Reports Warn Of Higher Energy Costs, But Supporters Of The New Law See Benefits

By Sean Belk - Staff Writer

July 17, 2012 – In the next decade, California’s landmark climate change legislation, AB 32, aims to diversify energy sources, spur clean-tech innovation and bolster green industries to meet aggressive goals poised to scale back man-made green house gases, including carbon emissions, to 1990-levels.

But a string of new studies, mostly funded by heavy polluters, including oil refineries, claim forthcoming regulations, such as the cap-and-trade program and the low carbon fuel standard, will send energy prices for consumers soaring, cause continued “economic slowing,” reduce state revenues and put thousands of people out of work.

Despite the gloomy studies, however, green industry advocates say the overall benefits of AB 32 to the state will eventually outweigh the costs.

“For certain industries, this is a boon . . . California has been attracting more green tech investment by far than any other state in the nation and that’s largely because of the policies put in place here,” said Tom Bowman, president of Signal Hill-based Bowman Design Group, who considers himself a premier interpreter of global change, climate and energy science and green business strategies. “The question really is: does it actually hurt the state overall or is it just an adjustment phase? Most of the businesses I talk to say it has more to do with adjusting than any kind of penalty to the state.”

The two opposing pictures represent mounting debate about the potential impacts of the state’s rigorous set of pollution-reducing initiatives – expected to be the most stringent ever implemented in the United States. At the same time, reports claim some clean fuel products have struggled to fully hit the market, while national efforts to stimulate green job growth have so far fallen short.

The California Global Warming Solutions Act was passed by voters in 2006 and includes the cap-and-trade program, which goes into effect next year, and is considered the most hard-hitting portion of the law. The new law imposes fee-based regulations on any business that produces 25,000 tons or more of carbon emissions per year. The law applies to 600 of the heaviest polluters in the state, including oil refineries and cement manufacturers.

To help ease the transition to reduce emissions, however, the new law is designed to provide electric utility companies with “allowances” that heavy emitters would receive free of charge initially and then would have to purchase. The proceeds from the sales would then go toward investing in renewable energy sources. According to Dave Clegern, spokesperson for the California Air Resources Board (CARB), the main agency responsible for implementing the legislation, AB 32 will open up market competition and is expected to bring down energy costs over time.

The low carbon fuel standard, which applies mostly to the transportation industry, calls for a 10 percent reduction in the “carbon intensity” of California’s transportation fuels by 2020. By calculating carbon intensity through a “life cycle approach,” the law encourages fuel producers and refineries to start making more fuels other than petroleum-based, such as alternative fuels and clean fossil fuels, such as natural gas. The initiative provides subsidies to heavy emitters through “carbon credits,” earned from companies that generate fuels that have carbon intensity below the standard.

In 2010, Proposition 23, mostly backed by oil companies, tried to suspend the implementation of AB 32, but the effort failed to receive voter approval.

‘Renewable’ Race

Seal Beach-based Clean Energy Fuels, which built a 2.9-acre liquid and compressed natural gas fueling station at the ports of Long Beach and Los Angeles that converted 1,300 diesel-burning trucks to cleaner natural gas fleets, remains a strong supporter of the low carbon fuel standard for the transportation industry.

But even the natural gas provider has some concerns about whether enough alternative fuels will make it to market in time for the state to meet its lofty goal of having 33 percent of all power in the state run on “renewable” energy by 2020.

“What we need to do is look at all alternatives and make sure California businesses have low cost energy and have real alternatives . . . that can provide savings to businesses to help us create jobs and strengthen our economy,” said Todd Campbell, vice president of public policy and regulatory affairs for Clean Energy.

While natural gas is considered a less costly, low carbon alternative to diesel, the fuel isn’t considered a renewable source under the state’s cap-and-trade program. One of the cheapest renewables that Clean Energy develops and produces, however, is biomethane, which is derived from landfills and organic waste, Campbell said. But pipeline injection of biomethane from landfills is currently prohibited in California even if the gas is treated to meet health and safety standards, according to state documents. The laws only allow public utilities to purchase biomethane from out-of-state sources.

Unless biomethane can be produced in large quantities, however, solar and wind generated power will be the only major renewable energy alternatives for public utilities and that may significantly increase energy costs, Campbell said. “If the state starts picking winners and you only have solar and wind as your options, then you’re really limiting the state to solve its goals . . . with probably the most expensive renewables on the market, which is terrible,” he said.

Fuel ‘Shuffling’

With regulations expected to ramp up in 2015, oil-related groups and the businesses most impacted, although not entirely opposed to the goals of AB 32, are pushing legislators to tweak California’s aggressive emissions reductions laws to lessen the financial burden on the oil industry.

Some groups claim clean-burning fuels such as biofuels and corn-based ethanol may have to be “shuffled” from other states and possibly other countries due to conflicting regulations and a lack of resources to produce the fuels locally. This would inevitably cause more emissions, while making it costly and difficult for oil refineries to meet all of the state’s new standards.

