In 2006, California approved AB 32, a sweeping law to reduce carbon emissions that contribute to climate change. Fynnwin Prager, a researcher at the University of Southern California, examines the implications of AB 32 for economic inequality.
It is often said that policies have winners and losers. AB32 – California’s landmark cap-and-trade climate policy – has seen its fair share of both, and it is barely a year old. AB32 caps California greenhouse gas emissions – reducing down to 1990 levels by 2020 – and allows emissions rights to be traded between industries, so that the cheapest sources of reductions can be found. Earlier this month, a Sacramento Judge ruled in favor of AB32 in the latest – though surely not the last – legal challenge by pro-business groups. Since being initially passed in 2006 by Governor Schwarzenegger, AB32 has overcome further pro-business challenges at the ballot-box, and has dodged lawsuits from environmental justice groups during a long administrative review process.
This raises the question of who the winners and losers of AB32 really are. Interest groups everywhere claim to be losing out from AB32. Regulated industries, especially those with high greenhouse gas emissions, are particularly fearful; their customers and suppliers have reason for concern too. Some environmentalists worry that emissions will “leak” into neighboring states and countries where regulations – or offsets – are less costly. Unions worry about jobs and wages being cut, while other opponents complain that increased electricity and fuel prices will hurt consumers, especially the poorest who spend larger proportions of their income on necessity goods.
There is particular concern therefore that lower income households will bear the burden of AB32 in terms of jobs and consumption, not to mention health. Environmental justice campaigners have long been skeptical of cap-and-trade policies such as AB32 (Los Angeles has been running such a program to reduce Acid Rain pollutants since the 1990s), which they fear will enable “hot-spots”, whereby the worst polluters in poor neighborhoods to purchase emissions rights, and possibly even increase greenhouse gases and other harmful emissions.
And yet continuing climate change is also bad news for social equality. Increased heat waves are more likely to impact the poor and communities of color. In Los Angeles alone, nearly twice as many African Americans die from heat waves compared to other residents. This is partly due to a lack of access to air-conditioning and transportation, and is also influenced by urban design – the lack of shady trees – and the location of historically African-American communities within the Los Angeles basin. Climate change is also likely to speed up smog formation, which already disproportionately impacts the health of poor communities. Climate change is also projected to increase prices of necessity goods, and reduce jobs in sectors such as agriculture that disproportionately employ low income workers.
Does this mean that you are damned if you do, and damned if you don’t? Not necessarily. A study published last year by Adam Rose, Dan Wei, and myself in Contemporary Economic Policy found that AB32 could be designed to produce wins for the environment – reduced greenhouse gas emissions – economic efficiency, and social equity. We projected that AB32 would improve economic output in California. AB32 is likely to encourage many businesses to find so-called “no-regrets” emissions reduction strategies, whereby long-run savings outweigh up-front investments. Businesses are not currently undertaking these strategies for various reasons, including a lack of capital, short-term investment focus, a lack of information about the cost savings of energy efficiency, and behavioral and process inefficiencies – for example, the industrial equivalent of forgetting to switch off a light. AB32 is expected incentivizes energy efficient behavior; these and other benefits outweigh costs to other sectors.
We confirmed that policy design determines outcomes. Economic growth for California is greater when emissions rights are freely granted to industry instead of being auctioned. AB32-induced economic growth under both designs leads to household income increases for all but the lowest income bracket, as shown in Table 1. However, higher income households also receive a larger piece of this new pie, leading to increased relative inequality. When emissions rights are auctioned, revenues are generated and can be redistributed. Our findings show that neither income tax relief nor per-capita dividend are sufficient to offset the negative impacts to the lowest income households. Redistribution must therefore be more skewed to lower income brackets to achieve economically equitable outcomes.
The caveats are important here. This study only covers one element of social welfare. Some other studies instead use changes to consumption as a proxy for welfare changes as it may be more reflective of long-term welfare. Lower-income households are likely to be disproportionately burdened by climate policy as they spend larger amounts on greenhouse gas intensive products – such as energy, fuel, and food. The health impacts of AB32 are not examined, though retrospective assessments of the US Acid Rain program – the pioneer of cap-and-trade policy – have found no evidence for the emergence of “hot-spots”.
AB32 will fall somewhere between a win-win and a lose-lose. AB32 will reduce California emissions, yet low income communities are likely to suffer climate change with or without AB32. California will hope that favorable economic outcomes, and its reputation as an early-adopter, will encourage others in the US and beyond to follow. The Golden State does however control how it spends cap-and-trade auction revenue. Recent California legislation requires auction revenues be spent on job creation and public health concerns among others, all while at least 35% are spent on “disadvantaged communities”. The proof will be in the pudding, but such attention may just produce a “win” for equality.