Note to California Manufacturers: Brace Yourself for Higher Costs

I’m indebted to Tom Martin, Executive Director & Legislative Chairman of the Small Manufacturers Association of California, for permission to reprint this column, which I shortened a bit. Credit is also due Michael B. Marois, a Bloomberg reporter, for his focus on this event that inspired Mr. Martin’s column.

California manufacturers from food processors to apparel makers are warning costs will skyrocket if state regulators proceed with a plan to reduce their allocations of free greenhouse gas emission credits.

Starting in 2018, some companies California considers to be at risk of losing business to competitors outside the state’s landmark emissions cap and trade market will receive up to 50 percent fewer free pollution credits. That means they will either have to buy more allowances at auction or invest in ways to cut carbon pollution even more.

California has the toughest greenhouse gas curbs in the U.S., seeking to cut discharges to 1990 levels by 2020. The pushback from industry comes as Gov. Jerry Brown and other state Democratic leaders are looking to advance those climate change policies further even as business leaders warn that lack of a national and global carbon emission market puts companies in the state at a competitive disadvantage.

“Manufacturers are the canaries,” said Dorothy Rothrock, president of the California Manufacturers & Technology Association. “All of the costs in this system are radiating up and concentrate in manufacturing. It’s cumulative and it’s not happening anywhere else like this. California is doing it to its manufacturers in a way that no other state is contemplating.”

Brown has proposed cutting the state’s petroleum consumption in half by 2030 in an effort to curb carbon pollution. He also wants to expand renewable energy mandates to require utilities to obtain 50 percent of electricity from renewable sources, up from 33 percent.

Marois reports that California has capped greenhouse-gas emissions from industry since 2013 and began imposing limits on transportation fuel suppliers this year. The statewide cap, set at about 394.5 metric tons for 2015, shrinks roughly 3 percent annually to achieve a 15 percent reduction by 2020.

Companies must surrender allowances that permit the release of a metric ton of carbon dioxide. While allowances, issued by the state, are sold in quarterly auctions, most have been handed out for free, with industries such as food manufacturing receiving allocations as transitional assistance.

State Allowances Shrinking

The total state allowances available shrinks with the cap over time, and so do the handouts. Under the current level of free allowances, the state is on track to meet the 2020 limit, Rothrock said.

“You don’t need to do it to reach the 2020 goal,” she added. “It’s simply increasing the amount of revenue that will be raised by the state. It’s just a tax.” [Note: There are other ways California’s politicians want to increase taxes on businesses in 2015, but that’s another story. – J.V.]

California’s program is intended to operate in a global market where companies in other states and in other countries would face similar pressures to reduce emissions or spend money to buy pollution credits. California a year ago linked its cap and trade market to one in Quebec.

Companies in California already are some of the most energy-efficient and environmentally friendly in the nation because of climate-change programs.

The state gets 23 percent of its electricity from renewable sources and is on track to meet its 33 percent goal by 2020. That compares with 13 percent nationally, according to the U.S. Department of Energy.

“It’s going to be an additional cost of doing business in California that only the one or two affected steel mills in California will have to pay,” said Brett Guge, executive vice president of finance and administration for California Steel Industries Inc. a maker of flat-rolled steel in San Bernardino County. “We will do everything we can to comply, but it’s a big concern.”

During the state’s auctions, companies submit confidential bids for the number of allowances they want at specific prices. The highest bidder is awarded permits first, and then the second-highest, and so on until all of the permits for sale have been called. Then all bidders pay the price of the lowest winning offer.

The state is supposed to spend the money it earns from the auctions on projects to reduce greenhouse gas emissions. Brown’s budget estimates the state will earn about $1 billion from carbon auctions in the fiscal year that begins July 1.

Emission Reduction Increases Costs

Also, manufacturers’ cost to transport goods and materials is higher because transportation fuel suppliers are now required to participate in carbon-emission reduction programs.

Manufacturers in the state paid an average of 11.93 cents per kilowatt-hour in November, according to the U.S. Energy Information Administration. That was 79 percent higher than the national average of 6.67 cents.

“We are doing everything we can to be as efficient as we can, but at the end the day, if you burn natural gas, which we have to do, there will be carbon emissions,” Guge said. “When you look around the world, the hunger for carbon-based energy isn’t diminishing, it’s growing. So whatever California does, it certainly has a cost to companies here, but it’s not making a dent in worldwide carbon emissions.”

One focus of this blog has been to address California’s perennially difficult business environment. Joseph Vranich is known as The Business Relocation Coach while the formal name of his business is Spectrum Location Solutions. Joe helps companies find great locations in which to grow. Also, Joe has been a Keynote Speaker for more than 20 years – see A Speaker Throughout the U.S. and in Europe and Asia.

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