Briefing Report: What AB 32 Hath Wrought

Wednesday, February 10, 2010

"Every new regulation concerning commerce or revenue; or in any manner affecting the value of the different species of property, presents a new harvest to those who watch the change and can trace its consequences; a harvest reared not by themselves but by the toils and cares of the great body of their fellow citizens."
- James Madison in Federalist No. 62

In the beginning...

On September 27, 2006, Governor Schwarzenegger signed AB 32, the Global Warming Solutions Act of 2006 (Núñez) in an effort to reduce greenhouse gas (GHG) emissions that some have attributed as the main cause of anthropogenic global warming (AGW).  By adopting AB 32, albeit by a slim majority, the Governor and the legislature effectively relegated a substantial body of regulation of carbon dioxide (CO2) to the Air Resources Board (CARB or ARB) without providing for any true oversight or accountability for the unelected board.

Tasked with developing a menagerie of rules and regulations intended to reduce GHG emissions to a 1990 level by the year 2020, the ARB's new charge afforded wide latitude in identifying the scope of the problem.  To ensure that their GHG emissions reductions would actually come to fruition, the ARB gained more police powers over California.

Governor Schwarzenegger has used the executive order as his preferred method of advancing policies pertaining to alleged global warming.  These actions have often paved the way for future legislative options.  AB 32 was a codified outgrowth of Executive Order S-3-05, which established unprecedented targets in reducing GHG's emissions of year 2010 to those of 2000, 2020 emissions to 1990 levels and another 80 percent reduction below 1990 levels by 2050.  The executive order also created the Climate Action Team (CAT) charged with directing state agency efforts on the reduction of greenhouse gas emissions within their organization.  The next step was Executive Order S-21-09, which directed ARB to use its authority under AB 32 to adopt a regulation consistent with the 33 percent renewable energy target by July 31, 2010 in consultation with the Public Utilities Commission and the California Energy Commission as previously established in Executive Order S-14-08

Let There Be Legislation

Though the ARB has been regulating California's air for over 40 years, AB 32 has become the centerpiece of all things global warming, building upon generations of previous legislation.  SB 1771 (Sher, 2000) established the California Climate Action Registry (CCAR) allowing voluntarily record and credits for early reductions of GHG emissions in anticipation of a future program.  The enactment of AB 1493 (Pavley, 2002—also known as the "Pavley Tailpipe Rule"), boosted the debate on the regulation of CO2 emissions while targeting cars and light trucks.  While these bills may stand on their own merit, most any regulation tied to CO2 emissions as a result of these bills has been developed, and is predominantly funded, under the AB 32 matrix.

Pursuing GHG emissions regulations through legislation has become very popular.  One example is SB 1368 (Perata, 2006) which puts limits on available power sources used to meet California's energy demands.  Another is SB 375 (Steinberg, 2008) which developed a preferred growth scenario for local development standards in addressing land-use patterns and their effects on air quality.  Both measures granted the ARB new and expanded control over energy purchases, transportation planning and local land-use policy all under the aegis of stopping AGW.  In short, these measures embrace the notion that a prosperous economy and healthy environment should be determined by government.

The ARB will likely continue seeking legislation to clarify and expand their regulatory regime.  Already, SB 31 (Pavley, 2009) would have given more authority to the ARB to charge CO2 emitters for allowances under an aggregate cap-and-trade system since the auctioning of allowances is not permitted by existing statute.  Though the author abandoned her efforts to pursue this bill in January 2010, the policy may be resurrected during the second year of the session.

So Let It Be Written in Regulation

In establishing emission thresholds, the ARB set the 2020 goal for emission levels at 427 million metric tons of carbon dioxide equivalents (MMTCO2e) and outlined strategies to achieve these reductions from the projected 2020 business-as-usual emissions of 596 MMTCO2E.  The capped sectors of large industry and energy must demonstrate a reduction in the aggregate equal to 147 MMTCO2e.  The uncapped sectors represent the smaller parts of the economy and must attain reductions equal to 27 MMTCO2e.  After it adopted mandatory reporting regulations for GHG's and set a target for 2020 GHG emissions, it approved the Scoping Plan at the end of 2008 to lay out a strategy for reaching AB 32's emissions reduction goals through 2050.

The Legislative Analyst's Office (LAO) identified a number of shortcomings in the economic analysis of the scoping plan.  Other independent peer reviewers did not consider it a serious analysis including Harvard University's Robert Stavins who wrote, "I have come to the inescapable conclusion that the economic analysis is terribly deficient in critical ways and should not be used by the State government or the public for the purpose of assessing the likely costs of CARB's plan."  Under pressure from the Legislature, the ARB agreed to redo their economic analysis by the end of 2009.  To date, the analysis has yet to be completed.

All early action measures were supposed to take effect by January 1, 2010.  In 2009, the ARB created the Economic and Allocation Advisory Committee (EAAC) to advise on a cap-and-trade program, the most significant piece of the total emissions reduction strategy.  The final draft regulation is scheduled to be heard by the Board in October 2010 with the totality of all GHG rules scheduled to take effect by January 1, 2012.

