Assessing The Economic Impacts Of Large-Scale Environmnetal Regulations In California

Short Abstract A sophisticated computable general equilibrium model of the California economy tracks how regulatory costs, parameterized as enhanced capital and/or intermediate requirements for regulated industries, ripple through the economy as increased demand for compliance related inputs. Effects on statewide and sector-specific output, employment, factor payments, and trade balances are reported. Longer Abstract This paper uses a sophisticated computable general equilibrium model of the California economy to assess the economic impacts of various large-scale environmental regulations. The model, E-DRAM (Environmental-Dynamic Revenue Analysis Model) was build by the authors for the California EPA/Air Resources Board by modifying DRAM (Dynamic Revenue Analysis Model), a model they helped build and refine for the California Department of Finance's use in conducting revenue analyses of pending legislation. E-DRAM has 30 industrial sectors, 2 factor sectors - capital and labor, 7 household sectors (stratified by income tax bracket), and 36 government sectors (7 federal, 21 state, and 8 local), and one sector representing the rest of the world (ROW). Industries demand inputs, factors and intermediate goods, which they combine to supply final output goods. Factors are supplied by households, which demand final goods from industries. Government sectors tax and spend. Households and industries buy products from California or ROW based relative tax-inclusive prices; households migrate in/out of state based on relative economic conditions. E-DRAM also contains an air quality module which tracks five criteria air pollutants based on the emissions intensities of each industrial sector as computed from primary data. In consultation with regulator experts, the regulatory scenarios under study are parameterized as some combination of capital and input requirements imposed on the regulated industries. In E-DRAM, capital expenditures dedicated to regulatory compliance produce environmental quality but do not contribute to traditional industrial output. Increases in operating expenditures are modeled as uniformly raised or sector specific changes (increases and or decreases) in input requirements. With regulation(s) thus parameterized, E-DRAM solves for a new equilibrium. This new equilibrium is interpreted as an alternate state of the California economy under the new regulatory regime, ceteris paribus. Absolute and percentage change in statewide and sector-specific output, employment, factor payments, emissions, and trade balances are reported for policy experiments examining the economic impacts of the State Implementation Plan (SIP) of the Federal Clean Air Act, petroleum dependency issues, and fuel efficiency standards.