After sifting through the detritus of the recent national and statewide elections, it is almost comical, though sad, to see the state of California in full lemming mode preparing to jump off their own fiscal cliff.
In addition to voting in favor of new tax increases under Proposition 30, much to the pleasure of Gov. Jerry Brown and the millions of non tax-paying takers in the population, the electorate was also able to hand Democrats a super majority in the state legislature, allowing them to bypass Republican approval for future tax increases.
Yet another part of the emerging story here is the collapsing business environment as documented earlier this year in Forbes Magazine. California currently ranks as one of the bottom four states according to this survey of America’s best places to start a company. Part of the reason for the overwhelmingly negative business environment is the draconian nature of the overall regulatory regimen. In this survey, California received a grade of “F” for friendliness of regulations in general and a grade of “D” for friendliness of environmental regulations.
Within the category of environmental regulations, one important aspect is the list of restrictions and standards for greenhouse gas emissions contained in AB32 (Global Warming Solutions Act of 2006), signed into law by Gov. Schwarzenegger and the California Legislature in 2006. Most of the requirements under AB32 have already gone into effect, but the burden of the costs will be increasingly borne by consumers and businesses in the years to come. Witness some of the recent pronouncements by oil industry officials during recent third quarter conference calls with the investment community, this one from Chevron’s EVP, Global Downstream, Mike Wirth:
California has a go-it-alone plan on greenhouse gas initiatives. And it will further deteriorate what is already a weak economy and make no meaningful impact on global greenhouse gas emissions. There will be a negative impact on jobs, on consumers and by design and by intent, AB32 and the low carbon fuel standard will raise fuel prices and further isolate this market from the rest of the world.
So it runs the risk of disadvantaging California businesses by imposing higher costs that aren’t borne by out-of-state competitors and the policy is one that we have real questions about…If you get fuels under the cap and trade which is anticipated up towards the middle of this decade, the costs explode and that’s where you go from costs in the hundreds of millions of dollars a year to costs in the billions of dollars a year. And frankly, all this stuff has to go through to the market. We cannot absorb it and I don’t intend to absorb it.
And so the expectation is that we see hundreds of millions or billions of dollars of increased costs that translates through into the price of the product…California consumers will continue to pay a higher premium than the rest of the country. And that is the policy path we are on.
Moreover, another comment from Valero President and CEO Bill Klesse during his company’s third quarter conference call further reinforces the destructive nature of California environmental regulations:
… we think that the regulatory environment in California is not constructive to the California economy. It’s not constructive to the working person, and not constructive to our industry. Whether it’s AB32 or whatever regulations we’re faced with, but in AB32 in particularly, the academics and extremists have hijacked the process, and they’re coming up with regulations that are totally not workable.
In short, the regulatory framework designed to help California contribute to managing an unproven problem (“Global Warming”) will do nothing but further discourage new business formation in the state and encourage existing businesses and tax-paying consumers to leave. As the tax base declines, the burden on those remaining tax-paying entities will likely become increasingly unbearable, resulting in either a financial collapse of the state and a proposed massive bailout by Uncle Sam or some massive restructuring of the budget which would likely displease many statists currently enjoying the status quo.
Either way, it is becoming increasingly apparent that the canary in this socialist coal mine may be singing its final tune.