California's environmental policy has made headlines recently, with Gov. Arnold Schwarzenegger announcing that he plans to sue the federal government over its refusal to let the state enact its own plan to reduce greenhouse gas emissions, and instead adopt a more lax federal plan. While the E.P.A.'s regulation promises to increase fuel efficiency standards by 40 percent come 2020, the California plan would cut emissions from new vehicles by around 30 percent by 2016.
But from an economic standpoint, is Schwarzenegger's move a good idea for the state? In their new working paper "Too Good to Be True? An Examination of Three Economic Assessments of California Climate Change Policy," the economists Robert Stavins, Judson Jaffe, and Todd Schatzki examine California's Global Warming Solutions Act of 2006, which purports to reduce the state's total emissions by 25 percent, bringing emissions back to their 1990 level by 2020. The authors review in detail the studies used as justification for enacting the policy, all of which found that the state could meet its 2020 target at no net economic cost. Their conclusions are summarized as follows:
[A]lthough opportunities may exist for some no-cost emission reductions, these California studies substantially underestimate the cost of meeting California's 2020 target…. by omitting important components of the costs of emission reduction efforts, and by overestimating offsetting savings that some of those efforts yield through improved energy efficiency. In some cases, the studies focus on the costs of particular actions to reduce emissions, but fail to consider the effectiveness and costs of policies that would be necessary to bring about such actions. While quantifying the full extent of the resulting cost underestimation is beyond the scope of our study, the underestimation is clearly economically significant. A few of the identified flaws individually lead to underestimation of annual costs on the order of billions of dollars.
Billions of dollars of underestimated costs is no small mistake (calling into question whether the initial researchers faced political pressure to deliver that "no net cost" verdict), and these results could mean serious repercussions for a state that's already facing a looming fiscal crisis, not to mention the ongoing costs of recovery for the 2007 wildfires for both the federal and state government.