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California’s Crazy Climate

Originally appeared in Defining Ideas: A Hoover Institute Journal on February 9, 2011

In 2006, the California Legislature enacted AB 32, the Global Warming Solutions Act that directed greenhouse gas emissions in the state to be at their 1990 level by 2020. To get a sense of what that means for the state, in 2006, California’s population already was 23 percent larger and its economy nearly a trillion dollars larger than in 1990, and it will be larger still in 2020, although how much larger depends in part on the costs imposed by this law.

As the ambitious title of the legislation suggests, California was committing itself to battling climate change by dramatically reducing greenhouse gas emissions across the state’s economy. Targets and timetables were set; state agencies, notably the California Air Resources Board, were empowered to implement regulations; and new subsidies, mandates, and restrictions were inaugurated.

Kelley With the feel-good mentality associated with the so-called “triple bottom line” of “people, planet, and profits,” the notion in the legislature was that California could make a real difference in global climatic conditions through emissions reductions. No doubt many legislators believed this groundbreaking law would contribute to lower greenhouse gas levels and in so doing, mitigate the possible effects of global warming. Many applauded the state’s efforts to cut greenhouse gases and to promote new renewable energy alternatives. Further, constituencies stepped up to seek state government financial and regulatory support for solar energy, wind power, energy-saving home and business improvements, and more fuel-efficient vehicles.

Those heady days, however, seemed to be coming to an end during the election campaign of 2010 when, in the face of 12 percent unemployment and a struggling state economy, Proposition 23 was put forth to voters. Prop 23 was designed to delay implementation of AB 32’s sweeping agenda until the economy recovered and unemployment fell to its 2006 level. Even so, it was defeated on November 2 by California voters. The path set forth by AB 32 in 2006 appears set to continue at least for the time being.

Despite AB 32’s lofty objectives, California’s actions will have no direct impact on global greenhouse gas emissions or on any predicted pattern of climate change. In this essay, no effort is made to address questions of whether climate change is real or of the links between human actions and climatic conditions. Rather, the objective is to show why California’s unilateral actions are costly to the state and why they will bring no direct global climate benefits.

First off, there are costs. There will be immediate economic costs because alternative green fuels and power remain far more expensive than their fossil-fuel competitors. They require subsidies, taxes, and regulations in order to compete. Witness the intensity of the political debate over Prop 23. It might be that some new beneficial green technologies will be spearheaded by state mandates, but these are not apt to help much on the jobs front.

Beyond that, because of AB 32, the costs of production in California and the prices of goods and services sold within it are likely to rise relative to other states. These are unhelpful outcomes for the state’s many unemployed and underemployed citizens. And the higher production costs are not spread evenly across the California economy, with agriculture, shipping, and other basic industries likely to be most negatively affected.

With its regulatory environment and high labor costs, California does not have a competitive advantage in the production of solar panels or wind turbines. It may have a competitive advantage in basic technology development, but those technologies are most likely to be applied in low-wage countries such as China, India, and Mexico. Once again, therefore, employment is not apt to be stimulated by AB 32.

There will be no direct benefits from AB 32 because global warming, whatever its magnitude and timing, is a global problem.

These costs might be acceptable—with elaborate and substantial transfer payments to those economically harmed—if there could be a direct effect of AB 32 on any possible climate change as its name claims. But there will not be.

Second, there is the problem of effective collective action across the planet. There will be no direct benefits from AB 32 because global warming, whatever its magnitude and timing, is a global problem. To the extent that greenhouse gas emissions contribute to higher temperatures, those emissions come from all over the planet. Cutbacks in one place (read California) can be perfectly replaced by releases elsewhere—China, Brazil, Indonesia, even Indiana. What this means is that no single jurisdiction can address it, no matter how well-intentioned.

It is essentially the tragedy of the commons. Greenhouse gases uniformly mix in the atmosphere, meaning that any country, state, or city taking action to curb them will incur the costs of those actions, but the benefits—such as the reduced risk of climate change damages—will be distributed globally. This generates a classic free-rider problem. Any benefits a jurisdiction gains from its climate policies will be less than the costs it incurs. It is thus in the interest of each jurisdiction to wait for others to take action—and then reap a free benefit. Unless there is worldwide collective action, each jurisdiction will see this free-riding potential and attempt to take advantage of the actions of others.

We already know that the collective action in addressing climate change is a huge problem. The Kyoto Protocol was controversial from the start and has had little positive effect. It expires in 2012. A series of so-called Conferences of Parties (COPs) of world leaders have met annually since 1995 in efforts to develop coordinated action, but these have been to no avail.

This critical collective action problem has received minimal attention in California, or for that matter in the U.S. generally, and yet it absolutely must be solved for the success of AB 32 or any other governmental action to address a global commons problem. But it is not going to be solved any time soon.

