The Clean Technology Challenge in California

James Dulgeroff
California State University San Bernardino

     Shaping the next industrial revolution is California’s own Global Warming Solutions Act of 2006, Assembly Bill 32 (AB 32), which places a cap on greenhouse gas emissions. California plans to lead the way to cleaner technologies that combat global climate change.  This paper considers the beneficial impacts of investments in clean technologies and weighs them against recent estimates of the costs of implementation for the Los Angeles basin economy.  California is betting that it can capture substantial amounts of venture capital, using the extra dollars of investment as a stimulus to the state’s economy.  This position has met with some criticism.  The objective of this paper is to formulate a reasonable comparison of the costs and the benefits that have surfaced in recent studies of the economic impacts of greenhouse gas reduction programs resulting from AB32, and to further this research effort by projecting impacts of investments in clean technology, using  a Los Angeles region input-output model.  The benefits of the projected investment in clean technology will then be compared to recent estimates of the costs of reaching the greenhouse gas reduction goals in the year 2010.  The costs estimates come from a recent study done by the Los Angeles County Economic Development Corporation (Freeman, 2008).
     For readers not familiar with this landmark legislation, a brief synopsis of California Assembly Bill 32 (AB 32) follows.  AB 32 is entitled the “Global Warming Solutions Act of 2006.” This bill provides the overarching framework for California's efforts to reduce global warming pollution. AB 32 establishes a cap on greenhouse gas emissions and sets a timeline for implementing regulations and policies that will make it possible to meet the state's emissions cap. “The law creates a central role for the California Air Resources Board (ARB), which is responsible for implementing the law. AB 32 also recognizes that many other state agencies-coordinated by the Secretary of the California Environmental Protection Agency through the Climate Action Team-will have a crucial role in reducing emissions. The ARB and all the agencies in the Climate Action Team will adopt and implement a whole package of policies to enable the state to meet AB 32's reduction target.” (Environmental Entrepreneurs, 2008)
     The Global Warming Solutions Act is designed to cutback greenhouse gas emissions to their 1990 levels by the year 2020.  The goal of this paper is to estimate the economic impacts of the actions to reduce greenhouse gases in a study area for which an input-output model is available to project those impacts and make a comparison with the result of recent estimates by the Los Angeles County Economic Development Corporation which examined AB 32 economic impacts for the Southern California Leadership Council which is a prestigious business-led-and-sponsored public policy partnership for the Southern California region.  In particular, this study is part of a growing criticism of recommendations by Governor Schwarzenegger’s Climate Action Team.  Of the actions being contemplated these are at the top of the list in terms of greenhouse gas reductions by 2020:  increased appliance and building standards efficiency (20 percent reduction), renewable energy as 20 percent of total electricity requirements (10 percent reduction through Renewable Portfolio Standard requirements), cleaner power plants (9 percent reduction), clean cars (28 percent reduction), renewable fuels (10 percent reduction), smart growth (16 percent reduction), increased water efficiency (3 percent reduction) and agriculture and forestry, including reforestation and biomass production (20 percent reduction). 
     In its report entitled The AB 32 Challenge: Reducing California’s Greenhouse Gas Emissions (Freeman, 2008) the Los Angeles County Economic Development Corporation has portrayed a costly and negative economic assessment of AB 32 implementation.  The report details impacts across those sectors which are greenhouse gas intensive and would be impacted by the California Climate Action Team’s programs.  It is evident from this study that impacts are estimated to cut across different sectors of the economy and are, therefore, estimating the direct and indirect impacts of the proposals.  The impacts are predicted to cost the Los Angeles basin economy $214 million due to higher electricity costs and industry relocation effects.  The most prominent assertion is that polluting is free and many of the policies adopted will simply increase costs of production.  The criticism levied against the actions designed to reduce greenhouse gas emissions is that advocates have erroneously anticipated energy cost savings benefits from the strategies without an honest assessment.  If these clean technologies were really cheaper, then why wouldn’t they already be adopted?  To support such arguments there are several case studies which document the increased costs associated with alternative energy and fuel conservation schemes.
