Juanita MartinezSmith, Watts & Company, LLC
The Effect of AB 32 On California's Business Climate:
An Interview With Registered Lobbyist, Juanita Martinez
Juanita Martinez is a registered lobbyist closely involved in the State of California’s ongoing legislative and regulatory processes to implement The Global Warming Solutions Act of 2006 (“AB 32”). She represents many of the companies that are targeted for regulation under the bill.
Q: Can you give us a little bit of background to AB 32?
A: On June 26, 2006, the California Senate Environment Quality Committee approved AB 32 with a vote of 4-2. The bill was carried by Assembly Member, then Assembly Speaker, Fabian Nunez (D-Los Angeles). The bill’s passage marked a revolutionary moment in history, giving the Air Resources Board (“ARB”) the authority to move forward and implement a program that no one in the world had ever before implemented. Since the bill’s passage, ARB began to move forward quickly. Starting January 1, 2007, ARB started throwing out ideas, holding workshops, and piecing together the different parts of AB 32.
One of the first big movements was the development of the AB 32 scoping plan. ARB had to lay out what their plan was to meet 1990 levels and get companies to reduce their emissions down to those levels within this plan. However, this task proved to be a tricky one for ARB since ARB had to go back to 1990 when companies and facilities were not responsible for keeping records of their emission levels. The lack of records created confusion for ARB and the parties that were going to be regulated under this law. Both entities were competing with each other over the process of developing the scoping plan.
During this time, ARB also started to pick apart how they were going to implement the different parts of the whole package. A couple of the parts of the package fell under the Market Mechanism Program, which made up only 20% of AB 32. The Market Mechanism Program includes offsets, which are the tools that companies use to offset their emissions. For example, ARB would tell Chevron, that they could only produce 100 emissions. If Chevron says that they couldn’t meet that emission level and could only meet 120, they would be over 20. What they would then need to do is go out to companies that create offsets to purchase offsets to comply with AB 32. Many companies are having to do this already and are struggling to meet current standards. These companies are worried that they won’t have enough tools they need as an industry to comply with the heightened standards. Industries are speaking out and warning that if they are not given the tools they need, then AB 32 will not be successful. Industries will not be able to meet the goals the bill sets forth.
The scoping plan also identifies standards other than offsets that companies must meet. The scoping plan also sets a 33% Renewable Portfolio Standard (“RPS”). Under this standard, utilities are told that they must derive 33% of their power from renewable energies, such as solar and wind. Many companies are complaining that this standard is too demanding because it is very expensive. Consumers also express concern about the expense in fear that it will simply be passed onto them. The law currently sets a 20% mandate and companies are not even able to comply with this standard. So, the jump to 33% seems daunting.
There are many other parts to the scoping plan. What companies have been doing for the past couple years is working with ARB to develop what the general ideas will be behind the regulations. A lot of the regulations have not yet been put in place nor has regulation begun. Right now, the bigger picture is just being pieced together.
The business community has really tried to work with ARB in piecing the big picture together to meet the standards they want to set. The media and environmentalists often tend to say that business can meet the standards set by AB 32, but they just claim to not have the ability. However, this is a common misconception.
Q: Please tell us who your clients are. What are their main concerns with AB 32?
A: In my former position, I focused on issues concerning the Western States Petroleum Association. I represented both companies that sell and refine oil, such as Chevron, Shell, BP, and Conoco, and also companies like Oxy that pull oil out of the ground.
Now, I represent mostly electric and transportation authorities, including San Diego Transit, Sacramento Regional Transit, and also the California Large Energy Consumer Association (“CLECA”). The main concern companies like CLECA’s have with AB 32 has to do with costs. There is some language in the bill that requires ARB to implement AB 32 with cost efficiency and cost attainment. That is big for CLECA and our other clients.
Q: How is AB 32 affecting profits for your clients?
A: Not only do I represent several companies, but I am also a part of larger coalitions as well. From all these different groups and companies, I see that no one is really being hit right now. Companies are just getting ready for what they foresee as the impacts of AB 32. The reason they have not been hit is because the regulations have not been put into place and will not be in place until 2012. However, companies are still looking at how their long-term objectives will be affected. Companies like Chevron have programs and business plans in place for the next 15 to 20 years that are not easily changed.
