Cap-and-Trade: California’s New Way to Self-Destruct

Cap-and-Trade: California’s New Way to Self-Destruct

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California claims many proud “firsts” – first Disney theme park, first motion picture studios, first state governed by Arnold Schwarzenegger. Soon it will add: first state to commit fiscal suicide by imposing cap-and-trade regulations. No wonder poppies are California’s state flower.

Fact No. 1: California has more debt than any state in the union. This distinction is bestowed by State Budget Solutions, a non-partisan group that reports annually on states’ financial posture, factoring in oft-hidden items such as future pension obligations and unemployment trust fund loans. Under this approach, California owes $612 billion.

Fact No. 2: California’s financial woes are not limited to future obligations. The state is also running a sizeable deficit, which threatens to trigger cuts to school budgets. Unemployment in the state is currently 11.9 percent, compared to 9.1 percent for the U.S. overall. Meanwhile, the state’s top personal income tax rate is 10.3 percent, topped only by Hawaii and Oregon, and the tax levied on local businesses is just under 9 percent, one of the nation’s highest. In their 2011 assessment for the American Legislative Exchange Council, “Rich States, Poor States,” Arthur B. Laffer, Stephen Moore and Jonathan Williams ranked California’s prospects 47th out of 50.

In short, California is a mess. Nonetheless, the state has taken a great leap into the economic unknown by implementing the nation’s first cap-and-trade program, a key piece of environmental legislation first passed in 2006, under which the state is required to cut its greenhouse-gas emissions to 1990 levels by 2020. Cap and trade has failed in Europe, the only place where the approach has actually been adopted, because it raised costs and damaged the region’s competitiveness. California faces the same future, as the rules, known as AB 32, will likely send businesses fleeing.

Already, the state whose motto is “Eureka” is losing big time in the nation’s economic footrace. From 1999 to 2009, California’s output increased 43 percent, while the nation’s grew 47 percent. Personal income in the state advanced 38 percent, compared to the U.S. average of 46.2 percent. Per capita income increased only 34.7 percent, vastly trailing the nation’s 41.1 percent advance. Can the people of California really imagine that imposing a complex new bureaucracy on top of their already struggling economy is a good idea?

It isn’t as though the state is short of climate laws today. The South Coast Air Quality Management District, the pollution-control agency for Orange County and urban portions of Los Angeles, described as “the smoggiest region of the U.S.,” has an annual budget of nearly $130 million, supported by “fees businesses must pay if they release large amounts of pollution” and businesses’ “annual fees for their permits.” In other words, this smog capital already has a mini cap-and-trade in place.

Needless to say, not everyone is excited about implementation of cap-and-trade.  California’s Small Business Association (CSBA) has estimated the law could cost the state 1.1 million jobs due to the expected hit to that sector alone. As a report prepared for the association points out, that’s equivalent to 3 percent of California’s population. CSBA estimates the total cost of implementing AB 32 is $183 billion in lost output, or “one and a half times the total budget for the state of California.”

Even assuming that these estimates are somewhat exaggerated, they should be taken seriously by legislators. They should also be weighed against the expected advantages of the cap-and-trade bill. The only existing laboratory for this type of legislation is Europe, where cap-and-trade was adopted in 2005, as a byproduct of the Kyoto accords.

In 2009 testimony before the Senate Committee on Foreign Relations, Ben Lieberman of the Heritage Foundation pointed out that only the recession – not the anti-pollution legislation – had succeeded in bringing down emissions in the EU. Since 2000, emissions for most countries had risen faster than in the U.S., which lacks any such regulation. Lieberman argued that “reducing carbon dioxide from the existing installed base of energy-producing and [energy]-using equipment and vehicles is prohibitively expensive” and the legislation drove up Europe’s energy costs and unemployment. Though optimists both here and abroad expected a flood of “green” jobs, even Spain, which attracted some of that investment, has seen above-average unemployment.

Part of the European challenge has been that it ventured out on this limb alone, unaccompanied by the U.S. and China, the world’s largest sources of emissions. In a competitive world, Europe ladled higher costs on its manufacturers, expecting that others would come onboard. After the disappointing climate gathering in Copenhagen at the end of 2009, carbon prices began to fall as traders doubted the approach would spread.

Earlier this year, Lisa Zelljadt, analyst at Point Carbon, an Oslo-based marketing and trading analytics company, was quoted in Renewable World explaining the deteriorating scenario this way: “The European Union Emissions Trading System, this $2 billion programme, is going to go forward, and it is the only programme of that size… Any part of the world going it alone faces singular economic pressure by putting a price on carbon at a time when fossil fuel use remains high. Every widget made in Europe becomes more expensive than a widget made in a country without a cap-and-trade plan.”

This is, of course, also California’s problem. If businesses find the new fees and bureaucracy too onerous, they can jump to Nevada or Arizona. What a risk to take! Time for the state’s lawmakers to have that famous “Eureka!” moment – before California becomes a fiscal lemming headed right off into the Pacific.