     Estimated losses are $214 million in 2010 as the initial year for implementation of the California Action Team strategies are based on the higher energy costs and the relocation of businesses outside of California to avoid compliance cost.  This paper proposes to introduce the impact of new venture capital start-ups and the impact of their added investment on employment opportunities in the same study area as the AB 32 Challenge Report.  Estimates of the amount of venture capital investment in California were portioned down to the Los Angeles basin economy by using the employment shares out of the total employment in each of the commercial sectors affected.  These estimates were conservative for two reasons.  First, the 2010 estimate of dollar amounts of venture capital were assumed to hold constant the proportion of California clean technology venture capital as a part of projected, total clean technology investment by U.S. businesses.  If anything, it could be assumed that investment in clean technology sectors of the economy will grow as the 2010 deadlines for implementation get closer.  It would make sense that California might gain a greater share of U.S. investment in its plan to take advantage as an early adopter of clean technologies.  Second, the impacts on the economy exclude the induced impacts of any cost saving so as to avoid the criticism levied on earlier impact studies.
     Only the inter-industry stimulus will be examined that results from the direct impact of jobs created in the industries where the venture capital is projected to be spent. 
There would be added positive effects on the economy when people filling those extra jobs in the regional economy go out and spend the income earned in their newly created jobs.  The decision was made to exclude these economic impacts because the AB 32 Challenge Report does not report such negative impacts.  References are only made in that study to direct and indirect losses in the industries that are predicted to relocate, presumably avoiding the added costs of complying with regulations which reduce greenhouse gas emissions.  Therefore, the input-output model assessment made in this paper will be comparing apples to apples.  Only the effect of investments in a particular sector directly receiving the investment, or a business in the regional economy that is correspondingly part of the supply chain of that sector will be estimated.
     The advantage of using an input-output model to examine the impacts is that it does allow us to consider backward linkages to sectors within the region that supply inputs to the sectors which will receive the new investment dollars.  It should be instructive to give some examples of each separate sector that we found to be significantly affected by direct investment that goes under the general heading of clean technology.  Just what are the clean technology sectors and, more specifically, what do these technologies do?  Table 1 displays industry categories that were linked to sectors in the Los Angeles basin input-output model. The term cleantech refers to clean technologies that produce products and services which compete favorably with standard products while reducing waste and use of natural resources.  In the case of greenhouse gas legislation we are more specifically limiting ourselves to technologies which minimize the release of greenhouse gases known to contribute to global warming.  In this paper we examine venture capital flowing into the region that is specifically linked to technologies known to reduce environmental impacts associated with human activities.
      These industry groups are taken from a report from the National Resources Defense Council (2004).  This same report uses the same categories to breakdown the venture capital spending in California.  Actual dollar figures are reported for 2005 venture capital spending in each of these categories.  Our study projects the anticipated increased funding by each of these sectors for 2010, and proceeds to share it down to the Los Angeles basin using the relative employment share of each sector to the total employment of each of these industries in California.  The broad industry groups are reported in Table 1, along with the known venture capital spent in California (in millions of dollars).
     As projected 2010 investments in these industries were linked to their specific sectors of the Los Angeles basin economy, the input-output model revealed that they will generate approximately 70,000 additional jobs (because of the added spending in the economic activities listed in table 1).  These estimates are based on the assumption that by 2010, when the Climate Action Policies go into effect, the California share of cleantech funding will remain constant.  There is an additional assumption that overall venture capital funding in cleantech will increase in the U.S. at the same rate that it has over the five-year period from 1998-2003.  If that is true, according to the National Resources Defense Fund (2004), venture capital funding attached to clean technologies to reduce greenhouse gas emissions should grow from $484 million for California in 2005 to $1.7 billion in 2010. 
