Monday, March 15, 2010

The Problem With AB 32

Much has been written lately on the advantages and disadvantages of California's Global Warming Solutions Act of 2006, also referred to as AB 32. This has become a hot topic, for at least two reasons. First, California Assemblyman Dan Logue initiated a bill to suspend AB 32 until the economy recovers from its present shambles (unemployment is 12.5 percent officially, and more likely 18 percent actually). When Logue's bill was defeated in the legislature, he started a ballot initiative for the November 2010 election so the people of California can vote on the issue of whether to suspend AB 32 or not. Logue's actions drew considerable ink in the press and the internet blogs.

Second, Republican Gubernatorial candidate Meg Whitman announced that her first act as Governor, should she be elected, will be to suspend AB 32 for one year. That position is in direct opposition to the leading Democrat candidate, presently Attorney-General Jerry Brown. Brown is on record as fiercely supporting the entire man-made global warming theory and AB 32. Whitman's statement also drew considerable ink.

Recently, the "google alert" that I set up for AB 32 has notified me of several publications each day, indicating that AB 32 is in the news much more than was the case just a few months ago. There are two basic camps, one for suspending the law until unemployment drops to 5.5 percent, and the other for pushing AB 32 to the limit. The impact on jobs, especially California jobs, is part of the disagreement. Proponents, including Governor Schwarzenegger, claim that the law will create jobs. Opponents state that the law will kill jobs by forcing companies to close their doors or move away from the state.

I am on record supporting the opponents, and have been since I first read this law several years ago. I have made speeches across the country on what AB 32 requires, and how it will kill the economy.

The fact is that yes, some jobs will be created by AB 32, and some jobs have already been created by AB 32. Chief among these are the consultants for ARB who perform studies, and those who write the regulations themselves. The regulations are complex and time-consuming, and will not be finished until late in 2011. There are also some reporting and auditing requirements already in place, and each of these functions requires people and creates jobs. There are also some new businesses funded by government (both federal and state) that seek to create markets and market share for the new "green economy." There also is some private venture capital that funds startup businesses in the green economy (more on that in a moment). Yet, the number of these jobs is very small. The unemployment in California overwhelms these tiny job numbers.

Proponents like to use an old but trusty statistical trick when the numbers are not in their favor: they resort to percentages. It works like this: if there are 100 people in a brand-new industry, doubling the number of people in that new industry creates only 100 jobs. But, out of a workforce of 16 million (the rough number for California's work force), no one wants to brag that their new industry created only 100 jobs in a year. Instead, one can say that the industry had a 100 percent job growth in that year. That sounds much more impressive. So that is what the AB 32-is-creating-green-jobs group does. They trumpet the percent increase in jobs. One report has it that green jobs are growing at 5 percent per year. That is a ridiculously low growth rate, and even more so because of the very low starting numbers. The proponents are grasping at whatever weak arguments they can find.

The proponents next argue that AB 32 is creating and will create millions of jobs in fabulous new industries that do not produce CO2. It is notable that few, if any, of these proponents are engineers and understand what they are talking about. As I have written elsewhere, fundamentals of physics can not be violated, ever. The key to green jobs' success is alternative means of producing energy; energy for electricity, for transportation, and for heating and cooling.
The reality is that we have had the means to produce energy without producing CO2 for many decades. The only question is one of economics, that is, how much will the energy cost when produced in this way. Whether the energy is from solar, wind, geothermal, fuel cells, or from fossil fuels with complete CO2 capture and sequestration, the technology exists. One problem for the AB 32 proponents is that fossil fuels are too cheap, so that their pet technologies cannot hope to compete. The governments (state and federal) have entered the fray, with mandated minimum production rates for renewable energy, and with liberal funding for the renewables. Examples of mandates include the Low Carbon Fuel Standard for biofuel usage in California, and the Renewable Portfolio Standard for solar, wind, geothermal, and a few other non-fossil fuel power sources. There are federal mandates for ethanol in gasoline, also. The governments have also mandated less transportation fuels be consumed, by increasing automobile mileage standards, and providing incentives for the purchase of hybrid vehicles.

There are industries and businesses working heroically to install solar power plants, wind-power plants, geothermal power plants, and fuel-cell power plants, all in an effort to make money and comply with the government's mandates. All of these non-CO2 power plants produce power but at much higher power prices compared to conventional fossil fuels. And that creates the argument for the opponents of AB 32. No matter what government-funded studies conclude, the reality is that private businesses must pay their bills, or go out of business. Some will declare bankruptcy. One of the bills that must be paid is the electric bill. As that bill increases due to high-cost renewable power plants, businessmen will find it more and more difficult to keep their prices low and compete with other providers of their products and services. California businesses must increase their prices or lose money. There are other bills to pay besides the electric bill. Diesel fuel must be purchased, if the business ships any goods to customers, or sends out workers to a job in a diesel-powered truck. Raw materials must be purchased, and their costs will also increase because they, too, arrived on a truck powered by diesel fuel. The price of diesel fuel is increasing because of AB 32 bio-fuel mandates. Finally, the employees will find that their wages do not extend as far as they did previously, primarily because the workers' electric bills at home went up, the grocery bill went up, purchasing a new car is much more expensive, and purchasing gasoline for the car (no matter if the car is new or not) costs much more due to the ethanol that must be added to the gasoline.

There are also increases in the water bill for all customers, entirely due to the increased electricity prices. Pumping water in California consumes great quantities of electricity, and the price will go up.

Throughout the history of capitalism and business schools, one key to success is to grow a business by reducing the costs of running the business. This is elementary, and is true because it works. Businessmen, and their consultants, devote much time to analyzing existing costs and evaluating alternatives to reduce those costs. Installing labor-saving devices such as computer-controlled machinery reduces the payroll and eliminates jobs. Installing a more efficient machine that uses less electricity, or produces less waste from the raw material, or uses an entirely different process, also cuts costs. Shipping products in bulk instead of small quantities reduces costs. Training employees to be more productive allows more product to be made with the same payroll costs. Each cost reduction allows the business to reduce the product price, thus gaining a competitive advantage when customers buy his products rather than the more-expensive products from another manufacturer.

And now, AB 32 proponents want to defy all the wisdom of all the business schools and the decades and centuries of hard-earned experience gained by tough, seasoned businessmen. AB 32 proponents want to increase the costs of doing business in California, and they claim that by doing so, more jobs will be created. Does anyone see this as nuts?

There are many businesses in California that cannot make further improvements in energy efficiency, because for many years they have been mandated to invest in "Best Available Control Technology." There are no inefficient motors remaining to replace, in their businesses. They must, however, pay the higher price for electricity as the renewable power plants cause power prices to increase. They might install cogeneration power systems, but those are mainly already done in California. For a small businessman, installing cogeneration is almost always not cost-effective, so that will not occur.

That then, is the problem with AB 32. Costs on almost everything will increase, from water, to electricity, to gasoline, to diesel fuel, to groceries, to goods in shops and malls, even coffee at the local coffee shop. As a colleague stated, if any of these changes were economically attractive, businesses would already be jumping on them without any government prodding. The fact that they have not is a clear indication that costs will go up under AB 32.

Because of all the above, I am firmly against AB 32. I will place my name on the petition to place the Suspend AB 32 initiative on the November ballot. And, I will vote to suspend AB 32 in November.

Roger E. Sowell, Esq.
Marina del Rey, California

1 comment:

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