California's strict regulations don't stop at the state border : The Indicator from Planet Money From Sacramento to San Diego, the state of California is a tryhard when it comes to regulations. Today, we're singing about how the nation's strictest standards affect economies across state lines.

The California Effect

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SYLVIE DOUGLIS, BYLINE: NPR.

(SOUNDBITE OF DROP ELECTRIC SONG, "WAKING UP TO THE FIRE")

ADRIAN MA, HOST:

There's a kind of person - we probably all have met one - who likes to one-up people, right? Like, you say, I'm thinking of going to the beach this weekend, and they're like, oh, yeah, that reminds me of this one time I went to Fiji.

DARIAN WOODS, HOST:

Yeah, I know exactly what you're talking about. You say, I saw this great movie, and then your friend says, well, actually the book is better and - oh, and by the way, I actually know the director.

MA: (Laughter) Yeah. In the world of environmental regulations, the state of California is like that person. Case in point - the White House last year asked carmakers to voluntarily sell more electric and hybrid vehicles. Then just over a week ago, California was like, oh, that's cool. We like the environment, too, but we're actually going to ban the sale of all gas cars entirely by 2035.

WOODS: It's a hella (ph) strong move.

MA: Yes, it is. And it turns out California has a history of this kind of regulatory one-upsmanship (ph), creating some of the strictest regulations in the nation not just around cars but all kinds of products. And the thing is, the effects of these regulations don't often stop at the state border. Sometimes, they spread to other states and even other countries. It's called the California effect.

(SOUNDBITE OF MUSIC)

MA: This is THE INDICATOR for Planet Money. I'm Adrian Ma.

WOODS: And I'm Darian Woods. Today on the show, how does the California effect influence the products we buy, the cars we drive, and even the air we breathe?

MA: We explain with some facts, some figures and a song.

(SOUNDBITE OF MUSIC)

WOODS: The California effect is the term that was coined by David Vogel.

DAVID VOGEL: I'm a retired professor at the University of California at Berkeley, and my specialty has been environmental politics and particularly California environmental issues.

MA: And the California effect is this idea that when the Golden State adopts or, in legal speak, promulgates strict regulations, those standards often spread to other jurisdictions. And David says you can especially see this with environmental standards.

VOGEL: Regulating appliances so they use less energy, extensive labeling of hazardous materials in California, building codes which attempt to make buildings more energy efficient.

WOODS: David knows all this because he wrote a book on the history of California environmental regulations with a musically inspired title.

VOGEL: Well, the title of the book, of course, was "California Greenin'," which was based on The Mamas & Papas songs.

(SOUNDBITE OF SONG, "CALIFORNIA DREAMIN'")

THE MAMAS AND THE PAPAS: (Singing) California dreamin', California dreamin' on such a winter's day...

WOODS: I mean, we're a little bit less innocent these days. I mean, I think "California Greenin'" makes me think of something else related to medicinal marijuana pioneering in California.

MA: It's greenin' (ph) in more ways than one. And, you know, when David told me this, I actually could not resist pitching him another title based on another famous California anthem.

You know, this is reminding me of that Tupac song. The chorus is (singing) California knows how to party.

If they changed the lyrics a little bit, it should be, like, (singing) California knows how to promulgate regulations.

It's not as catchy, maybe. But...

(LAUGHTER)

WOODS: Maybe don't give up your day job, Adrian.

MA: I mean, look, it needs a little workshopping is all.

WOODS: Anyway, back to regulations - David says that the prime example of the California effect is the state's regulation of car emissions. So think back to the 1970s, and air pollution in Los Angeles was really, really bad. And when Congress was passing the Clean Air Act, California wanted a special carve-out to pass emission standards that were even stricter than what the federal government would require of other states. And Congress said, OK.

MA: And then California turned around and said to carmakers, you want to sell here? You got to sell cleaner cars. And the carmakers said fine. So how did this one state bend these multinational corporations to its regulatory will? Well, there are a couple of reasons - economic, of course. First, California is what economists call ginormous.

WOODS: Note that technical word down, everybody.

MA: Yes, word of the day. With a population of 39 million, it is by far the biggest state.

WOODS: So I'm just looking up Texas now, the second biggest state. Population is only about 29 million - a lot smaller.

MA: I mean, 29 million is not bad, but it is way behind California.

WOODS: And check out California's spending power. In 2020, roughly 1 out of every 8 consumer dollars in the U.S. was spent by a Californian.

VOGEL: It's such a large market so that anything which California acquires for its own product sold in its state is going to resonate among national and global companies. If you don't want to have to make separate products for California and the rest of the country, you might as well just make them according to California's standards.

WOODS: In short, it comes down to economies of scale. And so that means as you become bigger and bigger as a company, it becomes cheaper and cheaper for you to produce goods.

MA: Right. And if you're a carmaker and you want to sell to California, you sort of have two choices. You could make two versions of every car with a special Cali edition, but then you'd have to reconfigure your designs and supply chains and assembly lines. Really, the cheaper and more profitable way to go would be to make one car that meets emission standards everywhere.

WOODS: And this business logic of regulations can even extend overseas. So, for example, David says that in the 1970s, the European Commission was debating how to regulate auto emissions. And German carmakers raised their hands and were like, we want stricter regulation.

VOGEL: Why - because a major portion of the market for German cars is in California, and the German manufacturers realized that they needed to meet California's standards to retain their impact on the American market. And they pressured the European Union to adopt environmental standards which were as close as possible to those of California.

MA: Plus, for German automakers, getting Europe on the California standard also gave them a slight competitive advantage over their European rivals - you know, the ones that weren't selling that many cars to California and now were going to have to play catch-up. And you can see this dynamic all over the economy - right? - where stricter regulations actually benefit an established big business. So that business may actually end up on a sort of unexpected side of the debate, asking for more regulation. And as those strict standards spread, David says this can create a sort of race to the top effect.

WOODS: Back in the U.S., you can see some evidence of that race happening as well. So about three decades ago, California began requiring carmakers to sell more low- or zero-emissions vehicles in their state. And since then, about a dozen states have chosen to adopt California's rules for themselves. So as the demand for hybrid and electric cars grow, they want to secure a piece of that growing market.

MA: Now, it's important to say a lot of people do not see California's power to move markets as a good thing. Earlier this year, attorneys general from 17 states actually complained to the Environmental Protection Agency, saying that California, with its special emissions carve-out - it has too much power. And Missouri's AG actually called California's rules oppressive. David says he understands this point of view.

VOGEL: I think many people would argue that, that California has regulated too stringently, and its economy would grow more rapidly if it had less regulation. I think reasonable people can disagree about that.

WOODS: In any case, none of this is stopping California lawmakers from promulgating away. Last week, lawmakers passed a whole raft of climate legislation from new restrictions on oil and gas drilling to an ambitious goal of achieving net-zero carbon emissions by 2045.

MA: Yeah. Clearly, California knows how to promulgate some regulation. And speaking of which, why don't we give that song one more try?

WOODS: Hit it.

MA: And a three, four...

(SOUNDBITE OF MUSIC)

COURTNEY THEOPHIN, BYLINE: (Singing) California laws. Yeah. Yeah. California knows how to promulgate regulations. California knows how to promulgate regulations. In the city of Sacramento and the state of 39 million, they move the market. They move the market.

WOODS: (Singing) They move the market.

MA: This jam was produced by Robert Rodriguez and sung by Courtney Theophin. This episode was produced by senior producer Viet Le with engineering from Robert Rodriguez. Nicky Ouellet checked the facts. Kate Concannon edits the show. And THE INDICATOR's a production of NPR.

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