Friday, June 03, 2011

The WSJ on the Costs of State Level Carbon Cap & Trade

Perhaps New Jersey's Governor Chris Christie didn't want to pay for the carbon permits to cover his helicopter rides?  Externalizing social costs is a "wise" move.   Today, the Wall Street Journal offers another explanation for why Gov. Christie chose to drop out of the regional RGGI carbon coalition.  The WSJ points to the salient example of Ocean Spray's choice to move from NJ to PA.   Cost minimization suggests that PA may be a better location for their new production facility.  Penn's electricity prices are 50% lower than New Jersey's (or so says the WSJ).    I do not know how much electricity Ocean Spray uses to produce its output but the more energy intensive it is then moving to PA will save it more $.

The WSJ piece highlights why we need more research done by the nerd economists.   How sensitive is the response of job growth to electricity prices? How much will electricity prices go up by as states attempt to introduce renewable portfolio standards and cap & trade programs? 

I support California's AB32 and the RGGI Initiative. In the face of uncertainty but anticipating learning and desiring a "green guinea pig", the right path to pursue here is a credible ramp-up.  For example, California should announce a relatively loose carbon cap in 2012 but credibly commit to reduce the supply of carbon permits it will issue each year by a fixed amount. Over a 30 year period, this cap can get pretty tight but the point is that this will happen gradually in a predictable manner.
When policy gets ahead of the academic research, then anecdotal case studies such as the salient "Ocean Spray" case will dominate the popular discussion.   Critics will cry out; "paralysis by analysis" and there is some truth to this concern but I wish we live in an evidence based world where policies are designed with the input of the research community whose "large sample" statistical research anticipates some of the unintended consequences of well meaning regulation such as cap & trade.  So, in English, how many "Ocean Sprays" are out there?  How many jobs would New Jersey lose because of RGGI participation and how many would it gain as new opportunities are created?  How can each of these be quantified?

Erin Mansur and I have provided some estimates in our paper that we are now revising.