CO2 Cap Would Hurt Calif. Economy

Published August 1, 2006

Californians will be burdened with higher energy costs, millions of dollars in lost business production, and widespread job losses under carbon dioxide (CO2) caps proposed in California’s Assembly Bill 32, according to a report released June 16 by Margo Thorning, Ph.D., senior vice president and chief economist for the American Council for Capital Formation.

A.B. 32 directs the California Environmental Protection Agency to create and implement a cap-and-trade limit on carbon dioxide emissions from stationary sources.

Economic Disadvantage

“A.B. 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 [greenhouse gases],” Thorning’s study 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.”

Thorning reports real Gross State Product (GSP) has grown almost 50 percent more slowly in recent years in California than in neighboring states. While California’s real GSP grew at an average annual rate of 3.5 percent from 2002 to 2005, Arizona’s GSP grew at 4.9 percent, Nevada’s at 6.5 percent, Oregon’s at 5.5 percent, and Idaho’s at 5.5 percent.

New caps on CO2 emissions would make it even more difficult for California to retain industry and jobs and to increase real income in the state, the study found.

Unreachable Goals

According to Thorning, meeting the A.B. 32 target–returning to 1990 emission levels by 2020–would require a 30 percent drop in per-capita emissions between 2000 and 2020.

Notes Thorning, “In order to meet the emission reduction target in A.B. 32, per-capita emissions would have to fall by 13.1 percent over the 2000-2010 period and an additional 19.4 percent from 2010 to 2020. In other words, the required reductions in per-capita emissions are 4.5 to 6.5 times greater than what occurred from 1990 to 2000. The technologies simply do not exist to reduce total (and per-capita) emissions over the next 14 years by the amounts mandated in A.B. 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.”

In addition, California’s economy will already be strained by a law enacted in 2002 requiring California to produce 20 percent of its power from renewable sources by 2017.

‘Symbolic, Futile Statement’

Proponents of A.B. 32 “fail to realize that economic growth can have a positive impact on GHG [greenhouse gas] emission reductions,” noted Thorning in her report. “For example, the U.S., with its dynamic economy and voluntary approach to emission reductions, has cut its energy intensity 12.2 percent over the 1997-2003 period compared to only 7.6 percent in the [European Union] with its mandatory approach. Technology development and deployment offers the most efficient and effective way to reduce GHG emissions. The voluntary approach will allow emissions intensity to be reduced in a cost-effective way.

“Establishing a mandatory cap and trade system in California would impede, not promote progress in reducing emissions intensity globally,” Thorning concluded.

Competitive Enterprise Institute Senior Fellow Marlo Lewis said both the legality and likely effect of emission caps are dubious. “There are certainly legal questions regarding a state’s ability to impose its own caps on carbon dioxide,” said Lewis. “But there are practical issues as well. Study after study shows that carbon caps would be tremendously expensive while producing very little real-world benefit.

“A cap on emissions in California, no matter how stringent, will have absolutely no appreciable effect on global temperatures. All such a program would do is economically punish the state’s citizens merely to make a symbolic and futile statement,” said Lewis.

James M. Taylor ([email protected]) is managing editor of Environment & Climate News.

For more information …

Dr. Margo Thorning, California Climate Change Policy: Is A.B. 32 a Cost-Effective Approach? American Council for Capital Formation,