Research on other, much simpler, smaller commons problems, ranging from the management of the harvest in fisheries, to extraction from aquifers and oil and gas reservoirs, to coordination of irrigation systems reveal a number of empirical regularities that must be met if collective action is to take place successfully. These have been chronicled in my research as well as that of that of the 2009 Nobel Prize winner in Economics, Elinor Ostrom. They provide important insights into understanding the magnitude of the global collective action problem and why it is not likely to be addressed.

The requirements for successful collective action include:

1. Clearly defined boundaries. This means that the commons problem and the parties who are part of it (say a depleted fishery and the contributing fishers) must be identifiable and observable.

2. Agreement on the size of the problem. Before the parties can agree to bear costs and change behaviour, they have to agree on the nature of the problem to be solved and their contribution to it.

3. Even distribution of benefits and costs. There must be a generally uniform allocation of the costs and benefits of collective action.

4. Monitoring, accountability, and compliance. The actions of the parties must be watched and violations of the agreement must be policed with agreed-upon sanctions so that there is general compliance. With cheating, agreements break down quickly.

5. The benefits must be observable. Addressing any commons problem involves costs. Fishers forego harvest; irrigators forego diversion or pumping water; and so forth. But if the beneficial responses from these cuts can be observed by the parties and be tied to their behavioural changes, then they can conclude that on net, they are being made better off by their sacrifices.

If global warming really is a threat, California should focus on adapting to it.

Although many local commons problems have been solved when these conditions are met, global warming meets none of them. Consider the following:

 1. The atmosphere is not clearly defined. It flows across countries and constituent groups that participate in any agreement and across those that do not. The problem—to the degree it exists–is truly global and applies across the planet.

 2. There is little agreement on the size or timing of the global warming problem. Different climate models provide different estimates of the linkages between greenhouse gas emissions, the current stock of greenhouse gases, and temperature projections. Further, estimates of the timing of any climate change vary widely. Some believe there is a considerable window of time for adjustment, while others believe it may already be too late. Perhaps more critically, the distribution of any change in temperature is even more variable.

 3. This uncertainty contributes to wide variation in the benefits and costs of participating in global collective action. Some regions, notably northern countries like Russia, Canada, and so forth, might actually see beneficial results from some warming. Other areas, such as low-lying countries, might be harmed by it. Additionally, developing countries want to increase, not decrease, their energy use as they seek to raise the living standards of their citizens. They naturally are reluctant to clamp down on economic growth in a manner that may keep many in poverty. As a result, they demand that developed countries cut back more. At the same time, however, both groups of countries compete in the global market place, so that higher production costs from green energy mandates in developed regions, such as California, can place industries in those jurisdictions at a competitive disadvantage relative to industries in China and elsewhere.

 4. Monitoring compliance with international agreements is difficult, usually based on self-reporting, which can be notoriously self-serving and inaccurate. And because sovereign states are involved, there are no clear effective sanctions for failure to comply. Carbon tariffs are often pointed to as a remedy, but these can have their own consequences when it comes to trade. Consider the reaction in the U.S. to China’s likely reduction of the purchase of Boeing planes or American wheat in response to any tariffs on Chinese steel, for instance, which is produced with high emissions. It is obvious that compliance is a major problem.

 5. Finally, for all of the reasons stated above, constituents who bear the costs of climate change policies, like the citizens of California, are unlikely to see any direct benefits from it. Further, many benefits of their sacrifices will not take place until far into the future, while the costs are immediate. This lack of positive reinforcement dramatically raises the political costs of adhering to any climate policy.

First off, the state’s leaders—whether political, business, or academic—should be honest about the collective action problem and why measures undertaken by a single jurisdiction are unlikely to have any impact on global climatic conditions any time soon. With that information, voters could make more informed choices about policies that might be undertaken.

Second, if global warming really is a threat, the state should focus on adapting to it. Specifically, if the climate becomes more arid, California should invest in research and development of new infrastructure for water transport, at least in the most populous parts of the state; on new drought-tolerant crops; on new dams and other structures to hold water and protect low-lying areas like the Sacramento Delta; and on new energy technologies.

Third, and perhaps most important, the state should promote economic growth and wealth creation. Richer societies are much better able to respond to climate disruptions and other shocks. This includes productive investments in education at all levels, in highway and other infrastructure, and the removal of the burdensome regulations for which California is notorious.

California can be a leader in addressing any possible climate change. This will not be achieved through command and control legislation such as AB 32, but through rapid economic growth and investment in its population and their entrepreneurial, innovative abilities to move the state forward no matter what the climate of the future might be. AB 32’s unilateral climate policy makes no sense environmentally or economically.

GARY D. LIBECAP is the Sherm and Marge Telleen Research Fellow at the Hoover Institution as well as the Bren Professor of Corporate Environmental Policy, Donald R. Bren School of Environmental Science and Management and an economics professor at the University of California, Santa Barbara. He is also a senior fellow at the Property and Research Center – PERC in Bozeman, Montana. An expert on natural resource and environmental economics, he specializes in property rights and markets. His current research examines the legal and regulatory transaction costs of water marketing in the western United States. He is the cochair of Hoover’s Property Rights, Freedom, and Prosperity Task Force.

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