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Western Promises

by Daniel Foster

Gaze into the abyss of Cali’s cap-and-trade

If America worked like California, America would have guaranteed paid vacation, bihourly breaks, and workman’s comp for the caregivers down at The Babysitters Club Local 427. If America worked like California, our naked masses would be welcomed into our McDonaldses — provided they lay towels between their undercarriages and the plastic bucket seats — but toys would be forbidden in their Happy Meals. If America worked like California, every home would have an obligatory compost pile, and none would have puppies from pet shops. If America worked like California, the legality of fireplace usage would vary by day per “Spare the Air” edicts, and the reading of the Gospels with four or more friends would require a conditional-use permit. And if all of America were absorbed by the Sacramento Commissariat, all of America would have A.B. 32, the Golden State’s ambitious carbon-curbing initiative, and all Americans would be wearing dumb smiles as we marched over the edge into an economic abyss.

To see why, you drive east on I-80, out of San Francisco, across the bay and over the nub of the North Coast ranges into the vast, flat, wet expanse of the Central Valley. The Sacramento Valley, to be precise, where they can grow anything. At the university town of Davis, you get on State Route 113 and you drive north through ten miles of brown-green to Woodland. You go past a strip mall or three, you cross over the tracks, and, in an industrial island in the middle of a sea of farmland, you come to the Pacific Coast Producers tomato plant. It’s less than a half hour’s drive northwest from Sacramento, and is staring at the business end of A.B. 32.

Owned by a co-op of 165 family farms, Pacific Coast does peaches and fruit-salad mixes at other installations, but here in Woodland it’s all about the tomato. This facility is a full-line cannery that cranks out tomatoes — whole peeled, diced, pureed, and in paste form — using product from fields within 15 miles of the production floor for the food-service companies that supply your kids’ cafeterias and the supermarket brands you keep in your cupboard. Half of the business here is “industrial paste,” a less than appetizing name for a perfectly good comestible. Fresh tomatoes, don’t you know, are about 95 percent water and 5 percent solids; industrial paste concentrates them down to at least 30 percent solids. Water is heavy, and every pound adds to shipping costs. So producers like Pacific Coast ship the paste — 40 million pounds last year, in ton-and-a-half bins — to customers who use it in the manufacture of, say, spaghetti sauce or ketchup.

All that concentrating is done in massive evaporators, which burn natural gas: almost a trillion BTUs of it per year. Enter the California Air Resources Board (CARB). A Sixties-era anti-pollution agency grandfathered in when the feds passed the Clean Air Act, it is the only state-level agency of its kind in the country. And it is invested with immense power, as the team at Pacific Coast Producers discovered when CARB was tasked with translating the lofty goal of A.B. 32 — by 2020, reduce greenhouse-gas emissions to 1990 levels — into a strict regulatory program.

“When they passed it [in 2006], we were just working for a living canning food,” Pacific Coast’s CEO Dan Vincent shrugs, saying he didn’t expect A.B. 32 to affect his business much. “When they started drafting regulations, we started paying more attention.”

CARB’s plan is multifarious, but two planks do much of the heavy lifting: a cap-and-trade regime and a low-carbon-fuel mandate. The former requires large industrial enterprises to secure “allowances” from the state for any carbon dioxide emissions; the allowances are of course capped, and companies can trade the allowances they have. Emitters are given a certain number of allowances “for free,” but by design the allotment shrinks every few years. Firms can make up the difference by reducing emissions, securing offsets (think planting trees in South Central Los Angeles, good for a fraction of a percent here and there), and buying additional allowances at auction or via an exchange. The fuel mandate, more of a good old-fashioned command-economy measure, requires that California transport-fuel producers reduce the average “carbon intensity,” the carbon dioxide output from production to combustion, of the fuel they sell in California by 10 percent.

California-based oil refineries are fixing to take the brunt of this double whammy; not least because, according to a major study undertaken by the Boston Consulting Group, achieving the 10 percent reduction in carbon intensity is basically impossible for gasoline producers. Since the full production cycle has to be taken into account, even most biofuels and other alternatives can’t meet the 10 percent reduction standard, and those that do can’t be produced in sufficient quantities. Today, the state’s gasoline market is conveniently self-sufficient; demand is more or less met by in-state supply. But if CARB has its way, refiners could begin exporting fuel en masse because it can’t be sold in California, leading to serious gas shortages as early as 2015. By 2020, as many as eight of the state’s 14 refineries could close, eliminating 50,000 jobs, not including indirect job losses down the stream. And yes, this is counting the fabled “green jobs” that will be created, mostly out of state, by the new regulations.

Oh yeah, and consumers could be paying as much as $1.83 more per gallon at the pump, in a state that already has some of America’s most expensive gas (over $4 a gallon, at last check).

These estimates, all from the BCG study, are based on CARB’s own assumptions. If they turn out to be too rosy, the impact could be even greater. One issue is volatility: With an economic disruption, prices could crater or shoot to the moon, sending shocks to consumers like those experienced when a combination of ill-thought-out regulation and manipulation of the electricity market hit California with both massive rolling blackouts and 800 percent price increases in the early 2000s.

