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California: The green guinea pig

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While specific firms such as a Tesla may win or lose this competition, the world economy can only gain. As China and California both invest more in the green economy, the probability of a fundamental breakthrough in “green tech” increases. Once a new idea is developed it is a public good that can be replicated around the world. Yes, California produces just a fraction of the world’s greenhouse gas emissions but if AB32 stimulates “green” innovation then this could be a global game changer. Economists have long noted that human ingenuity can substitute for natural capital. Up until now, investment in the “green economy” has lagged. AB32 will address this funding gap.

While the innovation induced benefits from AB32 could be quite large, the Air Resources Board needs to be vigilant about keeping its regulatory costs low. Today, Republicans tend to oppose climate change regulation. They will be more favorably inclined as the reality of climate change starts to be apparent and if the ARB can credibly demonstrate the low regulatory costs and “green job” creation of complying with this regulation.

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.

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.

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