The ARB continues to pursue a steady course working through its AB 32 timeline despite the lack of a proper economic analysis upon which to guide recommendations for emissions reduction schemes.  Enforcement for all compliance mechanisms will need to be increased to make sure that this complex allocation market can be appropriately monitored and free from the manipulation that has been rampant in the European models.  They have also contemplated the issue of "leakage" where emissions reductions that occur here are offset by increased emissions elsewhere because of the state's onerous regulation.  Like water down the mountain, capital always moves in the path of least resistance.

Bearing the Economic and Regulatory Burden

From the beginning, AB 32 was sold as a cost-effective and simple way to avoid the catastrophic consequences of AGW in California.  During the AB 32 signing ceremony in 2006, Governor Schwarzenegger defended the bill from business critics:  "Some have challenged whether AB 32 is good for businesses.  I say unquestionably it is good for businesses.  Not only large, well-established businesses, but small businesses that will harness their entrepreneurial spirit to help us achieve our climate goals."  It is difficult, though, to unravel the exact costs for implementing all the pieces of the AB 32 Scoping Plan.  Combining the direct budgetary expenditures, the indirect economic impacts and the regulatory burden upon businesses, the costs of implementing AB 32 will be enormous.

Through regulation, the ARB is authorized to adopt a schedule of fees to be paid by large GHG emitters (i.e., power plants, manufacturing facilities, and other businesses) beginning in September 2010.  These fees are intended to support the administration costs of implementing AB 32.  This fee will also pay back over $82 million loaned from special funds used to set up the program over the last few years.

In July 2009, Sanjay Varshney's and Dennis H. Tootelian presented the results of a study commissioned by the Governor's Office of Small Business which analyzed the potential economic impacts of AB 32 on the state of California, its consumers and its small businesses.  From the study, when the plan is implemented, they wrote:

  • "[S]mall businesses in California will pay an additional $49,691 as a result of the California Air Resources Board's implementation of AB 32."

  • "California families will be facing increased annual costs of $3,857 and that in order to cope with the increased costs generated by the Greenhouse Program, consumers will be forced to cut their discretionary spending by 26.2 percent."

  • "[T]he average annual loss in gross state output from small businesses alone would be $182.6 billion, approximately a 10 percent loss in total gross state output.  This will translate into nearly 1.1 million lost jobs in California.  Lost labor income is estimated to be $76.8 billion, with nearly $5.8 billion lost in indirect taxes.  This decline in revenues will have a severe impact on future state budgets."

Proponents of the CO2 regulations were quick to assail the study.  Had they waited a few months to read the ARB's own EAAC recommendation on implementing a cap-and-trade plan, they would have seen that auctioning allowances alone could cost consumers and ratepayers a total of $143 billion from 2012 to 2020.  Speaking on all costs, the EAAC report states, "AB 32 is likely to raise fuel and energy prices, and these price increases will be reflected in higher prices of consumer goods."  The ARB cannot have it both ways, saying that AB 32 is spurring job growth in the green economy and at the same time deny that it is having an economic impact in other sectors of the economy because it has not yet been fully implemented.  This sits in the face of the plain reading of AB 32 where nearly two dozen times it calls for regulations and other measures to be "feasible" and "cost-effective."  Clearly, this plan is neither.

Waiting to Exhale

The term "global warming" has recently shifted to "climate change" (thus allowing the alarmists to blame any change in weather/climate on humans).  Few deny that climate change exists; change is a defining characteristic of climate.  Whether mankind causes climate change and has the ability to overcome natural forces to stop it is another story.  It should be remembered that CO2 is a gas that occurs naturally in the atmosphere.  It is exhaled by humans, and is absorbed by trees and plants to produce oxygen, is not toxic and in fact, is essential to life on earth.  The growing body of evidence suggests that CO2 impact on climate change is marginal (if there is an impact at all).  Additionally, it has been revealed that much of the data to support AGW heretofore has been manipulated, skewed and compromised to support a highly politicized environmental-industrial complex.  The scientific "consensus" of AGW does not exist.  The state ignores this reality at its own peril.

While people generally want to be seen as environmentally conscious, recent public opinion polls show that when the people are properly educated about the costs of implementing GHG reduction schemes, they are significantly less inclined to support the program.  Taking a more measured approach on how to adapt better to a changing climate without imposing devastating regulations may be a preferred policy avenue.  The Governor has statutory authority to delay implementation of the bill, "In the event of... [a] threat of significant economic harm."  An unemployment rate of 12.4% should be reason enough to delay implementation.  A recent legislative attempt to suspend the regulations by Assemblyman Dan Logue, AB 118 (2009) was defeated in committee, when three Republicans voted "Aye" and six Democrats voted "No."  If the state were to step aside and allow efficiencies to happen in the economy in their own due time, such affluence would minimize - if necessary - GHG effluence at a price the market is willing to bear.

It is not possible to regulate California to prosperity and having her go it alone on GHG emission reductions, as it were, is a fool's errand.  This economic harm can and should be avoided.  Yet, pursuing the implementation of AB 32 appears to be a foregone conclusion, despite the mounting criticism of the costs, intentions and science of the policy.


For more information on this report or other Environmental Quality issues, contact Lance Christensen, Senate Republican Office of Policy at 916/651-1501.