Will AB32 Lead to Manufacturing Job Loss in California?

I don’t think so but it could have.  Several years ago, I was asked to review the California Air Resources Board’s original economic scoping plan focused on the likely consequences of AB32.  My 2008 remarks are quoted in a new blog post from today.  It is a fact that there are some highly energy intensive manufacturing industries.  Below, I list the top 5 electricity intensive industries where the right column reports an index of kwh consumed per $ of output shipped.

Erin Mansur and I document that these industries are sensitive to electricity prices and tend to cluster (all else equal) where electricity prices are lower.  At the time I wrote my remarks, I did not know that the ARB would offer permits for free to initial polluters. This reduces the incentive to migrate away from the regulated area.  I also knew at the time that California’s economy does not rely on these industries as major employers.   Given that California’s electricity is generated using natural gas (rather than coal), the two key unknowns are;  1.  How much will AB32’s RPS standard and the Cap and Trade for carbon dioxide raise residential, commercial and industrial electricity prices?  2.  How responsive are California’s manufacturers in terms of exiting California and building factories elsewhere when industrial electricity prices rise?  The ARB is quite concerned about this possibility and has the right incentives to monitor this and to take action if this unintended consequence appears to be serious.  So, my answer to the question is “No”.  As I have pointed out before, any environmental regulation creates some job destruction and job creation (think of Tesla Automotives).   Empirical economists have trouble predicting the births of new firms (that currently don’t exist) due to new regulation that hasn’t been fully implemented yet.