      This is a reasonable figure.  In response to the concern that the California economy is going into a recession, this figure holds the California share of projected clean technology funding in the U.S. constant.  Given that the Global Warming Solutions Act requires implementation of proposed early action reduction strategies in California, there is reason to believe that the state would actually attract larger than historical shares of venture capital as government policies promote these technologies by providing a greater, reliable demand for them.  California requirements to reduce greenhouse gas emissions, for example, would seem to provide a reliable increase in the demand for alternative fuel and hybrid vehicles.  Therefore, the assumption that California maintains a constant share of the growth projected in U.S. venture capital funding is quite conservative.
     For the purpose of doing this comparative study a six-county input-output model of the Los Angeles basin economy was utilized.  The data for this model was developed at the Southern California Association of Governments under a grant that fostered forecasts of economic activity for the purpose of creating detailed economic impact modeling for the agency’s service area.  The input-output flow table was updated using employment data for 2000.  Recent changes in technology, therefore, have not been incorporated into the input-output matrix.  However, many sectoral input-output relations should not be impacted by technology changes given the objectives of this study.   Take, for example, electric generation, at the national level the main renewable energy industries, including solar, wind, geothermal, and biomass currently employ about 115,000 people.  The entire U.S. coal industry, by comparison, employs 83,000 people (Renner, 2000).  When we run a simulation of imported energy from outside California, versus expanded renewable energy produced locally the relative capital intensity of these different methods will probably remain constant. 
     These technologies will probably maintain their differences in terms of relative inputs utilized by a given economic sector.  For example, solar collectors and wind turbines will remain much more labor intensive, and therefore a dollar spent on renewable energy will likely produce substantially more jobs than a dollar spent on the more capital intensive, tradition systems of power generation.  The relative amounts of these inputs (labor and capital) will not change substantially.  At least this is the assumption behind the input-output methodology.  The methodology assumes the proportion of inputs used by any given economic sector to produce its output remains relatively constant over the period of analysis.  Thus, when new investment stimulates a given sector, like the demand for solar collectors, then the amount of fabricated metal used to manufacture a unit of solar energy remains constant per dollar of output in that industry.            
     For the purpose of this study the Los Angeles basin economy was the study area.  This region is composed of six counties—Los Angeles, Orange, Ventura, Riverside, San Bernardino, and Imperial.  The urbanized portions of this region are within an eighty-mile circle of downtown Los Angeles, which serves as ground zero for the financial and economic heart of activities that comprise 40 percent of California’s economy.  An input-output model of the Los Angeles basin was updated to reflect 2005 employment levels by an aggregation of 2-digit Standard Industrial Classification Codes used by the U.S. Bureau of Economic Analysis (BEA).  The model was originally designed for detailed disaggregation in the following sector groups: high technology (five sectors), diversified manufacturing (23 sectors), defense (3 sectors), resource based (5 sectors including separate agriculture, mining and petroleum), basic transportation (5 sectors including separate rail, trucking, and air), other basic-export-oriented (6 sectors including wholesale trade), and the non-basic, population-serving activities (18 sectors including separate local transit, and utilities broken down by renewable and nonrenewable).  The model of the economy was sufficiently disaggregated (without reference to all 66 sectors in a tabular format).  It is important to point out that this information is roughly equivalent to the economic data for the study area, for purposes of comparison, which was referenced in the AB 32 Challenge Study (Freeman, 2008).
     An additional $329 million was the estimated share of the California venture capital investments predicted for 2010.  The investment was broken down to increase the final demands, by industrial sector as a direct consequence of the anticipated increase in venture capital funding by sector as projected by the National Venture Capital Association (2004).  The actual breakdown of investments by sector was based on projections of venture capital spending, based on known magnitudes for 2004, as reported by the National Resources Defense Council (Burtis, 2004).  The stimulus to the supply chain of industries directly feeding inputs produced in the study area to support the increases in investment in greenhouse gas reduction activities totals $558 million in the Los Angeles basin and this would generate approximately 70,000 jobs in 2010.  This would be the positive impact, without the stimulus of projected energy bill savings and respending of those saving, which comprised 90 percent of the benefits projected in three studies that have been heavily criticized based on a Brookings Institute study (Stavins, 2007).  These three studies, cited in the AB 32 Challenge Study, are alleged to exaggerate the benefits to anticipated technologies exhibiting energy cost savings which the market would already have adopted (if it were true) according to this research presented by the Los Angeles County Economic Development Corporation.  The criticism levied against the greenhouse gas reduction strategies and studies that support them, thus far, involves questionable benefits, and the attendant accusation that there is no consideration of the costs of implementing the Climate Action Team programs in California.