Right now companies are acting just on what they think AB 32 will do, the way they think it will be implemented, and what they think regulators are considering. The major impact of this, however, is that companies are not investing in California. While they do not necessarily mean they will get up and leave, when companies are thinking of future investments, they are not thinking about California. For example, when Oxy is thinking about where to invest their $2 to $3 million dollar project, they are going to pick Texas over California because Texas state laws will protect their interest whereas California doesn’t provide them with security. You also have companies like Shell that have sold all their gas stations and are phasing out. I would guess that you will no longer see Shell gas stations in California in the next four to five years. While they will still refine oil, they will just not have any gas stations.
Q; Are any of the companies that have traditionally dealt with fossil fuels branching out to selling low carbon fuels (“LCF”)?
A: BP is a great company to use as an example. BP uses wind and solar energies. They are definitely also branching out into other alternatives and looking at what some of the renewable technologies are available. It is smart business for BP and other companies to diversify the energies they use as well as research new technologies.
Part of the scoping plan under AB 32 sets a low carbon and fuel standard. Companies have traditionally looked to this as an option and have seriously considered it in the past. These companies devote an extensive amount of resources to research alternative fuel energies and have said this is what makes sense for our business. A lot of companies are looking at LCF and diesel fuels. However, in the last year or so we have seen that biodiesel is not always the best alternative. In order to produce biodiesel, for example, many processes utilize corn and get this corn from Mexico. However, people in Mexico cannot afford corn for their normal meal and companies have begun to realize there are negative impacts to producing biodiesel such as the one just mentioned.
Q; What is your view on how AB 32 will affect the economy and small businesses?
A: I think it will be a bad thing for small business not because I don’t believe in the intentions of AB 32, but because of the way AB 32 is being implemented. Up to this point, ARB has ignored the costs that will come from implementing the program. In order to adequately understand the impacts, you need to be honest about what the costs will be to implement the program. If you are misleading yourself and thinking it will only be a benefit with no costs, then you will not be able to adequately evaluate the impacts on small businesses. AB 32 needs to be implemented in such a way that takes the effects and costs into account.
Take for example the anticipated increase of costs to electricity. AB 32 is anticipated to tell utility companies that they will need to meet 33% RPS. Solar is extremely expensive and will increase costs to utilities if it must be used to generate 33% of the total output of energy. Wind is also extremely expensive, perhaps more so than solar. Utility companies work in such a way that they do not need to take any hit on costs. If something costs them $1 million, they will push it through to the consumers and the consumers will need to pay that $1 million. That push through will also go to small business. Those are the people that will be hit the hardest.
Q: Are alternative energies more expensive because there is no infrastructure for them or because that is how they inherently are?
A: I think it is a combination of both. Fossil fuels have been around a lot longer and they aren’t as expensive as wind and solar. Transmission, deliverability, and infrastructure are just not in place for alternative energies like it is for fuels.
The way California is structured and the way the environmental community has spun it is that, yes, they want renewables. However, they do not want you to build it in the desert because of the turtles. They do not want us to build a wind farm in the desert because there are birds there that it will kill. Yet, they require you to purchase renewable electricity.
The fact is that you need to give a little to get a little here. But, there’s no give. It’s going to take a lot and there needs to be a change in the way California views our renewables. The permitting process needs to be changed and they need to understand that these facilities will need to be built here in California. This means that some of the land that people want protected will need to be given up because that is the only land available for this type of use. There is no place in cities like Los Angeles to build more wind farms. However, there are places in the desert.
Innately, solar and wind energies are more expensive. It costs more to produce. Even though you have a huge part of the environmental community pushing for an RPS program, there’s no place to do it. So, you have companies, such as solar companies, that support RPS, and say they want the mandate increased to 33%. However, these companies are not producing energy in California. They take their business of producing to different states whose laws are much more business friendly. So, companies like these are producing the product outside of California, but also getting their demand in. Even though Californians are paying for these products at an increased rate, they are not benefiting from the jobs manufacturing these products create. They are here promoting the idea, but not giving the benefits to California that we need.
