Another Dishonest Attack on California’s Landmark Climate Law

rp_Tim-Oconnor-picture-228x300.jpgJust over two years ago, the California Manufacturers and Technology Association (CMTA) hired Andrew Chang and Company, LLC, a Sacramento-based economics consulting firm, to produce a report titled “The Fiscal and Economic Impact of the California Global Warming Solutions Act of 2006.” Though one might hope a report of this nature would deliver honest analytics and academic rigor, EDF economists found it to be an all-out attack on California’s AB32 law, thinly disguised as a credible analysis, and based on a fundamental misunderstanding of basic economic principles, misguided modeling assumptions, faulty calculations, and a willful disregard for the potential benefits of environmental regulation.

Fast forward to September 2014, and now the California Drivers Alliance, an organization organized and funded by a collection of oil producers known as the Western States Petroleum Association (WSPA), has taken a deceitful page out of CMTA’s playbook. This time though, the deceptive report comes from Andrew Chang’s former business partner, Justin L. Adams, now at Encina Advisors. The report – “Placing Fuels Under the Cap: The Economic Impact to California” – again concludes AB32 will be destructive to the economy, while ignoring the wage gains many Californians will receive from higher-paying jobs in California’s emerging clean energy economy.

While there are more holes in this latest report than in a block of Swiss cheese, here are three of the biggest ones:

First: Billions are missing; where’d they go?

The Drivers Alliance report mysteriously assumes California will collect revenues from selling cap-and- trade allowances but then makes this revenue magically disappear.

  • Let’s start with the first year, 2014-2015. The report correctly cites the 2014-15 State Budget as the basis for modeling, but flatly refuses (on page 20) to chalk up any benefits to the state economy in 2015. Because of this, the report’s “policy scenario” shows billions of dollars missing at the beginning of the program. Through their multi-billion dollar sleight-of-hand, Adams and the Drivers Alliance are able to calculate the economic cost at the beginning of the program to be nearly 3 times that of the impact of the program in later years.
  • In subsequent years, 20% of money taken in by the state does not generate any economic activity whatsoever. Not only have the authors ignored potential positive effects of investment, they presume that auction revenues spent on transportation, transit, and affordable housing will simply disappear from the California economy. Never mind that this money must, by statute, be returned to California through investments that cut greenhouse gases.

Second: Cherry-picked results on job losses and fuel costs hide the fact fuel policies create higher paying jobs and lower cost vehicles for Californians

The report selectively highlights economic impacts in some areas without mentioning economic benefits in others. For example:

  • While it’s obvious not all jobs are created equal, the report doesn’t take this fact into account in the model or conclusions. Rather, the report cherry-picks reductions in lower-paying jobs while hiding the dramatic increase in better-paying positions in the construction industry. For example, three new jobs in construction (average salary of $41,000 / year) will be created for every job lost in lower-paying jobs like retail clerks (average salary of $24,000 / year) and food service (average salary of $27,000 / year).
  • Similarly, the report uses a specious approach in evaluating fuel costs by dismissing the fact that AB 32 fuel policies deliver targeted investments that reduce the cost of more efficient vehicles for working-class Californians and improve air quality where it is needed most. For example, 25% of the revenues raised in cap-and-trade auctions are required by law to be used to benefit disadvantaged communities.
  • Finally, projects funded under the 25% rule demonstrate how investments achieve critical co-benefits such as air quality improvement, public health benefits, and, significantly, job creation. These facts are not taken into account by Adams and the Drivers Alliance in their report.

Third: Using a model that overestimates impacts because it ignores changing conditions inspired by the policy being modeled

At the heart of their analysis, Adams and the Drivers Alliance use a static input-output model to calculate economic effects of California policies – and report the conclusions as nearly fact. However, since this type of model cannot incorporate changes to the economy, and is run using uncertain gas price projections while ignoring the benefits of fuel diversification, Adams and the Drivers Alliance deliver results that are out of touch with the real world. For example:

  • The IMPLAN model, like other input-output models, examines the relationships within an economy using fixed technology assumptions. Accordingly, IMPLAN uses the past economy to forecast changes in the future, ignoring innovation, disruptive change, and consumer behavior modification. Therefore, the forces and dynamics that most strongly characterize California’s changing economy are not factored into the report, and likely yield far-end overestimates of economic costs.
  • The IMPLAN model also uses price projections developed by the Market Simulation Group (MSG) to forecast gas prices felt by consumers. A critical flaw is that these inputs are static projections that cannot take into account emerging issues such as the increased supply of alternatives, oversupply of oil in world markets, or market mediated pricing effects caused by reduced consumer demand. Taken together, these pricing effects can cut the cost of gas and diesel while reducing price volatility that undermines economic stability. Accordingly, the IMPLAN numbers completely ignore the portfolio effect of AB 32 fuel policies that can yield long term price declines.

Cutting transportation pollution isn’t magic, but it’s not fantasy either

Solving California’s transportation-related climate and air pollution problem isn’t magic, but it is possible with smart policy and hard work. Looking back, the state has been a pioneer in solutions for traditional air pollution from transportation dating back to 1970’s– yielding breakthrough technology like the 3-way catalytic converter that has since been adopted across the planet and has made our communities healthier. Through policies like AB32, California is at it again, yielding new clean technology investments and innovations from every corner of the state.

Like other discredited reports bought and paid for by major California polluters, (read about them here, here, here, and here) this new report ignores the myriad ways pollution reduction is good for California, and leaves unexplored the economic benefits that can result when the state invests in cleaner options for consumers.

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