Cap-and-Trade in California

| Thu Apr. 29, 2010 9:30 AM EDT

When I turn on my TV these days, I'm usually assaulted by ads from the two candidates trying to win the Republican primary for governor of California this year. Both of them are Silicon Valley moderates who are desperately trying to convince the GOP faithful that they're actually stone cold reactionaries, and the ads have gotten pretty ugly. And not just toward each other. One ad that's currently in heavy rotation, after spending its first 25 seconds trashing the opposing candidate, ends with this ominous message: "After Arnold, don't we deserve....a Republican?"

Ouch. Why are California Republicans hating on Arnold Schwarzenegger? The bill of particulars against the Governator is long, but a big part of the answer is AB32, a global warming bill passed by the Democratic legislature and signed into law by Schwarzenegger in 2006. "I say the debate is over," he had declared a year earlier, and needless to say, those are fighting words for modern conservatives.

But what makes it worse — much, much worse — is what AB32 does. This is not your run-of-the-mill conservation or energy efficiency bill. That would be bad enough. But the centerpiece of AB32 is a plan to limit California's greenhouse gas emissions, and the primary way it does this is by authorizing the California Air Resources Board to implement a cap-and-trade plan designed to reduce CO2 emissions to 1990 levels by the year 2020. It's the same kind of cap-and-trade proposal that President Obama and congressional Democrats want to impose on the entire country.

Now, this would hardly be the first cap-and-trade plan in history. That honor belongs to the effort to limit acid rain in the early 90s, which employed a cap-and-trade mechanism that was — surprise! — originally a conservative idea designed to make use of market principles to reduce sulfur pollution. Nor would it be the first CO2 cap-and trade plan. Europe is already in phase two of ETS, their continent-wide cap-and-trade program. In fact, it wouldn't even be the first CO2 cap-and-trade plan in the United States. RGGI, a cap-and-trade mechanism for ten northeastern states, started up two years ago and auctions off CO2 permits every three months. You can see the results online if you're interested. (In the most recent auction, a permit to emit a ton of CO2 sold for about two bucks.)

But none of that matters. California is still California, a bellwether for the nation, and cap-and-trade here would give the idea both exposure and legitimacy that neither RGGI nor far-off Europe ever could. And so the opposition has gotten hot. AB32 set out a 6-year implementation schedule, which means that cap-and-trade is still a couple of years off. To keep that from happening, an ugly confederation of oil companies and conservative activists has banded together to put an initiative on the November ballot that would temporarily suspend AB32 until the economy improves. How long is "temporarily"? Until unemployment is down to 5.5% for four quarters in a row. And how long would that take? State estimates suggest that California's unemployment rate won't drop to that level until 2017, which means the earliest AB32 could go into effect is 2018. But what are the odds that California won't suffer any kind of economic downturn in the next eight years? Pretty slim. The reality is that the proposed initiative would almost certainly kill off AB32 for good.

So what are the chances of repeal succeeding? Hard to say. The anti-AB32 movement is called the California Jobs Initiative, and their argument is that AB32 will cost California over a million jobs, something the state can hardly afford in the middle of a brutal recession. AB32's supporters dismiss CJI's numbers as ridiculous, and the ammunition employed by the two sides, as usual, is dueling reports. A study from Charles River Associates suggests that AB32 would reduce average household income in California by about 1%. A study from the Air Resources Board, by contrast, projects that both household income and the number of jobs in California would rise slightly by 2020. The Legislative Analyst's Office, generally considered an honest broker, suggests that California might suffer small near-term job losses if AB32 is implemented, but their analysis is pretty shallow and speculative and their conclusions were backed up with virtually no evidence at all. Energy efficiency, on net, is usually a winner, something that a wide variety of studies has confirmed.

But all three studies agree on two things: (a) the economic effects of AB32, whether positive or negative, are likely to be modest, and (b) there's a ton of uncertainty in the forecasts. The best bet is to simply admit that the most likely economic effect of AB32 is either zero or not far from it. The econometric tools at hand just don't allow us to say much more.

But that might not be enough to save AB32. A recent Field Poll showed that 58% of Californians favor the law, but that's a pretty thin majority. A barrage of industry-funded ads will probably eat into that majority, and turnout at the November election is likely to skew conservative. Add in California's 12.5% unemployment rate and you have a recipe for a pretty effective fearmongering marketing campaign.

But even if the repeal movement fails, AB32 could still be in trouble if a Republican wins the governor's race. Jerry Brown, the only serious candidate on the Democratic side, supports AB32, but both of the Republican candidates oppose it. And since the legislation allows the governor to suspend the law for a year in the event that it poses a threat of "significant economic harm," a Republican governor could effectively kill it for good by simply suspending it every year for as long as they're in office.

This makes AB32's future hazy to say the least. Supporters need to fight off a well-funded initiative campaign and make sure a Democrat is California's next governor. And they need to do it in an electoral environment that promises to be heavily favorable to the GOP and to anti-government forces in general. Four years ago AB32 promised to be the most muscular climate bill in the country. But unless a bunch of things go its way, by next year it might be dead.

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