Q: Do you think that if California laws were friendly to business there would be some area to reconcile production of alternative energy with economic growth? How would you ideally like to see AB32 implemented?
A: I think one of the biggest things that could help AB 32 in its implementation is really slowing it down and looking at what the impacts are going to be, and not moving at such a rapid pace that you’re ignoring the harmful things that are going to come out of it. If AB32 continues to move as fast as they’re moving and at the pace they are there’s no way for a company to really sit down and analyze, ‘OK these are the impacts, this is how I can work within the AB32 or this is what I need to change for my business.’ But if you don’t give businesses the time to do that and you’re not implementing a program that really is cost effective and efficient than you’re sort of just implementing a program just to implement a program, without really recognizing the harmful effects or the benefits of it.
Another thing that ARB should be doing is slowing down because the federal government is moving forward with a climate change program now. When AB32 was going through a lot of the supporters were saying they wanted AB32 to send a message to the federal government; they wanted the feds to realize that climate change is a big deal and ‘if they aren’t going to do it then we are.’ But now that they have done it and the federal government does see that climate change is a big deal, I think we’ve accomplished what the supporters said that they wanted to accomplish, so now let’s let the federal government step in and do what they’re going to do on a climate change program because we really can’t work as California only. We really need to be able to work in a larger playing field with the whole country. And, it’s not the whole country but the world, because climate change and carbon dioxide isn’t a California only thing and it isn’t a local issue. As big as we want to believe we are and say we are, we really aren’t the big force we pretend to be. It’s like countries like China and India, those are the big ones that we need to get on board and countries like that aren’t going to deal with California on their own, they’re going to deal with the federal government and they’re going to deal with Obama, not Mary Nichols, the chair of ARB.
Q: Do you think that a carbon credit trading program would help speed up the timeline for implementation of AB 32 in a way that would help businesses?
A: The way it’s structured is AB32 is 100% of the pie. 20% of that pie is the market mechanism where carbon trading would come in, and the other 80% is called direct regulations and that 80% is going to go into effect with or without AB32. So 80% of the reductions are direct measures. Even if AB32 wasn’t in place, you would have these regulations that are law, and so we’re moving forward. The only thing that AB32 is really impacting is this 20%, which includes the offsets or the carbon trading part, so I don’t think that accelerating this 20% is going to speed things up at all. I think this 20% is actually going to make businesses have to move forward quicker, if we get this 20%. But we don’t need that right now, because we already have this 80%, that’s already going into effect, with or without AB32.
Q: Will you give us your thoughts on whether implementing this bill during an economic downturn makes sense fiscally?
A: Timing is a huge issue. The timing issue goes into conflict with elected officials’ timelines. People who are elected only have a certain amount of time here at the capitol, so they want things implemented while they’re here, because if they’re implemented after they’re here then what does it give them, they’re already gone.
But, I think you touch on a very important issue. We’re in a state of the economy right now where we’re in one of the worst recessions that CA has seen in years. You have job loss that’s going into the double digits, and you have families struggling, and small businesses already not being able to pay the bills, so now you want to top that off with a program that’s going to cost millions of dollars to implement. And that cost is going to spread out across to every business, to every home, to every facility. An association of municipalities down in Southern CA showed that the cost of electricity for a homeowner was going to increase, just with this 80%, was going to increase by 30%. So on your monthly bill with AB32 you would see a 30% increase. Then with strict measures implemented for a cap and trade program, your costs are going to increase by about 60%. So whatever your utility bill is, top that by about 60% and that’s what each individual homeowner is paying. And if you look at a low income family, you have low income families who don’t have a pool that they’re heating up, they don’t have some of the more luxury items, they have a refrigerator, a stove, and a TV. And that’s about 80-90% of what their electricity bill is. And those are objects that you can’t turn off for a normal family. And so now you’re telling a low income family OK, we’re going to increase your bill by 60%, you’re struggling month-to-month anyway, now just don’t watch TV or don’t cook as much. Start eating cold meals.
