Recent news delivered two different verdicts on two different climate policy experiments, both of which carry lessons for California and its delayed carbon reduction plan. The first, a revenue-neutral carbon tax in British Columbia is “a winner.” So says The Economist. But the second, the Massachusetts front of President Obama’s green jobs initiative, is a failure. What else to conclude from this week’s bankruptcy filing by Evergreen Solar, a recipient of millions in federal stimulus dollars and state subsidies?
There are lessons in both stories for lawmakers in the U.S., especially our environmental policy frontiersmen in California, who in 2013 will impose the only carbon policy outside Europe to rival that of our northern neighbor in its seriousness and aggressiveness.
First, from BC, we learn to be mindful of the costs of any unilateral carbon policy. Any tax comes at a cost, even a corrective one designed to make market participants pay the full social cost of their actions. That’s because the tax reduces the after tax returns to capital and labor, lowering investment and labor supply, and depressing economic activity.
In BC, these costs are offset, at least in part, by revenue-recycling provisions, that require the government to return the new tax revenues from fossil fuel consumption to the private sector through reduced income taxes. Lower rates on ordinary taxes, like the income tax, reduce the cost of funding government operations, while also affording a grand climate compromise that can win conservative support by averting government growth and reducing confiscatory taxes. Corrective taxes, then, can yield a double dividend by not only resolving market failures, but also reducing the cost of funding the government. In theory, such taxes can generate negative costs that obviate the need for evidence of nontrivial environmental benefits, in a cost-benefit analysis of the policy. In practice, however, economists are generally doubtful that carbon taxes provide that kind of free lunch.
Nevertheless, the report from The Economist, and glowing accounts from other media this summer, give the impression that BC’s carbon tax “has been good for the environment, good for taxpayers, and it hasn’t hurt the economy,” in the words of one economics professor in Ottawa. But only one of these claims can be credibly verified today: BC’s carbon policy has been good for taxpayers. In each of its first three years, the tax returned more money to income taxpayers than it collected in carbon tax revenues. Maybe this explains its broad support, which is widening as more conservative provincial leaders get behind it.
The problem with BC’s carbon policy is the same that will afflict California’s policy: the environmental benefits are likely to be arbitrarily small. Carbon emissions are a global public bad—emissions anywhere in the world cause damages everywhere. And those damages only accrue from excessive atmospheric carbon accumulation. Consequently, policy in BC or California must alter the stock of atmospheric carbon to impact the climate. The jurisdictions are too small to reduce annual carbon emissions in any appreciable way, let alone the stock of accumulated carbon already in the atmosphere. Even if California succeeds in reducing its carbon emissions by 25% in 2020, the state’s cap and trade program would only lower man-made carbon emissions by 0.32%, a tiny fraction that is further dwarfed when compared to natural carbon emissions. The emissions reduction is too small to generate any noticeable change in global temperatures, according to IPCC climate models.
Furthermore, firms are mobile, so efforts to regulate carbon in one jurisdiction can be expected to drive an exodus of carbon-intensive industries to surrounding ones. This migration causes carbon emissions to leak outside regulated jurisdiction, undermining the policy’s capacity to reduce emissions.
Given these realities, significant environmental benefits from climate actions in California and BC only accrue to the extent that other jurisdictions follow-on in a cascade of carbon control. But the evidence to date raises doubts about the trend-setting capabilities of these “green guinea pigs,” as they’re characterized by UCLA economist Matthew Kahn. But in Canada, other provinces have yet to jump on the BC band wagon (though Quebec imposed a tax on petroleum producers in 2007). In the U.S., several states have run away from the Western Climate Initiative since California first articulated its climate ambitions. None are running towards it.
It is perhaps in recognition of the limited capacity of these policies to deliver direct environmental benefits that their advocates also claim that raising the cost of carbon emissions is good for local economic growth. The Economist observed that under the carbon tax, BC’s economy is thriving relative to the rest of Canada (unemployment is slightly below the national average and growth is slightly above), but these statistics do not make a causal case, as other economists have noted. Is BC thriving because of the carbon tax, or in spite of it? How would its macroeconomic performance measure up without the tax? These are questions that might be answered in time, but the answers aren’t known yet.
Advocates for California’s cap and trade program contend that raising the cost of carbon emissions will attract green jobs to the state in order to meet regulation-induced demand for energy-efficient and clean technologies. Here, the news this week from Massachusetts is instructive. An industry analyst quoted by the Boston Globe said that the value of the now-bankrupt Evergreen Solar is essentially zero—equal only to the value of the scrap metal inside its shuttered manufacturing plant that once employed more than 800 people with the aid of federal stimulus funds and more than $50 million in state support.
The temptation to attribute Evergreen’s demise, as well as the struggles of another stimulus-backed solar manufacturer in California, to the general economic malaise is wrong for at least two reasons. First, demand for solar should be relatively strong, propped up by government and rate-payer funded rebates and by renewable energy generation requirements across at least 29 states. Second, Evergreen’s spokesman conceded that the source of the company’s problems is price competition from China, not demand at home: “Make a couple of phone calls and see in the solar projects around the state, where the panels are coming from. They’re not coming from a U.S. supplier.’’
And there’s the rub: The green technologies that Californians will demand under cap and trade don’t need to be made in California. They could be produced outside the confines of California’s carbon policy in nearby Arizona, Nevada, or Texas—or across the Pacific. Indeed, if American firms cannot compete with foreign firms before carbon prices raise the cost of production at home, how will they compete after the policies are imposed? Explaining how a policy that raises production costs can be expected to reverse a pervasive decline in American manufacturing is a job better suited for a contortionist than an economist.