California Climate Vote More About Protecting Investments

Posted on Fri 11/05/2010 by

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By Nicolas Loris

California voters overwhelmingly rejected Proposition 23, the ballot initiative that would have suspended the 2006 Global Warming Solutions Act (AB 32) until the state’s unemployment level dropped below 5.5 percent for four consecutive quarters.

AB 32 aims to return greenhouse gas emissions in California to 1990 levels by 2020. Many Californians saw Proposition 23 as a battle between out-of-state oil producers versus environmentalists and in-state venture capitalists spurring a clean energy revolution, so it’s no surprise California rejected it by a 61 percent to 39 percent margin. But the vote was not about climate policy to the venture capitalists in Silicon Valley. Rather it was about how their investments would fall flat without the taxpayers artificially propping them up.

Businesses rightfully have an interest in protecting their bottom lines, and many of the venture capitalist firms calculated that AB 32 would be a huge boon to the so-called clean-tech industry. “AB 32 is a stimulus for economic growth and innovation,” said Tom Werner, chief executive of California-based solar panel maker SunPower Corporation. Perhaps for his industry, but not for the rest of the state. Heritage research fellow David Kreutzer points out:

In addition to the standard environmental groups, those financing the opposition to Proposition 23 are mainly financiers who stand to gain from restrictions on conventional energy and billionaires who are far removed from worries over monthly energy bills and losing a job. The problem for the other 37 million Californians is that they do worry about how they can pay higher energy bills and about getting and keeping a job.

This process, known as rent-seeking (because it causes businesses to lobby for rules in their favor at the expense of others), is bad economics, bad for the consumer, and bad for the state of California. Not only is there an opportunity cost to lobbying (business resources spent on lobbying could be spent elsewhere), but politics governed by special interests typically worsens conditions for the consumer. Consumers are the ones who bear the costs of these government policies; meanwhile, industry receives a seemingly free windfall.

The tradeoff for less greenhouse gas emissions is higher energy prices and thus lost income and higher unemployment, which is why Proposition 23 was offered in the first place. Reports on cap and trade by government, and by think tanks—independent, left-leaning, and right-leaning—all conclude that cap-and-trade policies to reduce greenhouse gas emissions are economic losers. Studies from the National Black Chamber of Commerce, The Brookings Institution, the Energy Information Administration, the Congressional Budget Office, the Environmental Protection Agency, and The Heritage Foundation all found net decreases in income and employment—even after the government spends money to subsidize green jobs.

Venture capitalists should bear the risk and, therefore, reap the rewards or suffer the consequences of an investment decision. But if the government dictates these decisions by subsidizing a portion of the project, the venture capitalists receive all the rewards with minimal risk. With start-up companies and large corporations alike receiving money from the government through direct subsidies, tax credits, and unnecessary regulations, firms will divert investments to clean-energy technology away from other potentially more profitable and value-creating investments.

Alternative energy sources may be able to compete economically with more conventional ones and eventually replace them, but that process should be driven by the market. As Kreutzer notes, “Just as cars replaced horse-drawn carriages and electric lights replaced kerosene lamps (which replaced whale-oil lamps) and jetliners replaced passenger steam ships, it is likely that some new forms of energy will out-compete the old forms. If so, the developers won’t need mandates to get consumers to use them.” Profits and losses are a much better indicator of what producers should supply than what the government tells us we need.

The rejection of Proposition 23 may seem like a victory for environmentalists hoping to revive a national cap-and-trade program. But it’s more of the same: government policies that create concentrated benefits and widespread costs.

Nicolas Loris is a Research Assistant at The Heritage Foundation’s Roe Institute for Economic Policy Studies. Loris studies energy, environment and regulation issues such as the economic impacts of climate change legislation, a free market approach to nuclear energy and the effects of environmental policy on energy prices and the economy.

Read more informative articles at Heritage – The Foundry

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