Thursday, October 1, 2009

The Costs of Cap and Trade in California

In a recent report by Sanjay Varshney, Dean of the College of Business Administration, California State University, Sacramento and Dennis H. Tootelian, Ph.D., Professor of Marketing and Director, Center for Small Business, California State University, Sacramento titled “Cost of AB 32 on California Small Business-Summary Report of Findings," the financial impacts to the economy and people of California to implement California’s greenhouse gas program was outlined. AB 32 establishes a comprehensive program of regulatory and market mechanisms to achieve real, quantifiable, reductions of greenhouse gases (GHG) that were intended to be cost effective. This law establishes a statewide GHG emissions cap for 2020, based on 1990 emissions. California has lead the way in cap and trade legislation and serves as an example to the nation of the concerns and problems with this particular approach to attempt to prevent climate change by controlling CO2 emissions.

The report concluded that when the program is fully implemented, the average annual loss in gross state output from small businesses alone would be $182.6 billion, approximately a 10% loss in total gross state output. This will translate into nearly 1.1 million lost jobs in California. Lost labor income is estimated to be $76.8 billion, with nearly $5.8 billion lost in indirect taxes. The study also found that in order to cope with the increased costs generated by the AB 32 program, consumers will be forced to cut their discretionary spending by 26.2%. The study’s cost analysis was based on the California Air Resources Board’s (CARB) findings, which revealed significant cost increases. The study’s findings are consistent with the Peer Review analysis that CARB commissioned, which also concluded that the cost of the AB 32 Scoping Plan would be significant, and that the California Resource Board had significantly underestimated these costs. Unemployment in California was at 12.2% in August which translates to 2,248,000 people before the implementation of AB 32. If another 1,100,000 people are added to that total unemployment would reach 3,348,000 or 18.3%. In addition, there are both severe budget issues as well as water supply problems.

When fully implemented AB 32 is not going to stop climate change, though it may contribute to an amelioration of the increase in greenhouse gases. Even this modest reduction in CO2 emissions will not be met if the production of CO2 just moves out of state along with the economic activity that is producing the emissions. It is a fairly well known fact that greenhouse gas production is reduced in recessions, and I expect a wonderful report released from the EPA noting the recent reduction in greenhouse gas emissions. As the previous review of global warming research showed some research suggests that climate change may have some anthropogenic causes, but other research does not support that theory. Certainly, anthropogenic activity has contributed 4% of the 386 parts per million (0.039%) carbon dioxide in the atmosphere. If you recall, The "American Clean Energy and Security Act” is HR 2454, also know as the Waxman-Markley energy bill, or simply as "ACES" was passed by the House in June and models itself on the California plan. The bill includes a cap-and-trade global warming reduction plan designed to reduce carbon dioxide emissions in the U.S. No doubt Representative Waxman wishes to share the California economic experience of AB 32 with America and ensure we all reduce our greenhouse gas emissions, economic activity and discretionary spending all at the same time. Is this really how we want to spend the limited resource at our command?

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