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California's Economic Climate Change Denialism

There's no free lunch when it comes to cutting greenhouse gases

Ronald Bailey
July 21, 2009

In 2006, Gov. Arnold Schwarzenegger and the California state legislature decided that each and every man, woman, and child in California should eliminate 4 tons of CO2 emissions by 2020. And so America's first mandatory cap on greenhouse gasses, the Global Warming Solutions Act, became law. The state must now reduce its emissions to below 1990 levels, a 30 percent reduction from projected business-as-usual emissions, essentially cutting the allotment of carbon dioxide equivalent from 14 tons to 10 tons per person.

Opponents of the bill worried that deep, rapid cuts in emissions would hurt the state's economy. But never fear: In 2008, the California Air Resources Board issued a study reassuring Californians that they can make money hand over fist selling each other wind turbines and electric cars. Implementation of the cap "creates more jobs and saves individual households more money than if California stood by and pursued an unacceptable course of doing nothing at all to address our unbridled reliance on fossil fuels," the study cheerfully declared. Because by 2020 the mandates will increase economic production by $27 billion, boost personal incomes by $14 billion, raise per capita incomes by $200, and produce an additional 100,000 jobs. According to the study, "the bulk of the economic benefits are the result of investments in energy efficiency that more than pay for themselves over time."

The study projects that Californians will offset higher electricity and gasoline bills by driving more fuel efficient cars, by adjusting their thermostats to 68 degrees in winter and 78 degrees in summer, and by using energy efficient appliances at home. The idea is that while electricity will cost more, Californians will do things like switching from incandescent bulbs to energy thrifty compact fluorescent bulbs to reduce their energy usage.

But are these projections accurate? The study's economic peer reviewers don't think so. For example, UCLA economist Matthew Kahn warned that the cap "is presented as a riskless 'free lunch' for Californians." He noted that California's electricity prices are projected to increase by 14 percent, yet manufacturing employment is also supposed to increase by 0.4 percent. "This is a surprising finding," writes Kahn. "The micro-econometrics literature has concluded that increased energy prices retards manufacturing employment growth." He cites studies showing that cities with high electricity prices lose manufacturing jobs. Another peer reviewer, Harvard University economist Robert Stavins, bluntly states that the study's analysis is "systematically biased (and remarkably, internally inconsistent) in ways which lead to potentially severe underestimates of costs."

No one denies that energy prices will go up. Successful implementation of the Global Warming Solutions Act requires that 33 percent of the state's energy come from renewable sources by the 2020 deadline. Recent research finds that when states establish renewable portfolio standards for electricity, they pay on average 2 cents more per kilowatt-hour more than states that do not have such standards. That might not sound like much, but it's an 8 percent increase. California already ranks seventh in the nation based on how much California businesses, on average, spend for electricity. Only businesses in three very hot southern states and three very cold northern states spend more.

California gasoline taxes amount to 63.9 cents per gallon, the highest in the nation. Gasoline costs more in the Golden State than anywhere else in the lower 48 states. It is true that California is the fourth lowest state in per capita energy consumption. While some of the lower energy usage can be attributed to higher residential energy efficiency standards, substantially higher than average residential and commercial electricity rates also depress demand. The new mandates would add to the heavy regulatory burdens under which California businesses already groan. The Small Business Survival Index ranks California 49th among all states for business friendliness, just beating out New Jersey as the least business friendly state in the Small Business and Entrepreneurship Council's annual rankings.

Yet the California Air Resources Board predicts that increasing energy prices and implementing new regulations in California will improve the state's economic outlook. A 2007 study by the Electric Power Research Institute begs to differ; the non-profit electricity industry think tank found that "the cost of meeting the stated 2020 emission reduction goal could range from $104 billion to $367 billion of reduced consumption (discounted present value through 2050)."

Last week, the California Small Business Roundtable issued their own report, charging proponents of the 2006 global warming mandate with wild optimism about its alleged beneficial economic effects. The report notes that California's 700,000 small businesses comprise 99 percent of all employer firms, provide 52 percent of all jobs, and contribute 75 percent of gross state product. Using the California Air Resources Board's own figures, the new report finds that the annual implementation costs would likely result in a loss of $182 billion in gross state output and 1.1 million fewer jobs. The business losses would occur in part because regulations would increase costs to consumers whose discretionary incomes would be reduced by about $3,800 per year as they paid more for housing, transportation, natural gas, electricity, and food.

The California Air Resources Board issued a fanciful study finding that mandates to cut greenhouse gas emissions will cost Californians essentially nothing. This is pure California dreaming. In his stinging critique of the study, Harvard economist Stavins said that putting the world on a less carbon-intensive path will require serious policy and sacrifice. "This will not be easy, and it will not be cheap," he wrote. "Indeed it will be costly." Telling the public anything else is just climate change economic denialism.

Ronald Bailey is Reason magazine's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books. This column first appeared at Reason.com.


Ronald Bailey is Science Correspondent


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