The Sacramento Bee has published an opinion piece that I wrote with Bo Cutter. We argue that California's AB32 (the legislation intended to sharply reduce the state's greenhouse gas emissions) is off to a good start. While AB32 embodies many different rules and regulations, I view it as essentially creating a new set of "rules of the game". Households and firms are continually making investment decisions. Rational investors should anticipate that this regulation will tighten energy efficiency standards, fuel efficiency standards, and it will induce changes in land use patterns, changes in the pricing of electricity and changes in requirements for renewable power to be a larger share of the electricity mix. Some households and firms will easily and happily adapt to these new rules while there are other households and firms who will face greater compliance challenges. I am well aware that no regulation is ever a "free lunch".
I am a big believer in "induced innovation". This AB32 regulation will induce innovation that will "bend the curve". I am highly optimistic that the combination of California smart engineers, entrepreneurs, venture capitalists and committed environmentalists will co-ordinate through free markets to figure out next generation technologies for buildings, cars, power generation that uncouple economic growth form carbon dioxide production. In the absence of AB32, there would not have been the "nudge" for the venture capitalists and the engineers to direct their scarce time and talents towards this sector. In the absence of Federal legislation, we as a society need someone to be the "green guinea pig". As I have said many times, the rest of the nation should thank California and send us a check for providing public goods (i.e new ideas) for the rest of the nation and world.
Matt Kahn again (perhaps taking offense with this quote "The rosy message propagated by ill-informed and self-serving proponents is the real fairy tale."):
In today's Sacramento Bee, Andrew Chang has some tough things to say about California's AB32 and about Bo Cutter and myself. He omits some details that are worth mentioning. ...
Point #1: We were not paid to write our OP-ED and we collect no payments at all from the Air Resources Board. I do serve on its Research Screening Committee and I am paid $400 a year for the work (roughly 20 hours a year).
Point #2: Dr. Chang does not reveal how much his firm was paid for their "study" but I guess his firm was paid around $100,000. He has the right incentives to push his case that AB32 will end the world.
Point #3: Dr. Chang refers to us by name but doesn't mention that we are academic economists. The words "UCLA" and "Pomona College" do not appear in his piece. Are all economists' opinions about economic issues weighted equally by the public? Do we all have equal expertise about topics? UPDATE: I now see that nobody at their firm has a Ph.D. and one of their associates graduated from Pomona!
Point #4 Here is a direct quote:
"The California Air Resources Board acknowledges AB 32 will result in a net loss of up to $35 billion in gross state product, while researchers at Andrew Chang and Co. found that California will lose $153 billion, even under optimistic conditions."
So, in a state with 40 million people, he is predicting that every man, woman and child will lose roughly $4,000 each from this regulation? I would like to hear a simple story for how this can happen? The typical household spends roughly $1,600 a year on gasoline and $1,000 a year on electricity. Under what scenarios, do these costs more than double under AB32? I am an open minded scholar. Can he tell a simple story about how this well meaning regulation translates into price gouging? ...
I agree with Mr. Chang that regulation is never a free lunch. Where we disagree is about what is the engine of growth of the California economy and I am much more optimistic than he is about our state's ability to adapt to changing market and economic incentives. He wants to protect the polluting firms and I want to nudge them to take a second look at their production and transport processes. A gradual but credible introduction of cap and trade will achieve my goals.
What are his goals? He appears to want to keep his clients happy. Who are my "clients"?The children of California!