The Climate Fight Heads to California

In 2006, California passed AB 32, a law mandating the installation of a cap-and-trade program in 2011 and aiming to reduce greenhouse-gas emissions to 1990 levels by 2020 and to 80 percent below 1990 levels by 2050. Now, with the financial backing of the oil industry, Proposition 23 has made it onto California's 2010 election ballot. This initiative would suspend implementation of AB 32 until the state's unemployment rate drops below 5.5 percent, effectively killing it. With the demise of a national cap-and-trade system in the Senate, ground zero for the climate-change fight will shift to California this November.

TAP talked to Matthew Kahn, a professor of environmental, urban, and energy economics at the University of California, Los Angeles, to get a sense of what's at stake.

What would the environmental, economic, and political consequences be if AB 32 gets undone in November?

The optimists say the future of California isn't Hollywood, and it isn't the military. It'll continue to be Silicon Valley. But it'll also be the green economy, and AB 32 could help the state play this leadership role at the forefront of green tech -- whether that's solar, wind, or electric cars like the Tesla. That this helps California, in the long run, to renew its economy. The opponents of AB 32 say it's well-meaning regulation but will raise electricity prices, and during a time of high unemployment that's the last thing the state needs.

It's an empirical question if it would significantly raise electricity prices. Then there's the second question of whether firms would actually leave California in the face of those higher prices. My short answer is that there could be a small impact on electricity prices, but I don't think it would increase the state's unemployment rate in the short run. California's already expensive in terms of land and regulation. When a firm locates here, what it's getting is a high amenities state. So, happy workers and highly educated and skilled workers.

So there are many different kinds of implicit or structural benefits a firm might get by relocating to California, and whatever problems we might have from the cap-and-trade bill would be marginal in that case?

Yes. There's no free lunch. And when a business comes to California, they know there's going to be regulatory headaches, there's going to be high land-rental prices, and it is possible there'll be slightly higher electricity prices moving forward. But offsetting that is the variety of benefits we just listed. I think that the typical firm already in California is not at the margin and is unlikely to be pushed out by perhaps a 5 percent increase in electricity prices -- but perhaps not even that high.

Five percent tops, that's it?

That is my intuition. But economists have been debating. ... That's me really rubbing my belly. I would put a large confidence interval on that. I've been fighting with other economists who are more confident in their predictions, with their crystal ball of what will happen. I am an optimist that in the medium term AB 32 will help to nudge the California economy in the right direction. I don't believe that there will be short-run significant costs, but you have to make some assumptions to generate that optimistic prediction.

AB 32 required the state board in charge of its implementation to do a study [PDF] of the legislation's possible economic effects. Their initial results said AB 32 would have modest positive results for California's economy, but in your peer review you were pretty tough on their modeling, right?

At the very top of my report I came out as a supporter of AB 32, but then I beat up hard on the actual economic analysis. Some Berkeley researches, they had a mathematical model which to me displayed too much confidence that they knew, kind of like Nostradamus, the future in the face of AB 32.

But here's the good news. They've paid much more careful attention to seeking input from economists in the last year, and this has made me even more confident that this regulation is going to be cost-effective.

The oil companies have an obvious interest in killing AB 32, but that their initiative got onto the ballot implies that their argument -- that AB 32 will kill jobs and hurt California's economy -- has caught the imagination of some voters.

I have a new paper on this point. Matt Kotchen of Yale and I, we used Google Insights to look at how many people are searching for the words "global warming" versus "unemployment," and we showed that as a state's unemployment rises, the count of people searching for global warming goes down. People are just not in the mood to talk about climate change in the midst of a recession.

We sort of have a fear of the unknown. AB 32 is new stuff. And you don't have to be a conspiracy theorist to see that there could be a link between putting a price on greenhouse-gas emissions and increasing job insecurity. That's not a crazy jump. So politically, the opponents of AB 32 struck at just the right time.

Will the failure of cap-and-trade in the Senate have any kind of ripple effect for California?

I actually want to answer your question in the reverse. I'm a big believer in experimentation, and letting a thousand flowers bloom. My hope here is that [the ballot measure] fails, AB 32 goes forward, and the rest of the nation sees that California is succeeding. There are other states, like Massachusetts, New York, Washington, Oregon, that would start to mimic pieces of what AB 32 has done right. So I would call California the guinea pig. We're doing the rest of the country a favor. And those ideas that succeed here are likely to be adopted in other parts of the country.

How do you sell the idea of California being a guinea pig?

Personally, I take pride in that. A society needs first movers. In a world of uncertainty, we need somebody to be the risk taker. And whether you're a hero or a sucker is sort of in the eyes of the beholder. And I view us as a hero here.

President Obama, now that he has failed at the federal level, might want to think through how he can reward good behavior at the local level. There might be marginal states -- states just on the threshold, having the same left-right fights -- that might be pushed to go green.