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Blue California Takes a Flyer on Green Legislation

California is again doing what it does best: proposing 20th-century, blue model solutions to 21st-century problems. Starting January 1, companies across the state will be forced to pay for their carbon emissions through a “groundbreaking” cap and trade market:

The rules are relatively simple for producers like Morning Star. At the end of 2014, they must present state-issued allowances—one per metric ton of emissions—for the greenhouse gases they emitted in 2013.

For the 200,000 metric tons of carbon dioxide emitted annually by Morning Star’s three plants, the company is being awarded about 192,500 free allowances the first year; the company must buy the remainder on the open market. In the first allowance auction in November, the allowance price settled at $10.09 a ton, meaning in the first year Morning Star has to pay roughly $75,000 to cover its emissions.

But over the next five years, the number of free allowances will decrease sharply to encourage further emissions cuts. At current rates, that means Morning Star will have to buy 100,000 allowances for both 2017 and 2018, by which time the prices may have doubled or tripled in an open market. The company estimates the law will cost it an extra $20 million over the next seven years.

The potential costs of this legislation are obvious even to California’s Greens:

Mr. Kastle said Morning Star’s margins are too slim to absorb new regulatory costs. But he also worries about the consequence of passing them on. He knows that the California garlic industry lost half its market to Chinese imports in less than a decade, and notes that China’s tomato-processing industry is on the rise.

The Air Resources Board is also wary of this competitive situation, which is why it has been flexible about adjusting its regulation.

In response to these facts, California environmentalists argue that the legislation creates incentives for the creation of new green jobs and industries that will outweigh its effects on existing companies. It’s unclear why we should take them at their word.

For instance, Greens hope that stricter emissions controls will spur investment in technologies like, say, catalytic converters, which transform emissions into less toxic gasses. Stricter regulation may indeed create a market for these kinds of technologies, but in today’s global economy there is no reason why California will get the jobs that come from making the needed products.

As the market grows large enough to support new green industries, the advantages of relocating to a cheaper and less heavily regulated environment and exporting to states like California rapidly grow. If the market for green tech gets big enough, the advantages won’t go to the greenest, most expensive states.

Smart green industrial and economic policy is possible, but California seems a very long way from finding it. Greens need to move past their fixation on regulation and consider other ways of investing in sustainable technologies and fuel sources.

Still, California is doing the rest of us a favor by trying this out. Making the transition from a manufacturing economy to a more sustainable information and service economy is just one of the challenges confronting the U.S., and we should are lucky the federal system allows us to try different experiments as we try to figure out how to adjust. California’s new legislation is just another experiment in one of America’s 50 labs, and the experiments that work will catch on. This one will probably fail, but that that failure will serve to warn others away from a policy dead end.

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