Going it alone on climate legislation

Posted by Kathy Baylis on Sep 20, 2010

Filed Under (Environmental Policy)

On November 2, California will vote on proposition 23 that postpones the move to a cap and trade system for greenhouse gas emissions until four consecutive quarters of an unemployment rate of 5.5, a condition that, according to a recent NYT article  has only been met 3 times over the past 40 years.  This proposition would essentially kill the 2006 California legislation that mandated the state to reduce emissions to 1990 levels by 2020. 

Opponents to the legislation argue that the legislation raises costs for California businesses, potentially driving firms across the state line while  California will not be able to capture much of the benefit of greenhouse gas reduction.  In economics terms, we might well be concerned about so- called leakage, where environmental regulation in one area just pushes the polluting activity next door.  An energy producer required to pay for carbon-dioxide generated from a power plant within California might just transfer some of that production capacity to plants outside of the state, both reducing jobs in California while having no effect on emissions.  Add to this the fact that because climate change is a global problem, most of the environmental benefits of any hard-fought-for emissions reductions will go to regions outside of California, raising the question as to why a jurisdiction would ever want to go it alone to reduce greenhouse gases.

So why go it alone?  Green jobs.  The opponents to proposition 23 note that the burgeoning green energy sector in  California is a source of jobs, with good potential for future employment growth as other jurisdictions move toward regulating emissions and import ready-made green technology from California providers.  In an op-ed article George Shultz, Reagan’s secretary of state compares California’s move on climate change legislation to the state’s earlier first mover experiments on clean air. “In the four years since California’s clean air standards were passed, clean energy investment has tripled. About three of every five venture capital dollars nationwide has been invested in California companies, with about $2.1 billion worth of clean energy investments in 2009 alone. “ Tom Friedman in the New York Times Sunday noted that China is making great strides in terms of encouraging green technology, at least in part as a jobs creation strategy. 

Demonstration Effect.  The real reason to make the first move is the hope that one can bring other jurisdictions on board by example.  If California can demonstrate that greenhouse gases can be reduced without large-scale job losses, it may make climate change legislation more appealing at the federal level.  Arguably, California’s tighter vehicle emissions helped the federal government impose stricter emissions regulations after auto manufacturers had already developed the technology and shown that it was possible to meet these higher emissions standard.  The Western Climate initiative is evidence that this demonstration effect may well be working.

What about leakage?  In a recent talk at the University of British Columbia, Stanford Economist Larry Goulder notes that policy options exist to mitigate against the leakage effect. The state could impose a form of border tax, or force utilities selling electricity to account for the emissions produced in the generation of that electricity regardless of where the generation occurs.  If these approaches ran up afoul of Interstate Commerce rules, California could tie the allocation of future permits to output of the good itself or the use of a input, implicitly subsidizing production.  Granting permits on the basis of using an input that substitutes for pollution in the production process may give firms an extra incentive to adopt pollution-reducing technologies.

Last, California is not really going it alone.  Along with multiple initiatives across U.S. states, two jurisdictions in Canada have bucked the tax cut trend and gone to the length of imposing an explicit carbon tax.  Quebec was the first North American jurisdiction to impose a carbon tax in 2007.  The tax itself is small (around $1.16 per ton of CO2) and limited to the use of hydrocarbons (petroleum, natural gas and coal).  A year later, British Columbia imposed a larger and broader-based carbon tax of around US$7.80 per ton of CO2, which is to increase to $23.50 by 2012.  Thus, despite the hold-up of legislation at the national level, other regions are pushing ahead with climate change legislation

One of the biggest arguments against national level climate change legislation has been that the United States or Canada needs to wait for a multilateral agreement before moving ahead. In short, that there is no advantage to unilateral action against this global environmental problem.  Other jurisdictions have argued with their feet that waiting for joint action is not the only solution.