States


It’s nice to win, now and then, in the battle against really bad economics.

Back in 2006, California adopted an ambitious state climate policy, known as AB 32. It will require higher fuel efficiency standards for cars and trucks, better insulation and energy efficiency in homes, and more vigorous promotion of renewable energy. Careful analysis by the state’s Air Resources Board and analysts at the University of California-Berkeley showed that AB 32 will have neutral to slightly positive effects on California jobs and incomes – a conclusion that was unacceptable to some of the bill’s opponents.

Last year, two reports trashing AB 32, and state regulation in general, were released by Sacramento State College business professors Sanjay Varshney and Dennis Tootelian (click here for the first, here for the second).  They projected that AB 32 would reduce the state’s overall income by 10 percent, and that regulation in general would shrink California’s output by one-third. Released with great fanfare, these super-sized critiques started showing up in media discussion of AB 32.

I did a report called “Daydreams of Disaster” for the California Attorney General’s office, evaluating the Varshney-Tootelian (V&T) studies. V&T assumed that all benefits of AB 32 were too speculative to include; in effect, they estimated benefits at exactly zero. The costs caused by AB 32, on the other hand, are treated with expansive generosity. Housing costs surge upward, based on the cost of converting homes to zero net energy consumption (but with no resulting savings on utility bills). The projected fuel savings from new, high-mpg cars are treated as a cost imposed on owners of older cars (but not a savings to new car owners). Food cost increases are estimated in an entirely data-free manner. V&T then multiply everything by 2.8 to account for indirect costs.

Even worse is the V&T critique of regulation in general. They estimate a single equation explaining state GDP, across the 50 states, based on six different rankings of state business climates from Forbes. Those rankings give every state a number from 1 (best) to 50 (worst); in the V&T equation, every one-point increase (worsening) in the “regulatory climate” ranking decreases state GDP by a bit more than $4 billion. California comes in at number 40 in the Forbes scorecard for regulatory climate, so V&T project losses to the state of more than $160 billion. And don’t forget to multiply the result by 2.8!

The worst mistake here, although not the only one, is this: State-by-state differences in the size of the economy are – surprise! – primarily determined by the population of the state, a factor left out by V&T. (Why does California have a bigger economy than Rhode Island? Because California is a bigger state with more people, not because of either state’s business climate or rankings in Forbes.) When I reran V&T’s analysis taking state population into consideration, the Forbes rankings had no correlation with the size of the state economy per capita.

My report was one of three independent evaluations of the V&T work, all reaching entirely negative conclusions. The word is starting to get around: the Legislative Analyst’s Office of the California legislature released its own analysis of the shoddy quality of the V&T reports; the head of Small Business California asked that the studies be removed from public websites, due to “deeply flawed methodologies and useless conclusions”; the story even made the San Francisco Chronicle last Friday, which quoted my summary remarks: “The losses they [V&T] project would be serious economic impacts – if they were real. They are, however, entirely unreal; they should be viewed merely as daydreams of disaster.”

There’s plenty more bad economics out there to do battle with. But it’s gratifying to see that there are some limits to what you can get away with in public debate.

Advertisements

A common concern for Americans thinking about climate policy is that emissions caps could really disrupt our lives, making it far more expensive to heat and cool our homes, drive, and run businesses – effectively cutting our incomes. Most countries in Western Europe generate half the emissions per person that we do in the United States, and yet it would be hard to claim that, say, the unfortunate denizens of Spain, France, or Italy live sadder, darker, colder, and generally more parsimonious lifestyles than Americans.

A little closer to home: The two extremes in per capita U.S. state incomes differ by about 2 to 1 (Connecticut’s average income is about twice Mississippi’s). Our research at SEI-US has shown, however, a 6 to 1 difference in emissions per capita among U.S. states, from 77 metric tons of carbon dioxide (mT CO2) in Alaska to just 12 in Vermont, after adjusting for interstate electricity trade (some U.S. states export their extra electricity to other states; we assign these emissions to the states where the electricity is used). Even after excluding emissions from industry, commercial establishments, and government, there’s still a 5 to 1 ratio among states’ per capita transportation and residential (heat and electricity) emissions.

California and Texas provide a useful spotlight on these differences: For transportation and residential uses, Californians generated 9 mT CO2 per person, compared with Texans’ 13 mT CO2. California, however, is richer than Texas – the average incomes in the states are $27,000 and $22,000, respectively. California has higher incomes, but lower emissions.

Emissions per person (in metric tons of CO2)
California Texas
Industrial 2.8 11.2
Commercial 1.9 4.1
Transportation 6.7 8.7
Direct residential (heating) 0.8 0.5
Residential electricity 1.1 4.1
Total 13.3 28.6

Here’s an interesting climate policy idea: If all Americans made the “sacrifice” of living like Californians, U.S. emissions would drop by 40 percent and global emissions by 8 percent as a consequence!

If, instead, U.S. per capita emissions equaled those of Texas, U.S. emissions would increase by 35 percent, and global emissions by 7 percent.

For more on California and Texas’ emissions check out my report with Frank Ackerman and Kristen Sheeran on why there are such big differences in per person emissions from state to state published by the Economics for Equity and the Environment (E3) Network. We are currently at work on updating these figures using the most recent data. The data included above are for 2005; average incomes are in 2005 dollars.