Deflating green-jobs bubble

JUNE 22, 2010

By WAYNE LUSVARDI

The California Jobs Initiative on the upcoming November ballot would suspend the green power provisions of Assembly Bill 32 (AB32) – the Global Warming Solutions Act – until the unemployment rate drops to 5.5 percent or below for four consecutive quarters.  AB32 requires the gradual process of increasing the amount of clean green power in California up to 30 percent, or higher, beginning in 2012.  The initiative is receiving financial support from two Texas oil companies that have refineries in California.

The initiative evokes images of the California Energy Crisis of 2001, where it was widely believed that Enron, then based in Houston, gamed the California energy market causing a huge spike in electricity prices even though it had a very small share of the California market for only a brief time.

Already a counter campaign has started called Californians for Clean Energy and Jobs that opposes the initiative and is backed by unions, environmental organizations, green energy companies, health care organizations and a number of liberal organizations such as the NAACP and AARP. They claim that creating green power will create more jobs than it will cost.

Their Web site shows a silhouette of a polluting oil refinery with the words “STOP Texas oil companies” on it, which is sure to evoke images of the 2001 Energy Crisis. Thus, asking voters to vote “Yes” on the initiative might be like asking voters to root for the Texas Longhorns against USC in the Rose Bowl.

The proponents of this initiative claim that AB32 is a jobs-killer that has caused many businesses to leave California, especially during a prolonged economic downturn. The two Texas oil companies with refineries in California have not stated whether they would abandon the state if their initiative does not pass.

But the campaign opposing the California Jobs Initiative may have already stolen the jobs issue away from the initiative’s proponents by government creating high profile jobs in the solar, wind power and clean technology industries and by pointing to dirty air at Los Angeles’ and Long Beach’s ports.  The proponents have nothing visible to point to except possibly the persistent unemployment rate. The provisions of AB32 won’t kick in until 2012.

The California Jobs Initiative is bound to confuse voters because voting “Yes” results in a suspension of the Global Warming Solutions Act of 2006.  In other words, a “Yes” vote is effectively a negative vote.  Couple this confusion with the negative imagery of Texas refineries backing the initiative and the proponents have a double negative to overcome just when the mood of many of the voters is to “just vote no” on all the initiatives and bond measures.

One of the few things this initiative may have going for it with voters image wise is that the science behind “global warming” has recently been discredited by the scandal involving the disclosure of emails from East Anglia University in England.

But the imagery on both sides of the initiative is unlikely to inform knowledgeable voters about the real long-term consequences of voting for or against the measure.  Both sides are self-interested. What the California Jobs Initiative is all about is a tug-of-war between the interests of the older conventional market-based energy industry (coal, natural gas) and the newer subsidy-based green power industries (solar, wind, clean technologies) that seek to use legislation and subsidies rather than markets to carve out a new green energy economy.

We need to look deeper about whether a “Yes” or a “No” vote is the most wise.  To do this we need to consider the lessons of the California Energy Crisis of 2001, the Real Estate Bubble from 2003 to 2008, and the 2008 meltdown of our financial system.

Like “affordable housing” that broke our national banking system, “green power” is a laudable goal.  But what are the long-term consequences?

In 1977, the Eagles came out with their song “Hotel California.” No one thought then that the Community Reinvestment Act of 1977 would end up bankrupting the entire national banking system.  After all, how could the pursuit of the American Dream of home ownership and laws against home loan redlining melt down our entire financial system? How could something good result in corrupting the banking system?

During the national meltdown of the U.S. banking system in later 2008, subprime loans comprised only 16 percent of all U.S. mortgages. By comparison, in 2012, AB32 – the Global Warming Solutions Act – will mandate shifting 30 percent of California’s electricity use to Green Power. Does California have anything to worry about?

California under AB32 has already affected the energy industry with toxic green power investments financed by government tax writeoffs and subsidies which are tantamount to subprime loans in the housing and banking industries. The unintended, but foreseeable, consequence of putting two good things together – Green Power and choice of energy supplier via the recent defeat of California Prop 16 is to bring about greater competition in energy markets around 2012. But it will be competition for higher priced Green Power, not competition for the lowest priced electricity as occurs in true energy markets. The institutional incentives for Green Power are to produce higher priced energy than conventional sources of energy. This is called inflation (AKA, a bubble).