“We just look at all of that and say, what are we doing?” said Catherine Reheis-Boyd, president of Western States Petroleum Association (WSPA). “All this shuffling goes on and you wonder, did you really accomplish anything but drive up the cost, lose jobs, shutdown refineries and have shortages of gasoline? . . . That’s just not what anybody envisioned here, so we need to rethink this.”

The WSPA recently commissioned a study by the Boston Consulting Group that claims the cumulative impact of the state’s provisions and regulations could force half of the 14 fuel refineries in California to close, causing as many as 51,000 layoffs. The report also states the new regulations may drive up gas prices in the state by as much as $2.50 per gallon by 2015, when most of the laws will be in full swing.

Bill Day, spokesperson for Valero, which has operated one of the area’s largest refineries in Wilmington since 1969, said such oil refining companies aren’t able to bear the higher energy costs like integrated oil companies, such as Exxon Mobil, Shell or BP that have large revenue streams. “We don’t have drilling and we don’t have upstream oil production,” he said. “So when people say the oil companies can just eat the cost of this, independent refining companies like Valero can’t and won’t.”

The California Manufacturers & Technology Association (CMTA), meanwhile, released findings last month from a study conducted by Sacramento-based Andrew Chang & Company. The report states that 26 percent of the emissions reductions of AB 32 will stem from “economic slowing” caused by a series of regulations, energy price hikes and hidden taxes. Overall, the regulations are expected to cost consumers, in the most “optimistic case,” a cumulative $135.8 billion.

By the state’s 2020 deadline, the gross state product will have dropped 5.6 percent and there will be 262,000 fewer workers in the state, the study claims, adding that household expenses will rise by $2,500 per year, while state and local tax revenues will decrease by over $7.4 billion annually.

Gino DiCaro, spokesperson for CMTA, said California has already lost one third of its manufacturing workforce over the last five years and the state’s new regulations will only drive more companies to states that are less expensive to operate in. “California manufacturers already pay 15 percent higher electricity rates than the rest of the country, so it’s already hard to compete in the state . . . when you put AB 32 on top of that . . . it will become very, very, very difficult to grow in California and . . . actually grow our own economy.”

Driving Innovation

Clegern, of CARB, however, said both studies only look at potential costs and leave out any notion of the financial benefits attached to the laws. He said large fossil-fuel emitters are able to purchase credits from electric utility companies.

The utility companies would then be required to invest the revenue from sales of the credits in cleaner renewable energy fuel products, therefore producing a broader range of energy sources and increasing competition, eventually bringing down energy costs for consumers, Clegern said. He added that heavy emitters would also get 90 percent of their allowances free the first year of implementation, with an annual reduction of free allowances.

“It’s possible that early on there will be some increase [in energy prices], but we don’t think it’s going to be a major factor and we believe that, overall, prices will come down over time, simply because people will have more choices for fuel,” he said. “There will be more competition in the marketplace because of an array of fuels.”

Overlooking any of the benefits, the studies, instead, portray a doomsday scenario, Clegern said, and are “misleading, biased and inaccurate.” He added that California now receives 60 percent of all green technology investment capital in the United States, and the new legislation will help put those investments into action, especially in the electric vehicle industry, which has already started coming to market.

“Overall, we think AB 32 is going to drive California’s technological development and the development of new fuels and new vehicles . . . and it should be a good motor for economic development in the future that should be sustained,” Clegern said. “The goal here is to kind of nudge things along into an economy where we’re not being held hostage by our addiction to petroleum . . . and it will also help dramatically reduce greenhouse gas emissions in the state.”

Although the recent studies have raised concerns about the possible lack of supply of renewable energy sources and the fact that electric vehicles are not cost competitive with gasoline vehicles yet, he said the studies fail to account for future innovations and cost-effective changes that the laws will create over time.

“The biggest issue we have with the modeling is that it does not consider anything but costs,” Clegern said. “They ignore their opportunities to comply with these programs . . . and they’re making assumptions based purely . . . on the assumption that absolutely nothing will change in the future, and we all know that’s not the case . . . They’re betting against innovation.”

However, the author of the CMTA study stands by his findings. In response to CARB’s critique, Andrew Chang states that his assumption of only a 1 to 2 percent annual decrease in costs is optimistic given that “costs associated with innovation may be significant.” He states, “Our assumptions are reasonable and conservative.”

Susan Frank, director of the California Business Alliance for a Green Economy, however, said the modeling of the CMTA study is “pessimistic,” uses a “sky is falling” approach and some have even called it “questionable,” given that the report is being funded by a group that has long been an opponent to the state’s legislation. She said a recent poll showed a continued majority of voters support AB 32.

Despite some reports claiming small businesses with fewer means would have to bear the brunt of the higher energy costs, Frank said that’s not the case. She points to a 2009 case report study by The Brattle Group, a finance and economics consultant for government and business, that found “potential changes in energy prices caused by AB 32 would have only a minor impact on California’s small businesses, most of which are not energy intensive.”

Frank added, “These reports put out by the opponents are often used as examples of what they report of how there isn’t support for AB 32, but it’s just not true . . . We’re seeing tremendous increase in jobs, a tremendous increase in energy efficiency and the fact is this is not going to [negatively] impact small businesses.”