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California Counts the Cost on Climate Change Legislation

Written by Amy Kaleita, Ph.D

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Pacific Research Institute (PRI)

Last week, an investment management and advisory firm comprised of professors from California State University, Sacramento, released a report attempting to estimate the costs to small businesses - and therefore to California's economy - of implementing Assembly Bill 32, the Global Warming Solutions Act of 2006. While the Varshney & Associates report has been criticized by some, it represents an important part of a responsible approach to concerns over climate change. 


AB 32 is a plan to reduce greenhouse gas emissions in California to 1990 levels by 2020, and by 80 percent by 2050. California's Air Resources Board, or CARB, is charged with imposing and enforcing measures to reduce greenhouse gas emissions from nearly every phase of life and work in the state. Late last year, CARB released their "scoping plan" describing how they intend to implement the Global Warming Solutions Act.

The new study, Cost of AB 32 on California Small Businesses, commissioned by the California Small Business Roundtable, concluded that the plan could result in average annual losses of $182.6 billion in gross state output, from small businesses alone. That would translate to nearly 1.1 million lost jobs. The report also estimates a reduction of more than 25 percent in the average family's discretionary spending.

Critics have downplayed the validity of this report, charging that it does not consider the potential economic benefits and savings to the state because of energy efficiency, "energy security," and technology industry stimulation. Indeed, over the long run, Californians may save money from more energy-efficient technologies and decreased needs for additional energy infrastructure.

Those results, however, will be a relatively long time in coming, and the value of the potential benefits is difficult, if not impossible, to estimate realistically. As noted by the study's authors, "the savings identified by CARB are considered too speculative to consider at this time, in part because the outcomes are uncertain and the savings require major investments by businesses and/or consumers that might not be possible."

That is particularly the case now, when small and large business are increasingly feeling the squeeze of a sluggish economy and tightening credit. California's Global Warming Solutions Act imposes implementation costs upfront. The payoffs, on the other hand, are slow and uncertain. That dynamic means that many small businesses will be even more at risk than they are now, a state of affairs the state probably cannot afford.

California is staring down the barrel of a $26 billion budget deficit, handing out IOUs to state employees, and its bonds are "within spitting distance of junk," as The Economist put it. In May, California's unemployment rate climbed to 11.5 percent, the highest since 1941. Nationwide, almost half of the cities with unemployment rates exceeding 15 percent are in California.

What's more, the report is hardly inflating the costs of implementing AB 32. Citing the uncertainties even in the upfront costs, the researchers used an initial cost of just under $25 billion in determining potential impact. They note that the actual implementation costs could be upwards of $100 billion. Contrast this with the approach taken by CARB.

Their own peer-review panel unanimously criticized CARB's assessment of the economic impact of AB 32. Several even noted that the state "handpicked" data to bolster the economic impacts of the plan. Further review by California's independent Legislative Analyst's Office found that "The plan's evaluation of the costs and savings is inconsistent and incomplete."

Cost of AB 32 on California Small Businesses has also drawn fire because it was commissioned by the Small Business Roundtable. That is hardly a valid argument and ignores a key reality. The state of California shows little interest in a rigorous assessment of the costs of implementing AB 32. It is therefore both reasonable and necessary that other entities step up to the plate. That is particularly true of those most likely to be most immediately and significantly affected by the measure.

AB 32 may not be a "solution" to global warming but reducing greenhouse gas emissions is costly. As the Varshney & Associates report notes, the economic damage to California is high, particularly to small business, the backbone of the economy. That reality is unpopular among those who feel that no cost is too great, but the costs remain a necessary part of the dialogue on the appropriate response to climate change concerns.

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