California economy

The non-partisan Legislative Analyst Office (LAO) recently reported implementation of AB 32 – the state’s cap-and-trade law signed by Governor Schwarzenegger in 2006 – will cause ‘economic leakage’ to states in the region with far less regulation.  The LAO evaluated the cost of California’s ‘go it alone’ approach to climate change and found a negative, near-term economic loss.  However, more importantly, not only will implementation harm the state’s bottom line, it will also do nothing to effectively reduce greenhouse gas emissions (GHGs).

 The LAO reported May 13 California’s economy will likely be adversely affected in the near term. Implementing the California Air Resource Board’s (CARB’s) Scoping Plan will raise the state’s energy prices which are already among the highest in the country. This will further impact the state’s economy by causing the prices of goods and services to rise, lowering business profits, and reducing production, income, and jobs. It will also worsen the already devastating state and local budget crises.

 These adverse effects will occur, in large part, through ‘economic leakage.’  In other words in order to avoid such burdensome regulations, businesses already in California will relocate out of state and out-of-state businesses will avoid expanding here. While it is true there will be both winners and losers under AB 32, including gains in so-called “green” jobs, the net economy-wide impact in the near term will likely be negative.

 The LAO only analyzed ‘economic leakage’ but ‘emissions leakage’ is equally important.  Based on data from the Energy Information Administration and Bureau of Economic Affairs, California is already the third best performing state in terms of minimizing GHGs. Every dollar we send out of state (via purchases, outside manufacturing etc.) increases the amount of emissions in states with lower GHG performance records. Depending on where California sends those dollars, the increase in emissions can be anywhere from two to nine times as much. Implementing AB 32 as proposed by CARB is completely counter to the law’s stated intent – to reduce emissions.

 The LAO correctly notes a shift away from manufacturing towards service industries.  While that shift has been going on for years, manufacturing remains a vital aspect of California’s economy along with agriculture and mining. Manufacturing’s contribution remains over four times that of the service sector. These productive areas are particularly trade sensitive, and are critically important to ensuring businesses and individuals acquire enough capital to spend on services like education and transportation.  This aspect of the LAO analysis and, more importantly, the underlying CARB analysis, is particularly troublesome. It ignores the difference in income-producing activities and expenditure activities. This further disregards low wage earners in service sector jobs and associated reduction in taxable state personal income.

There are many sides to this debate but we can all agree California’s economy is in trouble.  We should be taking steps to rectify our problems, not add to them.  Let’s not compound our issues with implementation of AB 32 when we can least afford it.