Thursday, 25 March 2010

New AB 32 Cost Studies: What does small mean?

Finally, we have some good economic modelling of AB 32. California Air Resource Board (CARB) and Charles River Associates (CRA) have released a pair of reasonable assessments with good models.

CARB is highlighting the best case scenario, which is roughly no impact, and most media articles are reporting the costs are low or zero. A summary of the results.

CARB: Income declines 0.2% - 1.4%, jobs decline 6,000 to 300,000
CRA: Income declines 1.4% - 2.2%.

I think the most likely case is a decline of 1% to 1.5% of income, and 200,000 to 300,000 jobs. In other words, this amounts to about $500 per capita annually, and an annual cost of $20 to $30 billion.

Can the state afford it? Sure. But is it correct to call it a small cost? Here are some comparisons.

Today, the BEA released estimates of California personal income for 2009. Per capita income in California dropped 3.5% between 2008 and 2009, and it is more like a 5% decline if you don’t count increased government transfer payments like unemployment. We lost roughly 900,000 jobs in California over the same period.

So, the on-going cost of AB 32 on the economy is likely to be about ¼ of our loss in the heart of the recession, and 1/5 to 1/6 of the entire loss in the Great Recession. Certainly, we can survive that, but is it small?

Let’s think of another environmental case: the big Dr. Doom earthquake scenario in the Delta that floods dozens of islands and is said to take the pumps off-line for a year or two. The cost of that has been estimated at $30 billion to $40 billion spread over several years. But that is just a short-term impact whereas the AB 32 costs are perennial. So, the costs of AB 32 are much larger than the big Delta earthquake.

If is said that this Delta earthquake would “cripple” the California economy and cut off it’s “lifeblood.” Well, the costs of AB 32 look to be larger so shouldn’t those same people be saying that AB 32 would kill the economy. (Actually, some folks like Dave Cogdill are consistent with their criticism, I’m thinking more of the Governor here. And I don’t think AB 32 does kill the economy, just as I don’t think the Delta quake is as devastating as it is portrayed.)

The other interesting thing in the CARB report are the estimated costs by industries. These industries will endure above average costs and job loss: construction, transportation/warehousing, agriculture, manufacturing. In other words, the costs of AB 32 will fall directly on the Valley’s economic base. These industries are projected to have below average costs or gains: Information and services, the coastal economic base.

I would recommend some detailed geographical modeling to CARB, and some measures to mitigate the costs on the Valley if my hypothesis is correct.

None of this is to say that we should repeal AB 32 or that the costs are too high for California to afford. But we shouldn’t be too dismissive of these costs either, especially when it comes to the Central Valley.

About the Author

Ethan Jacob

Author & Editor

I am Ethan Jacob Executive Director of the Center for Business and Policy Research at the University of the Pacific, where I have a joint faculty appointment in the Eberhardt School of Business and the Public Policy Program in the McGeorge School of Law..


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