Q: It seems that there might be a way for traditional companies to make profit. For instance, to manufacture solar panels here could provide jobs, but it might require changing business laws. So do you think, in the long run, that businesses making profit and the standards of AB 32 are mutually exclusive, or do you think that given enough time businesses could still retain their profit and not have to pass that on to consumers, maybe by branching into alternative energies and the low-carbon fuels that the bill requires?
A: There are companies--Chevron for example--which has some of the most efficient refineries in the world. We’re talking about a refinery that can surpass any other refinery in any other company, in part because of the strict laws that are in place in CA, but also because Chevron is a company that believes in being fuel efficient, that really wants and is striving to be the best, and to try to make CA a better place. So if you looked at their refineries, they’re so efficient right now, they’re probably at their max level of efficiency, and you have laws like AB 32 going into place that are going to tell them, you know what, even though you’re the most efficient refinery in the world you still need to cut back and you need to become more efficient. But all the technology that’s in place right now, they have all the updated technology. So the only way they can be more “efficient” would be for them to not produce or refine as much oil. So if they’re saying your limit is 100, and Chevron is saying well even though we’re the most efficient the lowest we can get is 120, and they can’t buy, can’t engage in carbon trading, then what they’re going to be forced to do is stop producing oil, which means they’re not going to be needing people to refine that, so they’re going to be cutting down and so there’s a reduction of oil that’s refined here and so you’re losing jobs and you become more of an importing state.
Q: Are there companies, like BP, as you were saying, that instead of refining oil would look into other technologies?
A: For a lot of the companies, refining oil and working in the fossil fuel market is their bread and butter. But they have branched out.
Q: Is the cost of changing from one source to another is very high?
A: Yes, and it wouldn’t be profitable for a company like BP, that’s an international company, to focus on having alternative fuels because the rest of the world doesn’t have that demand. California is not a very small market but it’s small enough that they can lose us and still have the rest of the world to sell to.
Q: I wonder if there’s a place for local businesses or start-ups that would develop alternative energy to come in to fill the gap in production that is not being met by larger companies, if those companies stop their production or selling here because of this bill?
A: AB32 does bring the opportunity for other companies to come in, the alternative companies. But one of the concerns in doing that is you have a lot of the smaller companies coming in but those jobs aren’t the same high-paying jobs that you have at a refinery, and they aren’t in the same quantity as you would have at a refinery. There was a job study that came out that said for every 50 jobs you lose you gain like 3. There’s huge loss in there.
Q: Are there any points you’d like to make as to what small or big businesses should look forward to?
A: I would really suggest that small and large businesses continue to monitor AB32 and continue to be involved, and to make sure that legislators and regulators hear their concerns and let everybody know what the impacts are to them. Staying informed and staying on top of what’s going on is going to be extremely beneficial and helpful because that way when the regulations do come down businesses won’t be surprised but will be prepared. The more they know now in the implementing phase the better off they’re going to be in preparing themselves to function and conduct a business that’s regulated under AB 32.
Commentary from BLJ Authors
A possible reason that alternative energy sources are so expensive is that there is no infrastructure for delivery of alternative fuels, and few companies competing to produce such fuels. Wind and solar cost less to produce than fossil fuels. Any current price difference to consumers is a function of lack of infrastructure; an easily remediable problem. As fossil fuels become scarcer and we have to go to more remote locations to extract them, their price will continue to rise. However, when the alternative fuel industry develops, price will come down. There may be a transition period where costs are higher than average. Arguably, this would be offset by jobs created in building such an infrastructure.
Green technology is an excellent opportunity to create jobs for people of all skill levels. The question we are facing is not whether AB 32 will hurt California businesses, but how California can develop business laws to be competitive in attracting alternative energy companies. We are on the peak of a major shift in our energy economy. Our ability to capture a share of that market will be crucial in helping our economy get back on track.
AB 32 set a national precedent. It is arguable that the federal government has begun to move meaningfully on climate change. Even if they have, it does not mean that we can’t think globally and act locally. It does not mean we should abandon what we think is good for California’s people and economy.