We need to remember the lessons of the California Electricity Crisis of 2001 before flipping the switch for AB32 and Green Power.

The California Energy Crisis was started in 1996 by the federal EPA mandating that California clean up its air pollution or federal highway and school funds to the state would be cut off by 2001. So we weren’t initially running out of electricity in 2001, we were running out of clear skies. In 2001, the only way to comply with the federal EPA was to shut down old polluting power plants of PG&E, Edison and SDG&E (the electric monopolies) along the coastline. But the mega-billions of dollars of bonds (mortgages) on these mothballed power plants weren’t paid off. And new replacement power plant construction was delayed in 2001 due to bureaucracy.

The state Legislature devised a plan to pay for the bonds by energy deregulation. The price of paying off the bonds would be included in the lower energy prices. This failed not because some Texas energy company called Enron gamed the system. With the recall of then Gov. Gray Davis and a new majority Democratic Party-controlled Legislature there was a political sea change that pulled the plug on deregulation to keep out-of-state energy providers from capturing a larger share of the state electricity market. Deregulation failed by being politically short-circuited more than by being tested. However, a deregulation pilot project in San Diego County did not indicate that deregulation would work as planned.

The second scheme to pay off the bonds involved creating an energy pricing fever by putting price caps on retail electricity but not on wholesale energy.  The goal was to inflate electricity prices so high that all the bonds on old power plants would be paid off by energy providers while customers would have their electricity bills frozen at the old prices.  This was what we experienced as the energy crisis with rolling blackouts and skyrocketing electricity prices. This Democratic Party backed effort failed too because price controls and price bubbles are always bound to fail.

Finally, the old bonds (called stranded debts) were folded into a $40 billion bond to be paid off by long-term contracts for power at higher prices than could be found in the spot market. These long-term contracts will be paid off in 2012 – the same year that AB 32 – the Green Power law – will kick in.

Which brings us back to the California Jobs Initiative and the proposed suspension of AB 32 – the Green Power law- until economic conditions improve.  If there is anything to learn from the 2001 Energy Crisis it is to be skeptical about any energy policy that promises too much. AB32 promises to eventually make Green Power affordable, reduce air pollution and create new green jobs that will cost less than the new economy it will create. This sounds a lot like the hyped promises of 2001, which failed. Learning the lessons of past attempts at tinkering with the electricity market in California is imperative before voting on whether to suspend or not suspend a shift to Green Power in California.

California may need a citizen circuit breaker on AB32 – the Green Power law — just as the U.S. needed a check on social lending for affordable housing before the crash of 2008.  But the California Jobs Initiative has an inescapable image problem that will be difficult to surmount.

Texas oil companies aren’t like Enron gaming the state energy pricing system and Green Power advocates aren’t progressives about to usher in an era of cheap, clean energy without any negative unintended consequences on our economy.

As some see it, the California Jobs Initiative is less about jobs and more importantly about the kind of economy California wants – either the “state capitalism” of Green Power, state-funded stem cell research, infill affordable housing mandates and a taxpayer funded bullet train or the former capitalist state characterized by Silicon Valley, the productive agricultural industry of the Central Valley, high tech venture capitalist Irvine, Orange County tollways and the economic engine of construction in the inland valleys.

Note: The author served on the California Energy Crisis Task Force of 2001 for the Metropolitan Water District of Southern California. The views expressed are his own.

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  1. Tyler
    Tyler 23 June, 2010, 11:02

    And just incase anyone didnt notice, Solyndra, the solar company praised as a green jobs creator by Arnold & Obama, has just canceled their IPO. Reports are stating that if the company does not receive a major cash infusion soon, it will not be able to survive he next 12 months.

    These companies are not able to compete financially even with monster govenment subsidies. This is a prime example of why we should not kill off jobs that we have in California in hopes that the green jobs will save the day. It may be wise to wait and see if it is possible for these companies to even survive before we bet the house of them being the Future of California.

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