On November 2, 2010 Californians will vote on Proposition 23. If passed it will delay the implementation of Assembly Bill 32 (AB32), which introduced a coherent climate change policy to California, until the return of “Good Times” 5.5% unemployment for three quarters (which is very unlikely in the foreseeable future). Proposition 23 has some reasonable arguments to support it, but I strongly believe that it should be defeated.
The first argument in favor of Proposition 23 (and against implementation of AB32) is that climate change is a global problem and actions of a state such as California won’t have much impact on the final outcome and thus the cost entailed by AB32 may be a luxury during hard economic times, which is consistent with the perception that California’s climate change choices are more “feel good” than “do good”. While California has been a trendsetter in many areas, California’s climate change actions haven’t changed the climate change policies of major greenhouse gas emitters like the US, India, or China. Yet while the impacts of California’s actions are limited, they have been influential. The passage of Proposition 23 will be a setback to efforts to address climate change globally.
However, while AB32 is a climate change policy its more significant and tangible impact is that it will shift California on to a less fossil fuel intensive path. With AB32 Californians will have the incentives for energy conservation and investments in renewable energy, and energy efficient equipment and industries. This transition will increase energy security, reduce the cost of importing fuel, and improve the balance of trade situation of the state and of the nation.
The higher cost of fuel implied by AB32 though is also a major source of concern. I have no doubt that high-energy prices are hurting people. The cost of rising energy prices is much higher than people actually perceive. Preliminary results of a study that I conducted with Steve Sexton and JunJie Wu suggest that the drastic increase in energy prices around 2007 and 2008 were major contributors to the widespread home foreclosures in California and the financial crisis. The logic is very simple. Higher energy prices tend to increase transportation costs, which tend to reduce the value of homes farther away from the city. When everything else is equal, people with lower incomes tend to live farther from the city and travel more than people with higher incomes. Thus, many relatively low income people took advantage of favorable mortgage conditions in the period after the millennium and given the low energy prices at the time bought better and nicer houses, but farther away from the city. But, as energy prices increased the high cost of transportation made it difficult for them to make ends meet. In many cases their home values become lower than their home mortgages (in professional terms, their mortgages went “under water”), which reduced the incentive to hang on to these properties. Indeed Californian cities that house low income individuals who commute long distances to major employment centers are among the leaders in foreclosure and negative equity rates (namely, percentage of homes where the outstanding mortgage is larger than the value of the house). For example, in 2009 America Core Logic reported that Merced has the second highest negative equity rate in the nation where 67% of the homes have negative equity. Stockton is 3rd (66%), Modesto 4th (65%), and Vallejo-Fairfield 5th (64%). California has seven of the top 10 cities with the highest negative equity shares. This suggests that high-energy prices already have inflicted significant pain on Californians.
One immediate but ultimately flawed response is to delay further policies that will increase energy prices and cause further suffering. However, shortsighted policies like this are the wrong way forward. We are in the current situation because in failing to recognize that the fundamentals were leading towards increases in energy costs, we developed incentives and policies that encouraged urban spread of people all over California and an addiction to a high-energy lifestyle. The low energy costs throughout the United States left us with an infrastructure vulnerable to energy price increases across the board and have contributed to an accumulating large balance of trade deficit that won’t go away (namely, for a long time we paid more for our imports than we gained from our exports and, de facto, became indebted to China and oil producing countries). Our automobile sector emphasized build up of SUVs, which for a long time were exempt from fuel efficiency (CAFE) standards, and as energy prices increased the “Big 3” are not as big as they used to be and one of them is controlled by Fiat. The problem is not so much the SUV, which for a while generated much income, but the fact that there wasn’t much incentive to apply American ingenuity and increase their fuel efficiency. As we expect future energy prices to increase, policies that will lead to withdrawal from energy addictions are needed rather than policies that will continue this addiction. Thus, Proposition 23 that aims to delay AB32 is counterproductive.
I have been working on water and natural resource issues in California for many years and have found consistently that incentive matters. In regions where water was expensive, for example San Diego or part of the Central Valley, farmers adopted water conservation technologies, like drip irrigation, and residents adopted precise irrigation schemes and dropped growing “thirsty” crops. Periods of high rises in the price of water, like in droughts, have triggered adoption of conservation technologies, more efficient irrigation technologies and pumps. Furthermore, the high price of water also triggered developments of a “green” irrigation industry that introduced “tape irrigation” used in strawberries and various types of irrigation software that are extremely effective in saving water. When California introduced pesticide application requirements farmers were complaining about the cost and feasibility of implementation. But in several years new software that took advantage of wireless telephony was introduced and allowed cheap and efficient reporting. Now this software is widely used in other applications for example farm labor management, tracing shipments, etc. The idea of induced innovation and that constraints and higher prices lead to emergence of new industry has empirical support. However, innovation takes time and it is unrealistic to expect that projects to develop green technologies are “shovel ready”. But, with the right incentive innovations that increase energy efficiency throughout the global economy are quite likely to emerge.
One objection raised against AB32 and the high cost it entails is that it makes California less competitive and we lose the manufacturing sector. California’s high labor costs and strict regulations are significant causes for not attracting manufacturing. California also has a lot of costly and excessive regulations and I will support assessment of the regulatory environment. California’s relative advantage is in its science based innovation, in being the state where new products are introduced first, providing creative solutions to emerging problems, and while a lot of the labor intensive (and probably more polluting) components of the green industry will be produced elsewhere, providing signals and demand for energy conservation in California is likely to build up a large alternative energy sector. Already we have seen significant investment in such sectors in California and a retreat from commitment for improved energy efficiency is likely to hurt this emerging sector.
AB32 is far from perfect, but it is a bill and can be changed in the future. It suggests cap and trade, for example, while I would love to see a fuel tax or carbon tax and actually have energy tax as part of California’s tax reform that may reduce other forms of taxation like sales and income tax and may even provide a “double dividend” of reduced pollution and improved productivity. Propositions are much less refined tools than bills and a proposition that will de facto kill AB32 will be devastating for the future of energy efficiency in California. In 1978 the fate of California changed, not for the better, with the passage of Proposition 13. Proposition 23 may have a similar impact. It should be defeated and then the challenge will be legislation that will improve on AB32.