by CalWatchdog Staff | May 17, 2010 8:10 am
MAY 17, 2010
By DAVE ROBERTS
If the California Global Warming Solutions Act of 2006, more commonly known as AB32 for its Assembly bill number, gets put on hold by state voters this November, it may be due in part to two professors who dared to take on the state bureaucratic establishment by predicting that the legislation would lead to near economic Armageddon in California.
Implementation of AB32 over the next decade would result in California losing more than a million jobs, an additional cost of nearly $50,000 to small businesses and nearly $4,000 in costs for the average family, according to Sanjay Varshney, the dean of the College of Business Administration at California State University, Sacramento, and Dennis Tootelian, a marketing professor and director of the Center for Small Business at CSUS, in a study released last July for the California Small Business Roundtable.
“[T]he potential loss of output, jobs, indirect business taxes and labor income is substantial and significant,” they state in a press release accompanying the report. “[C]onsumers will be forced to cut their discretionary spending by 26.2 percent. … the average annual loss in gross state output from small businesses alone would be $182.6 billion, approximately a 10 percent loss in total gross state output. Lost labor income is estimated to be $76.8 billion, with nearly $5.8 billion lost in indirect taxes. This decline in revenues will have a severe impact on future state budgets.
“Small businesses drive the economic engine in California. An adverse impact on small business is bound to adversely impact the production of goods and services in California, the risk tolerance of entrepreneurs and investors, the productivity of labor, the quality of life, and the overall well being of the State and its citizens. Currently California is facing one of the highest unemployment rates in the nation, an unstable real estate market with rising foreclosures, and rising numbers of families looking to move out of the state to find a more affordable living. Businesses are similarly faced with an inhospitable environment that features some of the highest taxes and utility costs in the nation, and an unfriendly regulatory climate that will likely result in more leakages of businesses elsewhere.”
The professors’ alarming findings are featured in large bullet points on the home page of the California Jobs Initiative (CJI) website, (although the findings are attributed to unnamed “economists” rather than Varshney and Tootelian). The organizers behind CJI – a coalition of oil companies, taxpayer organizations and business groups – have collected nearly twice as many signatures as needed to place the initiative on the November ballot. It’s designed to stop AB32 from being implemented until the state unemployment rate is 5.5 percent or less for four quarters. That would kill it for the foreseeable future – perhaps forever, the way things are going in the state.
AB32 requires carbon dioxide and other greenhouse gases to be reduced to 1990 levels by 2020, which equals about a 25-percent reduction from current levels. Over the next decade it will increase restrictions on everything from vehicle emissions to appliance efficiency to manure digesters at dairies. Just about everything that uses energy will come under its purview. Some implementation measures have already begun, affecting electrification of ships at ports, trucks that haul ship cargo, vehicle air conditioning, tire treads and landfill methane. The number and severity of regulations will increase in the coming years. The AB Scoping Plan timeline lists 72 measures that will be implemented.
Naturally, Democratic legislators, liberal groups and environmental organizations, with the backing of Gov. Arnold Schwarzenegger and the state bureaucracy, have a vested interest in seeing it roll out on schedule. So, the release of the Varshney/Tootelian study last year was the proverbial dropping of the turd in the punchbowl, and they counterattacked. The California Air Resources Board (CARB), the state Legislative Analyst’s Office (LAO), Attorney General Jerry Brown and several academics criticized the professors’ report.
“Examination of the Varshney/Tootelian analysis leads to the conclusions that their estimates are highly biased, are based on poor logic and unsound economic analysis, and are likely to be too large by a factor of at least 10,” concluded James Sweeney, professor of Management Science and Engineering at Stanford University, in a review in February.
CARB’s analysis of AB32, which it’s in charge of implementing, states, “After reviewing several critiques by independent economists, staff concluded that the Varshney and Tootelian estimate was unrealistic because it was driven primarily by two problematic assumptions – that AB32 would not induce any cost-saving increases in energy or fuel efficiency; and that all investments resulting from AB32 should be counted as losses to the California economy.
“Implementation of the Scoping Plan’s recommendations would likely have minor but positive impacts on small businesses in California. These benefits were primarily attributable to the measures in the Scoping Plan that were expected to deliver greater energy and fuel efficiencies. Thus, even when higher per-unit energy prices were taken into account, such efficiencies were expected to decrease overall energy expenditures for small businesses. Moreover, as the California economy was projected to experience continued economic growth associated with the implementation of AB 32, small businesses were expected to experience many of the benefits – more jobs, greater productive activity, and rising personal income – associated with that growth.”
But it was the LAO hit piece released in March that generated headlines such as this one in the San Francisco Chronicle: “Legislative analyst rips business reports.” The other Varshney and Tootelian report referred to in the headline concluded that regulations in California have cost the state’s economy $492 billion and 3.8 million jobs. “Our review of this study indicates that it contains a number of serious shortcomings that render its estimates of the annual economic costs of state regulations essentially useless,” Legislative Analyst Mac Taylor states in his report.
The backlash on Varshney and Tootelian has taken its toll. They declined to be interviewed for this article. “We were just waiting for things to cool off a little bit,” said Varshney. “The recent discussions we have seen have been fairly one-sided. We are just lying low right now. We are trying to keep our names out of the media for a little bit.”
But they did release a response on March 23 to the LAO critique: “We stand by the findings of our research, and emphasize that the costs of AB32 are materializing quickly as utilities announce sky-high rate increases, and still the economic benefits of AB32 are yet to be seen. The research conclusions about the positive impacts of AB32 that were relied upon for passage of the legislation have now been rejected by many sources. Instead, the conclusions in our report regarding near-term job losses have been confirmed by the Legislative Analyst’s Office.
“Rather than question the logic behind the AB32 or cost of regulations studies or attack their reliability, critics should talk to small businesses about the current economic challenges confronting California. Small business owners and the Legislative Analysts’ Office all agree that AB32 will cost Californians their jobs, the question is really about the degree and how many will be lost. We encourage the academic critics to produce their own research with a different methodology if they choose, and to engage productively in analyzing the issues that impact Main Street and the average family that is just trying to make ends meet.”
California Small Business Roundtable Chairwoman Betty Jo Toccoli clearly didn’t expect the firestorm that would result from the study. “I guess we did the report because at the governor’s conference a year ago the small business owners that attended said we needed to know something about the plan, what it would cost them … to help them plan for the implementation,” she said. She’s now not sure who to believe. “We have such extremes. From one side there won’t be any cost to business. Then we have this report that says it will cost jobs. It’s probably somewhere in between. We are not fighting AB32. We just want to make sure it’s implemented to make sure it doesn’t put any small businesses out of business.”
AB32 proponents appear to be vulnerable on that question, even if the regulations don’t lead to economic catastrophe. The LAO stated that some companies “might go out of business, cut back operations or choose to relocate elsewhere,” and that AB32 implementation will “involve various workforce labor dislocations, including temporary job losses and unemployment for some people and permanent unemployment and income disruptions for others,” pointed out Jon Coupal, president of the Howard Jarvis Taxpayer Association, which supports the California Jobs Initiative, in a press release.
“The legislative analyst also warns that because of AB32’s substantial up-front costs, the California Jobs Initiative will not suspend or repeal environmental regulations that already protect our air and water. But it will protect jobs by aligning California more closely with other states and countries in a fiscally responsible approach to climate change policy. Placing the initiative on the ballot will give voters a voice in an issue that will directly affect their pocketbooks and quality of life for years to come.”
CJI proponents expect the initiative to be certified for the November ballot by the Secretary of State on June 24.
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