Study Reveals Costs of California’s Climate Change Legislation to Economy

The Wisconsin Legislature recently adjourned without passing controversial climate change legislation, dubbed the “Clean Energy Jobs Act” (CEJA). All of the leading business and agriculture groups in Wisconsin believed the legislation would have significantly increased energy costs by forcing Wisconsin utilities to generate 25 percent of their electricity from higher cost renewable energy sources such as wind. Business and agricultural groups also opposed the controversial low carbon fuel standard (LCFS), arguing that it would have reduced the use of Canadian crude oil and disadvantaged corn ethanol, and thus increased the cost of fuel. The groups also pointed to studies that the legislation would have reduced manufacturing jobs due to higher energy costs.

Environmental groups, which supported the legislation, argued that the bill would have increased so-called “green jobs” and would have had a positive economic impact on the state. A recent report by California’s non-partisan Legislative Analyst Office, however, calls into question these policy arguments.

The California state agency studied the impact A.B. 32 will have on California’s economy. Specifically, the report studied whether the law’s three main provisions (cap-and-trade, renewable portfolio standard, and LCFS) will lead to “economic leakage” – the term coined to describe businesses relocating outside of the state due to higher energy costs.

According to the study:

California’s economy at large will likely be adversely affected in the near term by implementing climate-related policies that are not adopted elsewhere. This is in large part because such policies will tend to raise the state’s relative prices for energy, such as electricity. This, in turn, will adversely impact the state’s economy through such avenues as causing the prices of goods and services to rise; lowering business profits; and reducing production, income, and jobs. These adverse effects will occur in large part through economic leakage, as certain economic activity locates or relocates outside of California where regulatory-related costs are lower. 

The study further questioned whether such policies would add jobs, factoring in so-called “green jobs”:

While it is true that there will be both winners and losers under [A.B. 32], including gains in so-called “green” jobs, the net economy-wide impact in the near term of implementing [A.B. 32] in the absence of like policies in place elsewhere will in all likelihood be negative.

Although Wisconsin’s climate change legislation did not include a cap-and-trade policy, similar to California’s law, it did originally include an enhanced renewable energy mandate and a LCFS. Thus, the California study is illustrative for any potential future legislation in Wisconsin, particularly given Wisconsin’s large manufacturing sector.