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Green Economics

California: The green guinea pig

California has a chance to show the world how to balance greenhouse gas reduction with economic prosperity – if they can get it to work.

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The costs of AB32 compliance hinge on how California’s diverse households and firms respond to its new rules. In a diverse state, some nimble firms will easily adapt. New startup firms will pop up to participate in our nascent green economy. Some will succeed but many will fail. There will be incumbent firms who will suffer because of AB32. Such firms are likely to be energy intensive and capital constrained. Thus, they will not be easily able to change their ways. In cases such as this, the ARB will face challenges over whether it engages in “tough love” or whether it offers exemptions for businesses that can demonstrate that they are a “hard luck” case.

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The Air Resources Board would be wise to collect much more micro data about real world firms and households in California. Rather than relying on national data bases, a serious investment should be made in data collection to learn more about Californian residential, industrial and commercial electricity consumption, by working with the state’s electric utilities, and to study transportation choices made by households and businesses. Armed with such data, the state’s university researchers will be able to help the ARB identify the profile of different types of households and firms who will face the greatest challenges in adapting to the new regulation.

In the recent past, there has been an economic growth versus the environment tradeoff. Republican Administrations have ratcheted down regulation thinking that such red tape strangled economic growth. The authors of Proposition 23 were well aware that during bad times that people are likely to support costly environmental regulation. While it is surely the case that there have been many cases of regulatory over reach, I would argue that California remains a center of human capital and vast wealth because of our state’s unique quality of life. If AB32 can cost effectively enhance our state’s quality of life then it is possible that Prop 23’s defeat will help us to achieve the “win-win” of economic growth and a green future.

Matthew E. Kahn is a Professor of Economics at UCLA's Institute of the Environment and Sustainability. He is the author of Climatopolis (Basic Books 2010) and Green Cities: Urban Growth and the Environment (Brookings Institution 2006).

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