Sunday, January 20, 2013

California Law Tests Company Responses to Carbon Costs

Sorry (Naor), but it might be a while before I type up a good response to the carbon pricing conference (don't worry, I have tons of notes, so unless I lose my notebook, I won't forget anything).

I believe that I read this in December, but I might as well summarize it here anyway.

California's climate change bill AB 32 went into effect January 1st, so businesses needed to start preparing earlier.  After a relatively dispassionate effort at repealing the bill (little support from oil companies even), companies had to find a way to comply.  Unfortunately, there are some unavoidable consequences of such a far-reaching bill, namely the prospect of leakage.  Some companies may cut production or move elsewhere as higher energy costs lead them to lose competitiveness.

In order to make the transition to lower emissions easier, large polluters have been given free permits at the beginning in the hope that they would be able to pay for energy efficiency upgrades and other pollution-reduction measures and remain profitable.  The article highlights Morning Star, a tomato processing company subject to the cap-and=trade regime.  It expects costs to rise and needs to spend $75,000 in the next few years to comply with the law.  For now, California controls most of the tomato-processing market in the US, but China may take over if companies like Morning Star have to raise prices too much to stay in the US.

Overall, this was a good summary on the prospect of leakage from regional climate-change regulation efforts. There was just one sentence I had a problem with: "But many economists said they think such a cost-centric analysis ignores the jobs and economic activity that the law could generate." I don't think that environmental economists view this as a benefit.  Actually, more jobs means that compliance is more expensive.  Clean jobs are a byproduct of increased environmental protection, not an explicit goal.  Of course, any environmental legislation will destroy "dirty" jobs and increase "clean jobs," but the projected effect on employment should not dictate policy.

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