Cutting pollution in a cost-effective way

Recently California’s clean energy and pollution law, AB 32, observed its first auction of pollution permits. Much has been said about the impact of this auction on California’s economy, with competing interests making differing claims.


As economists and academics, we believe the auction and AB 32’s carbon market will help California meet its environmental standards affordably — and in a way that will be good for our state’s economy. Economists know that market incentives, like those created under AB 32, drive innovation and attract investment. Further, a carbon market provides financial incentives for large industrial sources to cut emissions, leveling the playing field, and fostering the development of new technologies.


By creating a market for trading pollution permits, and by auctioning these permits instead of giving them away for free, California is creating a flexible program for major emitters to cut pollution in the most cost-effective manner possible. Under the program, businesses – and not government – decide how to cut pollution, whether through capital improvements, investing in offsets, or buying additional permits. The bottom line: emitters can choose what works best for them.


Despite the claims by some about the costs of the AB 32 program, incentivizing efficiency will boost California’s economy. The market certainty provided by California’s clean energy and environmental policies prompts venture capitalists to invest in our state’s clean tech firms. These clean economy entrepreneurs grow their businesses and create jobs by providing large emitters with tools to cut pollution and improve efficiency.


California has constructed smart energy and pollution strategies that also make good economic sense. Our economy will grow and become more resilient, as it also becomes cleaner, more innovative, and less carbon-intensive. Californians will reap long-term benefits from AB 32, and the state’s global economic leadership will carry on. — Ed’s Note: Dr. Sudip Chattopadhyay is a Professor of Economics and Chair of the Department of Economics at San Francisco State University. Dr. Michael Hanemann is Wrigley Professor of Sustainability in the Economics Department at Arizona State University and Chancellor’s Professor Emeritus in the Department of Agricultural & Resource Economics at the University of California, Berkeley.

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