A second concern is how well the “trade” part of cap and trade will work. The scheme does allow participants with emissions lower than their allowances to sell surpluses bilaterally or through exchanges, but because the allotments decline over time and there doesn’t appear to be much room for efficiency improvements, especially in refineries, it’s unclear how much trading there will actually be.

Which brings us back to Woodland and Pacific Coast Producers. I spent an afternoon touring the plant and talking over coffee and Danish with Vincent and general counsel Mona Shulman. They’re concerned. The main targets of A.B. 32 were supposed to be the oil companies, power generators, chemical manufacturers — not Big Salsa.

Shulman has the alert eyes and reserved judgment of a capable lawyer. Vincent, who wears a clean checked Oxford tucked into blue jeans, has the sun-kissed ruddiness of a Chief Executive Farmer. He’s sharp and affable, and he looks more than a little like the actor Michael McKean. He tells me that although he knows CARB is “trying to do the right thing,” he’s never needed any regulatory incentive to get green.

“Cost is your incentive,” he says. “The irony is, all of our customers worry about ‘sustainability.’ They always have. But when you’re a farmer, that land is your resource, and you’re going to do whatever it takes to be sustainable.”

The cannery’s boilers are the most efficient available anywhere in the world. They’ve reduced water consumption at the plant by 30 to 40 percent. The cannery has moved away from trucks, and now 70 percent of its products go out by rail, saving millions of tons of carbon emissions. Pacific Coast did all of this not because Sacramento told them to, but because it was good business.

Not that that will save them from CARB. It’s a simple math problem. Vincent buys x amount of natural gas every year, so Pacific Coast emits y amount of carbon subject to caps. When Shulman suggested to CARB that maybe factories producing food, given food’s position right at the base of Maslow’s hierarchy of needs, should be regulated differently from hydrocarbon refineries, they were unmoved. Nor did Pacific Coast get any credit for the greening they had voluntarily done pre–A.B. 32. As a sort of consolation prize, CARB is undertaking a study to see whether food producers should be moved into a higher “leakage risk” category — that is, to determine how likely caps are to simply push emissions out of California and into neighboring jurisdictions. Industries with higher leakage risk are given more leeway.

Pacific Coast Producers has competitors in the Midwest, in Italy, and in China — always China, which has more than doubled its industrial-paste production in the past decade. Not only are these likely destinations for leaked emissions, but they render one time-honored response to new regulation — passing the cost on to the customer — unworkable. “What’s sitting in those bins out there is a true global commodity,” Vincent says, pointing to a wall of industrial paste in the factory yard. “That’s like oil.”

I ask what Pacific Coast Producers can do to reduce emissions, to get them clear when CARB lowers the boom. They’re looking at steam-recovery possibilities, their distribution plan, and so on, but it almost certainly won’t be enough. “Sure there’s some tinkering we can do out there,” Shulman says. “But once you hit that, there’s really nothing else we can do except reduce production.”

That means their farmers will either grow less or shift to crops that are less carbon-intensive. Here in the Sacramento Valley, the soil can support a range of crops. As you go farther south, the options are more limited. But the alternative for California food processors is to spend $163 million on allowances, collectively, through 2020.

Pacific Coast Producers is part of a trade group called the California Manufacturers & Technology Association (CMTA), which represents a few hundred businesses and has its offices within fist-shaking distance of the state capitol in Sacramento. As you might expect, CMTA is mighty worried about A.B. 32 and puts out chart after graph on its impact, each one grimmer than the last.

The key numbers: In the last two recessions combined, America lost 29 percent of its manufacturing jobs. But if all of America worked like California, it would have been 33 percent. In the modest recovery since 2010, America has added back 523,000 of those jobs. But if all of America worked like California, it would have been about 4,500. The U.S. overall unemployment rate sits at an unhelpful 7.5 percent, but if all of America worked like California, it’d be even worse, hovering over 9 percent.

What can be done? CMTA is pleading with the government to hold off on paring down carbon allowances until the state’s economy has recovered. More broadly, the California Chamber of Commerce has filed suit to prevent CARB from using carbon auctions to raise revenue in excess of its administrative costs, which they argue is all A.B. 32 allows CARB to do. Even more broadly, the libertarian-leaning Pacific Legal Foundation has filed suit on behalf of a number of businesses, arguing that the cap-and-trade scheme is unconstitutional because it amounts to a tax, and in California taxes need two-thirds legislative majorities.

Some experts suggest there’s a decent chance that once the regulations fully take hold — once $6-a-gallon gasoline becomes a reality and that sucking sound of jobs going to Texas gets even louder — legislators and regulators will panic and move quickly to undo the worst of it. This is made slightly more plausible by the state’s term limits, which mean that the legislators who passed A.B. 32 in 2006 won’t be the ones repealing it in 2015 or 2017. But I don’t think anybody at CMTA is holding his breath.

Neither is Dan Vincent. I put the theory to him. I suggest that there is no way CARB could go all the way with a scheme so implausible and uneconomic. That it’s just too nuts, even for California. He smiles.

“You must not live here.”

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