Turning Gold into Lead

Despite California’s deep economic wounds, Governor Jerry Brown (D) last month signed a bill (SB 2X) that increased the state’s already ambitious renewables portfolio standard (RPS) goal from 20% to 33% by 2020. Together with the state’s Global Warming Solutions Act of 2006, which requires caps on greenhouse gas emissions starting next year, the new law will push up the price of electricity and further delay the Golden State’s economic recovery by permanently driving away irreplaceable businesses and manufacturing jobs.

Worst-Run State

Last October, 24/7 Wall St., a financial news and opinion electronic newsletter, ranked the best- and worst-managed states in America. The best-run state was Wyoming, which received high marks in just about every evaluation category. Wyoming is also the least-populous state, perhaps hinting at one reason for its success.

The worst state on the 24/7 Wall St. list was Kentucky, barely edging out California for last-in-class honors. “While it does not quite rank as the worst state on our list, California stands out as being among the most poorly governed,” the authors wrote. “The most populous state in the union has been mired in debt and political unrest for nearly a decade. It bears the unique honor of being the only state considered economically unstable enough to have its debts, at a record $341 billion, rated at an A- by S&P.”

This year, without the $3.5 billion in federal stimulus funds to cover their losses, California legislators may finally be forced to pragmatically deal with a $19 billion budget deficit, on top of a 2010–11 carryover deficit of $6.1 billion.

A low opinion of California’s business climate is not limited to 24/7 Wall St. In its 2010 annual survey of the best and worst states for business, Chief Executive magazine gave its “booby prize” for worst state to California for the second year in a row. The global consulting firm Bain & Co. found that “California is far worse [for business] than any other state by a very significant margin.” Development Counselors International (specialists in business relocations) surveyed corporate executives in March 2011 and found that 72% responded that California has the “worst business climate” in the entire U.S. The Tax Foundation lists California as 49th in its 2011 State Business Tax Climate Index. And, according to Equifax, the four metropolitan areas with the greatest number of small-business bankruptcies (up 10% in 2010 alone) were located in California.

The direct result of a decade of anti-business practices has been permanent loss of good-paying middle-class jobs. For example, California has lost 640,000 factory jobs (34% of its manufacturing base) and 1.5 million residents over the past decade, while Texas gained more than 800,000 residents and added close to 800,000 jobs to its economy, according to the Bureau of Labor Statistics. California’s unemployment rate today hovers around 12.3% (Texas sits at 8.1%) with a cost of living 33% higher than the national average. It’s not difficult to pinpoint why so many businesses have pulled up stakes and relocated: an anti-business climate, the very high cost of doing business, and very high business and personal income taxes.

Another equally important factor that is pushing manufacturing jobs out of California is the rising cost of electricity, caused by the state’s ill-conceived energy policies.

Policies Push Up Prices

The two key energy policies, among many, that are rapidly pushing up the cost of electricity are the California Global Warming Solutions Act (AB32) and the state’s newly hiked RPS.

That AB32 is a jobs killer is not in dispute. Even one of the California Air Resources Board (CARB) scenarios predicts up to 320,000 additional job losses when the bill is fully implemented. A study by Charles River Associates, using CARB data, predicted a drop in household income of $1,175 as the best possible result of AB32. A report by Varshney & Associates concluded that the cost for every household will be “9% of its after tax annual income ($3,857) on AB32 related regulatory costs.” The California Small Business Roundtable predicts 1.1 million job losses caused by a fully implemented AB32, about 6% of the state’s current workforce.

Together, AB32 and the new RPS have trifling environmental value, in my view, but do increase upward pressure on the cost of electricity, further eroding the economic competitiveness of the world’s eighth-largest economy. Governor Brown said that he believed the state could get 40% of its electricity from renewables “at reasonable cost” in the near future. Today, electricity costs are so “reasonable” that Pacific Gas and Electric Co.’s top tier residential rates exceed $0.40/kWh, and additional rate increases are on the horizon.

Prices Push Out Jobs

California remains an energetic center of technological innovation, but its energy policies are causing businesses and middle-class manufacturing jobs to be exported at an irreplaceable rate. Also seemingly overlooked by the state’s political leadership is that once these jobs leave the state, the losses are permanent.

In the Middle Ages, alchemists searched for the secret of transmuting lead into gold. Today, California’s economy-killing energy policies have achieved the impossible—converting gold into lead.

— Dr. Robert Peltier, PE is POWER’s editor-in-chief.