Ending Oil’s Monopoly in California


The eyes and the hopes of climate advocates everywhere should be focused for the next two weeks on California.

Interstate 80, seen here in Berkeley, California, is a freeway with many lanes and heavy traffic.Wikipedia

Our prospects for breakthrough climate progress rest on five global theaters of war:

1. Curbing and then ending reliance on coal as a source of electricity.

2. Ending oil’s monopoly as a transportation fuel.

3. Accelerating—dramatically—the replacement of HFC refrigerants by safe alternatives.

4. Bringing transparency and the rule of law to local and global timber markets, particularly in Brazil and Indonesia.

5. Infusing manufacturing everywhere with new levels of technology and capital to end the reliance on low cap ex but inefficient and carbon wasteful factories as an economic development strategy.

Coal is still a behemoth and Southeast Asia is considering a new coal investment boom that could dramatically increase climate risk—but there is a strong, vibrant global movement to curb its destructiveness.

The world community is moving on HFC’s and their end seems in sight.

Deforestation, as always, depends heavily on better governance in complex and diverse societies—it’s a slow slog, not a breakthrough game.

Manufacturing—well, we are just really beginning to wrestle with its transformation.

But oil—oil is on the edge of a major event and it is going to happen or not, in a few short weeks in Sacramento.

In 2007 Republican Gov. Arnold Schwarzenegger mandated that the oil industry diversify and decarbonize the state’s fuel supply, gradually replacing oil with alternatives—electricity, natural gas, biofuels. Oil could produce these alternatives itself or buy them on the market, but by 2020, the carbon content of fuels had to be reduced by 10 percent.

Oil’s fuel monopoly is the leverage that enables a barrel of crude to fetch—in tight markets—the $75-$125 the industry profitability requires. No monopoly, no profits. (No profits and oil’s power to block climate progress withers).

Oil threw everything it could to combat this existential threat: multiple lawsuits in state and federal courts, massive lobbying and campaign investments seeking rescue from the legislature, even a ballot measure seeking the repeal of California’s entire global warming solutions framework.

Nothing stuck. Neither Schwarzenegger or his Democratic successor, Jerry Brown, flinched. Courts upheld the low carbon fuel regulations. Gushers of money could not line up the necessary legislative majorities, the initiative was decisively slapped down at the polls and the public continues to embrace the program.

As a result, the low carbon fuel regulations are now poised to be the biggest single contributor towards California’s efforts to reduce climate pollution.

But the litigation did slow the start of the program. The ramp up of fuel diversity was correspondingly been sped up, because the 10 percent by 2020 mandate remained. Meanwhile, the oil industry chose not to invest in making its own lower carbon fuels even though Chevron admits it could have done so at a profit. Now oil companies must pay others whatever the market demands for the non-petroleum fuels the industry should have been gearing up to supply on its own.

The economic impact on the oil industry is big. By 2020, the oil industry will have to offset (by purchasing low carbon fuels) a ton of CO2 for every 30 barrels of oil. That’s projected to cost about $2/barrel, only a nickel a gallon—but it adds up to $1.5 billion a year. Worse, the program will reduce demand for oil in California’s transportation sector by at least 10 percent. California refiners enjoy a monopoly within a monopoly. No out of state refiners produce the special blends of gasoline required by California’s special unique air quality needs and the state’s refiners, during the summer months, don’t produce quite enough to meet demand. That tight market allows oil companies to jack up prices. So every summer gasoline prices in the state rise often by $1.00/gallon. With demand for gasoline falling because of an increasingly large percentage of non-petroleum based fuels in the market, that price gouging opportunity will vanish—and refining in California becomes vastly less profitable. Indeed, the reduction in gasoline demand from more efficient vehicles has already led Exxon to complain that there is “too much” clean gasoline being made in the California market. (Losing that premium for, say, four months a year, would slash another $4 billion from the oil industry’s profits on refining).

Oil’s alternative is to roll the dice on politics again, this time giving its operatives a truly unlimited campaign budget and trying to force Brown to restore oil’s monopoly future in California. After all, if you stand to lose $5.5 billion—and if the rest of the world is poised to copy California—you can easily afford to invest a few hundred million in buying politicians or influencing elections.

The new strategy involves holding as hostage California future ability to finance clean energy with revenues from the state’s cap and trade program. New litigation claims that these revenues turn cap and trade into a tax which requires a new 2/3 vote of the legislature. Clean energy advocates would like to extend the program—which currently expires in 2020—to give investors and businesses certainty about future markets. Republicans oppose the extension—period. The oil industry is hoping to persuade enough petroleum Democrats in the legislature to vote “no” on an extension that it can force California to exempt oil from clean energy requirements in exchange for extending the program. Brown wants an extension—but wants a 2/3 vote to protect it against future legal rulings and challenges and it doesn’t seem plausible he can get such a super-majority.

Climate advocates may not even, given oil’s extravagant spending on legislative races, muster a majority in the Assembly to extend AB32. Facing that possibility, Brown announced that he might leave the extension of the program in the hands of the voters in a 2018 ballot measure, rather than calling the question in the next two weeks.

That would be an enormous mistake. California votes in 90 days. Voters deserve to know which members of the legislature listened to their sentiments—2/3 support the state’s climate efforts—and which listened to the siren song of oil campaign money. And the oil industry needs to be held accountable for its hostage taking. Those things can only happen if the legislature votes—so that if the extension of the climate program is blocked, that can become a major campaign issue in this election, rather than waiting for two more years for California to take the next step.

This is especially true because, with the whole world watching, oil will spend hundreds of millions of dollars against Brown’s proposed ballot measures—and initiatives are particularly vulnerable to such mega-spending.

Brown and the leaders of the California legislature need to put a simple majority vote extension of the state’s climate commitments to the vote. If it passes, they can move on to deal with the issue of authorizing the spending. If it is blocked, they can focus on electing new legislators who are not in oil’s pocket.

It’s time to call the question.

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