California Greening: Boom or Bust?

Owen P. Hall, Jr., PE, PhD, is Editor-in-Chief of the Graziadio Business Report and a professor of decision and information systems at the Graziadio School of Business and Management.

The ongoing dust-up about global warming has brought front and center a number of new opportunities and threats to California’s currently fragile economy. Whether man-made global warming is real or not, the debate is having a growing impact on business. California’s influence, as is the case with many issues, is at the forefront. The Golden State’s Greenhouse Gas (GHG) initiative is receiving worldwide attention. One goal of this initiative is to cut industrial CO₂ emissions by 25 percent by 2020.[1]

As a follow-up to the GHG initiative, the state of California sued six major automobile manufacturers for contributing to the global warming crisis by specifically failing to cut car and truck exhaust emissions.[2] Not resting on its laurels, the state followed up with a lawsuit against the U.S. Environmental Protection Agency for failing to act on California’s new limits on greenhouse vehicular gas emissions.[3] A number of other states have joined in the action. Most likely, there will be a protracted legal process—perhaps lasting many years. Interestingly, the proposed CO₂ standards will have, at best, only a modest impact on California’s overall air quality due to continued regional and worldwide population growth.[4]

Voices from the business community argue that more stringent environmental and energy regulations will simply chase more businesses from the state at a time when the overall economy has cooled off and the state government is having an increasingly hard time balancing the budget.

The state has already lost many businesses to Nevada, Arizona, Mexico, and beyond.[5] Losing businesses means losing jobs, which translates into less state income. While driving businesses out of the state could have a positive impact on air quality, it seems like a misguided solution to the problem.

Historical evidence suggests that well-crafted environmental and energy policies can have a positive impact on the state’s economy if managed correctly. A 2000 Rand report indicated that personal income was approximately $1,000 higher per year at the end of the century as a result of energy conservation programs that were implemented beginning in the late 1970s.[6] A second Rand report issued in 2006 suggests that with rising conventional energy costs (e.g., oil) and falling unconventional costs (e.g., renewables), the state could see around 25 percent of its energy supplied by unconventional, minimally polluting sources by 2025.[7] This projection, of course, assumes that the requisite infrastructure can be developed over this time period.

Any viable solution must recognize that energy consumption and environmental quality are both related to the job market.

What should be called for is a long-term approach that balances growing environmental awareness and increasing energy dependency from unreliable sources with the need to grow the economy and generate more jobs. Tax relief and tax credits represent an important aspect of this comprehensive plan. For example, the state should drop the minimum tax for small-to-medium-sized businesses (SMBs) engaged in either energy conservation or environmental quality businesses or in implementing energy conservation practices.

A substantial increase in tax credits for firms that 1) adopt unconventional energy sources, 2) reduce the energy signature of their products and services, and 3) switch to unconventionally-powered vehicles (e.g., hybrids) should lead to more significant outcomes compared to continuous litigation, which often yields questionable results.

A similar set of significant tax incentives for individuals engaged in like practices would go a long way to addressing the dual issues of environmental quality and energy independence. Another incentive package could be to encourage organizations to implement work-at-home policies. We are living in the digital age where the Internet has transformed the way organizations operate. The above incentives would not only create new jobs, but also help cut emissions and reduce reliance on unstable energy sources. It’s a win-win scenario.

Regardless of the pending litigations and potential incentives, many of California’s businesses are scrambling to prepare for potentially changing market conditions brought on by the threat of new regulatory requirements and increased consumer interest in “going green.”

Wouldn’t it be better to approach the problem from a positive job-creating perspective rather than a one-sided litigious one? How many jobs are created by lawsuits?

Firms that might be considering California as a new home—much like the gold miner did 150 years ago—could be deflected away after seeing the onslaught of regulations and lawsuits. There is new “new gold” to be mined in California, but the question remains:

What is the best way to extract these green nuggets?

This editorial first appeared in the Graziadio Business Report, Volume 11, Issue 2.

Related in the Graziadio Business Report

The California Electricity Crisis: Economic Lessons from a Failing Deregulation Process by David Smith, PhD, and Al Hagan, PhD

Launching an Effective Citizen Advisory Panel by John Milliman, PhD, and Ann Feyerherm, PhD

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