California, that former land of opportunity, was one of the first states to pass its own version of "cap and trade" to reduce greenhouse gas emissions. In 2007 when Governor Arnold Schwarzenegger signed the law, called AB-32, he said it would propel California into an economy-expanding, green job future. Well, a new study by the state's own auditing agency—its version of the Congressional Budget Office—has burst that green bubble.

The study released May 13 concludes that "California's economy at large will likely be adversely affected in the near term by implementing climate-related policies that are not adopted elsewhere." While the long-term economic costs are "unknown," the study finds that AB-32 will raise energy prices, "causing the prices of goods and services to rise; lowering business profits; and reducing production, income and jobs."

The economic reality here is what the Legislative Analyst's Office calls "economic leakage." That's jargon for businesses and jobs that will "locate or relocate outside the state of California where regulatory-related costs are lower." The study says the negative impact on most California industries will be "modest," but energy-intensive industries—specifically, aluminum, chemicals, forest products, oil and gas and steel—"may significantly reduce their business activity in California."

Yes, some new "green jobs" will be created. But the "net economywide impact," it says, "will in all likelihood be negative." Sorry.

The green lobby typically tries to discredit such results when they're sponsored by business, as if anything business commissions isn't credible. But no one can say that California's state auditing agency has an industry bias.
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Some Californians may shrug and say that such costs are worth it to save the planet from CO2. But the report bursts that bubble too, concluding that the California law's impact on carbon emissions will be de minimis because "the economic activity that is shifted will also generate" greenhouse gasses outside the state.

Recognizing this problem, California politicians are busy trying to get a Western regional pact to reduce carbon emissions, but so far Arizona, Montana, Oregon, Utah and Washington have refused. They'd rather have the jobs.
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It should be obvious to Members of Congress that similar jobs and business "leakage" will strike the U.S. in general if federal cap and trade passes. The hardest hit industries will leave the U.S. and relocate to the likes of China and India where marginal costs are lower. The recently introduced Kerry-Lieberman bill all but concedes the point by calling for tariffs on products from countries that don't impose similar energy costs.

In November, Californians will vote on an initiative to suspend AB-32 until the state unemployment rate falls to 5.5%. The rate is now 12.6%, the third highest after Michigan and Nevada, and a state already leading the nation in lost jobs and businesses, home foreclosures and debt doesn't need higher self-imposed energy costs.

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This article was published by The Wall Street Journal online on 25 May 2010.

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