AB 32’s Economic Cost Is Far Lower Than “Allowance Value”

   (The following is a response from Larry Goulder, a Stanford University economics professor, regarding the AB 32 allowance value discussed in a previous posting here and the actual economic cost of reducing greenhouse gas emissions to 1990 levels by 2020.)

 As chair of the Economic and Allocation Advisory Committee to the California Air Resources Board, I am writing to clarify an issue relating to your recent blog concerning the value of emissions allowances under California’s AB 32. 

In your blog, you accurately described the draft report’s range of estimates for the total value of emissions allowances over the interval 2012-2020. The listed range is $48 to 143 billion. 

Unfortunately, however, the connection between this value and the economic cost of AB 32 has been misinterpreted. 

Some have incorrectly identified this allowance value with AB 32’s cost to the California economy.  In fact, allowance value is very different from economic cost.  Allowance value does not leave the economy:  It remains in the economy either as freely offered — though valuable — allowances or as proceeds from an auction of allowances.  It is not an economic cost. 

 The net economic impact — positive or negative — of AB 32 depends on other factors:  Namely, the extent to which the program causes improved or worsened productivity in the way goods and services are produced and consumed in the state.

 The total allowance value under AB 32 could be in the range of $48 to $143 billion, but the cost to California’s economy is likely to be a very small fraction of the allowance value. 

Indeed, some studies indicate that the cost will be negative – that is, that AB 32 will raise state income.  The same studies that predict that AB 32 will raise state income also indicate substantial allowance value.

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