Arbitrary California-Only Cap Wrong Solution to Climate Change Issues

California’s Assembly Bill 32 Will Result in Higher Energy Costs, Reduced GDP and Significant Job Loss

American Council for Capital Formation
By Margo Thorning
June 16, 2006

Media Contact: Mike Burita 202.675.6990

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Sacramento – Californians could expect higher energy costs, millions of dollars in lost gross state product and widespread job loss under California’s Assembly Bill 32, according to a report released today. Dr. Margo Thorning, Senior Vice President and Chief Economist for the American Council for Capital Formation, provides a wide body of economic forecasts in a special report prepared on the arbitrary, California-only cap proposal currently pending in the California state legislature.

“AB 32 is likely to cause “leakage” of industry to states and countries with no mandatory emission caps resulting in job losses and no net reduction in GHGs,” Dr. Thorning’s analysis concludes. “Given the quality and quantity of empirical research demonstrating that near-term targets and timetables for CO2 emissions reductions will negatively impact California without materially slowing the growth of global emissions, policymakers in California should consider carefully whether they want to proceed down this path alone.”

Further evidence of the economic challenges California faces is the fact that its real Gross State Product has grown almost 50 percent more slowly in recent years than that of neighboring states. While California’s real GSP grew at an average annual rate of 3.5 percent from 2002 to 2005, Arizona’s grew at 4.9 percent, Nevada’s at 6.5 percent, Oregon’s at 5.5 percent and Idaho’s at 5.5 percent. If California adopts carbon caps it will be that much more difficult to retain industry and jobs and to increase real income in the state.

“Further, we must question any claims by proponents of the California-only emissions cap that limiting energy choices for families, making gasoline and electricity more expensive through these concealed taxes, or forcing electric utilities to change their plans for obtaining electricity will not hurt all California residents and its industries, including manufacturing,” continued Thorning.

Thorning’s report includes the following findings:

Effects of a Mandatory California-Only Emissions Cap

• A major stumbling block to reducing California’s emissions to the AB 32 target (1990 emission levels by 2020) is the fact that its own forecasts show a sharp increase in baseline GHG emissions, resulting in a 41 percent “gap” in 2020 between the AB 32 target and the baseline forecast. In addition, California’s population will increase from 37 million people in 2004 to 44 million in 2020. Population growth further compounds the difficulty of reducing emissions because more people increase energy demand for home heating, industry and transportation. Over the entire 1990-2000 period per capita emissions in California fell by only 2.9 percent. Meeting the AB 32 target would require a 30 percent drop in per capita emissions between 2000 and 2020. The technologies simply do not exist to reduce total (and per capita emissions) over the next 14 years by the amounts mandated in AB 32 - to say nothing of the time and expense required to replace existing energy using equipment - without severely reducing the growth in California’s Gross State Product (GSP) and in employment.
  
  
• If the U.S. had adopted the Kyoto Protocol (a target of 7% below 1990 emission levels by 2010), California would have lost income and jobs. Analysis shows that rising energy prices would reduce real gross state product in California by 3.0% in 2010, income would fall by $1600 per family of four (in 2006 dollars) and there would be 278,000 fewer jobs. In addition, the state would lose $14.3 billion in tax revenue (in 2006 dollars). Although the DRI/WEFA emission reduction targets are somewhat tighter than those in AB 32, a California law enacted in 2002 requiring that a 20 percent renewable portfolio standard (RPS) be implemented by 2017 makes the two scenarios reasonably comparable due to the high cost of renewable power compared to conventional sources of electricity, particularly when you consider that California will be “going it alone” and thus subject to more leakage of jobs than would have occurred under a mandatory nationwide emission reduction scheme.

Climate Action Team Report: Specific Issues and Concerns

• The Climate Action Team’s own report shows that many of the climate strategies under consideration could have adverse economic impacts. For example, the CAT documentation shows that of 33 climate strategies being considered, each additional job created would reduce California’s total income by $200,000 in 2020. Thus, CAT’s own data show the jobs being created do not pay as well as the jobs being lost.
  
  
• Overall the CAT economic modeling appears to reflect a “forced-march” analysis necessarily based on guesses because careful analysis of most of the 44 strategies being considered is not yet complete. The CAT report is essentially recommending to policymakers that the state move forward with various GHG reduction strategies without a detailed, peer-reviewed economic analysis.

“Energy use and economic growth go hand in hand, so helping the developing world improve access to cleaner, more abundant energy should be our focus. Climate change is a global problem and reducing emissions in the developed countries should not take priority over maintaining the strong economic growth necessary to keeping California one of the key engines for global economic growth,” concluded Thorning.
About Dr. Margo Thorning: Dr. Thorning is an internationally recognized expert on tax, environmental, and competitiveness issues. She writes and lectures on tax and economic policy, is frequently quoted in publications such as the Financial Times, Suddeutsche Zeitung, New York Times, and Wall Street Journal, and has appeared internationally on public affairs news programs. Dr. Thorning has made presentations on the economic impact of climate change policy at forums sponsored by the ICCF, as well as groups such as the Organization for Economic Co-operation and Development (OECD); the French Council of Economic Advisers; the International Chamber of Commerce in Paris; the European Commission; the American Chamber of Commerce in Brussels; the International Federation of Industrial Energy Consumers; and the Centre for Global Energy Studies in London.

About Dr. Thorning: In North America, Dr. Thorning has testified as an expert witness on capital formation and environmental issues before various U.S. congressional committees, including the Senate Environment and Public Works Committee, the Senate Energy and Natural Resources Committee, the Joint Economic Committee, the Senate Governmental Affairs Committee, the House Ways and Means Committee, the House Commerce Committee, and the House Committee on Government Reform. She also serves on DOE's Electricity Advisory Board's Subcommittee on Standards of Conduct and Corporate Practices. She also has testified before the Senate of Canada on that country's proposals for tax reform.

The American Council for Capital Formation (www.accf.org) is a nonprofit, nonpartisan organization dedicated to the advocacy of tax and environmental policies that encourage saving and investment. The ACCF was founded in 1973 and is supported by the voluntary contributions of corporations, associations, foundations, and individuals.

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