As I read this LA Times article, I see that a real debate is about to begin on California's carbon cap and trade program. A basic question in public finance economics focuses on economic incidence. In English, who bears the costs of new regulations such as higher gas taxes? This matters because California's cap and trade program will raise gas prices and electricity prices and water prices. We can (and should) debate how much they will increase.
In my own research, I have documented that suburbanites and Republicans do not support California's cap and trade program. This suggests that such individuals do not believe that they can easily adapt to higher energy prices.
Imagine a case where I own a 30 MPG vehicle and I drive 15,000 miles per year and the price of gasoline is $2.5 per gallon. So, my annual expenditure on gasoline = (15000/30)*2.5 = $1,250.
Now suppose that if the price of gasoline increases to $3 per gallon because of cap and trade regulation, suppose I buy a car that achieves 40 MPG and I drive 12,000 miles a year. These would be substitution effects induced by the carbon tax. Ignoring the transaction costs of trading my original car and buying the new one; my new annual expenditure on gasoline would be (12000/40)*3 = $900
So, because of my responsiveness to gas prices (elasticity of demand) the regulation has reduced my expenditure on gasoline by $350 per year. But, we see many suburbanites and rural people concerned about these regulations. This suggests that people cannot easily adapt to these new incentives.
I have argued that the Air Resources Board should be collecting panel data by household across California to study how diverse drivers and electricity consumers in the residential, industrial, and commercial sectors are consuming energy. Such information is essential for judging how the middle class will adapt to rising prices.
I teach my USC students that a rich household in downtown San Fran can easily adapt to this carbon pricing. Such a household may already have solar panels and drive a Prius and is living a low carbon public transit friendly, walking new urbanist lifestyle. Those who will bear the burden of regulatory compliance live in poorer, hotter places such as Bakersfield.