who meditates in the dark all day long. Now, California’s political representatives are quick to demand that the electric utilities protect the poor against these price hikes so if they listen to the economists they will raise the price of electricity and have targeted income transfers so that the poor’s purchasing power remains unchanged (Laspeyres price index). But, the utility must cover its costs. This means that middle class and rich households will have to cross-subsidize the poor. Perhaps Federal Obama Stimulus money can be used to pay for the subsidy but if it can’t then richer Californians will pay.
During a recession, do the middle class care much less about environmental policy? Unfortunately, according to monthly data from the PPIC think tank, the answer appears to be yes.
I do not support delaying AB32 but I do believe that this nasty recession should be used as a reason to try to achieve its core goals using full economic efficiency. In English, the marginal cost of abating a ton of carbon from each sector should be equalized. If this is not achieved then the rules are inefficient. I am not fully convinced that the 33% RPS is a cost effective policy for achieving AB32’s goals. Like most economists, I want to see the full reduction in carbon placed in the cap and trade program. In a diverse world, pollution permit trading offers us the best chance to achieve environmental goals at the lowest possible social cost.
The Assemblyman’s heart is in the right place but he is not showing much imagination. Every policy has winners and losers and he appears to be fixated on the losers. I am not convinced that the losers lose much. Another random variable is what the winners win. Today there are many small businesses in California gearing up for the “green economy”. Delay AB32 and you pull the chair out from such firms. They have been investing in green tech under the hope and expectation that the "green economy" is coming. Political uncertainty caused by infighting between democrats and republicans creates incentives for new irreversible investment to freeze up. After all, what's the point of making green investments in renewable power generation if one expects that carbon emissions will continue to be priced at $0 per ton! Expectations matter. I continue to hope that AB 32 sends a clear signal to business about gradually modifying their day to day actions starting today in order to meet future goals.
UPDATE: I just received this interesting email. There must be some truth to
this claim below. I grew up in Scarsdale, NY and this is exactly why Scarsdale forbade any rental housing within its borders. But, I wonder why a recession makes this effect worse. The politician I mentioned above was emphasizing the recession.
To: Kahn, Matthew
Subject: Don’t Delay Implementing California’s AB32
I think you're missing the reason for the opposition to AB32. The opposition at the grassroots is technically to SB375. Specifically to the Regional Housing Needs Assessments (RHNAs) which requires that each community accept its share of expected future growth and more significantly requires each community to accept its share of low income housing under the Region Housing Needs Assessments.
The problem is that in a lot of communities the major source of neighborhood equity is the quality of the local schools. Low income students tend to bring down school test scores which in turns hurts local property values.
Its in the small cities like Sierra Madre that are freaking out about the RHNAs. At the moment the City of Sierra Madre has stopped payments on its contribution to the Southern California Council of Governments because the locals are up in arms about low income requirement.
The issue is being framed about AB 32 because when the city talks about why it needs to add more housing (and more low income housing), the city cites requirements under state law to densify in order to minimize global warming under state law. So AB 32 gets blamed.
Technically it would probably be more precise to blame SB 375, but because the mixed income infill is framed as being required to achieve global warming targets, the opposition is thus to all global warming legislation in general including (AB 32). Mixed income infill is no problem in large cities which already have bad schools (City of LA, City of Oakland, City of SF, etc) but in any community where the local neighborhood equity is based upon the quality of local schools they are going to fight this tooth and nail.
I don't know if William Fischel was correct about Serrano influencing California Voters to pass Prop 13, but I suspect we are about to find out.