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Fiscal impact of state climate law disputed

By Jim Downing
jdowning@sacbee.com
Published: Monday, Oct. 19, 2009 - 12:00 am | Page 18A Sacramento Bee

A local academic has emerged as the leading source of dark forecasts in a recession-fueled debate over whether California's war on global warming will hurt or help its economy.

Sanjay Varshney, dean of the business school atCalifornia State University, Sacramento, predicts dire consequences if the state moves forward with plans to cut greenhouse gas emissions.

His figures – dismissed by some economists – have been cited by business groups and politicians calling on the state to delay carrying out AB 32, the state's landmark climate changelaw.

In a July paper paid for by the California Small Business Roundtable, an advocacy group,Varshney reported that trimming emissions would cost the average household $3,857 a year, kill more than 1.1 million jobs and cut the state's economic output by nearly 10 percent.

Costs for food, fuel, electricity and housing would all rise, he predicts, driving a 26 percent drop in discretionary spending, slashing tax revenues and squeezing small businesses.

Those figures, the result of Varshney's first venture into environmental policy analysis, have planted him at one of the poles in the climate change debate.

At the other pole are environmental and green-business groups that predict AB 32 will makeCalifornia more innovative and efficient, driving economic growth and creating jobs.

Varshney's study has been cited by everyone from the San Diego Union Tribune's editorial board to leading industry advocates in Sacramento. Last month, Republican Meg Whitman nodded to Varshney's job numbers as she made postponing AB 32 a key promise in her run for governor.

"We first must get our economy back on track," she wrote in an op-ed in the San Jose Mercury News.

In an interview in his CSUS office, Varshney, 42, a native of India, said he was honored by the mention. He said he supports fighting climate change in concept and doesn't have an agenda.

"The idea was certainly not to make this political," he said.

Under AB 32, California must cut its greenhouse-gas emissions back to 1990 levels by 2020. Meeting that target will demand big increases in energy efficiency, renewable electricity and alternative fuels, among other changes. The law's regulations begin to take effect in January, withemissions cuts phased in over the next decade.

The debate over whether those cuts will crush the economy or boost it has been bubbling since Gov. Arnold Schwarzenegger signed the law in 2006.

Schwarzenegger has consistently pitched a vision of a low-carbon future filled with green jobs and technological innovation.

Studies funded by environmental advocates and foundations have concluded that efficiency gainsand demand for new energy technologies will deliver an economic boost. A study last year that assumed somewhat more aggressive emissions cuts than required by AB 32 predicted a roughly 3 percent boost to the state economy and 403,000 new jobs by 2020. The study was commissioned by Next 10, a Palo Alto-based nonprofit.

"Every time we're able to save money on fossil fuels, we can spend more money on in-state goods and services," which are more job-intensive, said David Roland-Holst, the study's author and an adjunct professor of economics at the University of California, Berkeley.

AB 32 calls for the state Air Resources Board to produce a peer-reviewed economic analysis that would, in theory, settle the issue.

The agency's first attempt, incorporating Roland-Holst's modeling, found AB 32 would boost gross state product by about 0.3 percent and save households about $500 a year.

But outside economists weren't convinced.

After the report's release last October, reviewers tore into it for understating AB 32's costs, among other problems. Harvard University economist Robert Stavins wrote that it was "terribly deficient." The nonpartisan state Legislative Analyst's Office called the study "inconsistent and incomplete."

Last December, the Air Resources Board ordered the analysis to be redone. A major revision is due by the end of the year.
 Since AB 32 passed, California's unemployment has more than doubled. Those who opposed the bill to begin with have tried to capitalize on its uncertain economic impact to stall implementation.

This spring, Assemblyman Roger Niello, R–Fair Oaks, co-wrote a bill sponsored by the CaliforniaBlack Chamber of Commerce that would have suspended AB 32 until the unemployment ratefell to 5.8 percent. The bill was watered down by amendments and remains in committee.

Varshney's study came out in July, and Whitman has made AB 32 a key issue in thegovernor's race. Democratic contender Gavin Newsom, for his part, has said, "The potential employment upside to AB 32 is staggering."

Whether Varshney's business-funded study was meant as an attack on AB 32 or not, the air board returned fire this summer. The agency spent $3,000 to commission a review of the report by UCLA economics professor Matthew Kahn, released in September.

Last year, Kahn criticized the air board's study. For Varshney's report, though, he had stronger words.

"Varshney generated a tremendously large number with very little evidence," he said in an interview. "We need to debate the costs and benefits of AB 32, but this was really from left field."

Varshney and co-author Dennis Tootelian, a colleague at the CSUS business school, say they were clear in the report that they would assess only the direct costs of complying with AB 32, not any corresponding savings – for instance through improved efficiency. Varshney said the magnitude of those benefits is uncertain, and that the study, for which they received $54,000, doesn't pretend to be the last word on the topic.

"Our study is not exhaustive, and neither are any of the ones that exist," he said. "This was our first attempt."

But looking only at the costs of emissions cuts and not the benefits leads to striking inconsistencies.

For instance, Varshney estimates the average annual cost of housing will rise about 15 percent, or $2,048, under AB 32, based on the extra expense of making a new home "zero net energy" – drawing no net grid electricity or natural gas.

But at the same time, the report predicts annual household electricity and natural gas expenses will rise to $1,723, rather than fall, as would be expected for a zero net energy home.

While there isn't yet a thorough and independent economic assessment of AB 32's impact, federal analyses of national proposals to cut greenhouse emissions offer clues about the costs of such efforts.

In studies conducted during both the Bush and Obama administrations, the U.S. Environmental Protection Agency, U.S. Department of Energy and the Congressional Budget Office have assessed proposals to cut emissions in the range of 17 percent below 2005 levels.

Most of those studies have found a cumulative drag on the economy of less than 1 percent of GDP over 20 years, with one prominent model pointing to costs of between 2 and 3 percent.

However, Harvard's Stavins cautioned that those conclusions won't necessarily apply to AB 32,because both the emissions-cutting targets and the policies used to achieve them differ somewhat.

Studies of the costs of climate-change policies generally don't include the expense of coping with the major warming expected if global emissions aren't cut. In California, these expenses could include costs related to water shortages, increased wildfires, crop changes and poorer air quality,among others.

Those costs are uncertain but may be very large. Frank Ackerman, a Tufts University economist, likened spending now on emissions cuts to buying insurance against any potential calamity.

"You don't buy fire insurance because you are sure your house will burn down," he said. "You buy it because you can't be sure it won't burn down."