     The contribution of this paper is to advance benefits that are not tied to questionable energy bill cost-savings (the benefits that may not materialize and hence, would not show up as a benefit at all).  Rather, it is assumed that the negative impacts estimated by the Los Angeles County Economic Development Corporation are an accurate approximation, at roughly $214 million in 2010.  These increases in costs are due to higher energy costs associated with mandates for renewable energy sources being used to satisfy additional growth in electricity demands, and the relocation of some businesses out-of-state to avoid higher costs of production involving greenhouse gas reduction program requirements.  Against this loss, the input-output model utilized the increased investment in those businesses that would be stimulated by the Climate Action Team program changes in 2010.   The outcome was an overall stimulus to the economy of $328 million associated with increased investment in industries which would benefit from government incentives and regulatory guidelines.  Setting this added $328 million stimulus to the economy against the $214 million in losses would mean a net gain of $114 million to the regional economy.
     Two hundred years after its first gold rush, the 2050’s will reveal whether the Global Warming Solutions Act fulfills the promise of riches as its advocates have suggested.  This paper has sought to incorporate the negative as well as positive economic impacts and compare them with the aid of an input-output model for the Los Angeles basin.  It is reasonable to assume additional investment opportunities in clean technology sectors will be available as California tries to achieve a 25 percent reduction in greenhouse gas emissions by 2020, to be followed by the ultimate goal of 90 percent reduction by 2050.  All of this as the state experiences its largest absolute increase in population.  The costs and benefits of likely reduction strategies in the early phases of implementation, in 2010 are estimated and compared using available data for that year.  The net effect is positive.
     Will AB 32 spark a gold rush in the form of development of new clean technologies?  The California Environmental Protection Agency and the National Resources Defense Council estimate that demand for new technologies to reduce global warming emissions will create a multibillion-dollar worldwide market and has already been mirroring the average growth in the Dow Jones average.   The projections made in this paper assume cleantech industries matching the 30 percent increase over the past five years for California cleantech industries.  Is such a growth outlook overly optimistic?  If clean technology investment can maintain its historical pace along with the industrial core of the U.S. economy, then the new governmental incentives and regulatory guidelines for reducing greenhouse gases will lead us to a brighter future.  According to Ernst & Young and Dow Jones VentureOne, venture capital investments in clean-tech companies are on track to increase more than 35% in 2007 compared to 2006, in the nation as a whole.   Such an assessment is much more optimistic than what this study assumes.  If this is true, then the projected growth we have estimated is quite reasonable and would be a conservative estimate of the real growth-inducing investment potential.
     The tragedy of the global commons challenges us to rethink the intuition of Adam Smith who held that enlightened self interest (not unbridled self interest) leads us away from spoiling our environmental commons.  Perhaps the profit motive will again, within the regulatory limitations set out in the new greenhouse gas reduction laws, allow California to pursue its dreams of a wealthy and a healthy tomorrow.  The input-output analysis presented here indicates that cleantech will provide some good investment opportunities, if not a gold rush, for California.

Reference List:
Burtis, P. R. (2004).  Creating the California Cleantech Cluster, National Resources Defense Council.
       http://www.nrdc.org/air/energy/cleantech/contents.asp [online].
Environmental Entrepreneurs (2008) http://www.e2.org [online].
Freeman, G. (2008).  The AB 32 Challenge: Reducing California’s Greenhouse Gas Emissions, Los Angeles County Economic
       Development Corporation. http://www.laedc.org/reports/ [online].
National Venture Capital Association (2004).  Venture Impact, 2004: Venture Capital Benefits  to the U.S. Economy,  Arlington
       VA, National Venture Capital Association.
Renner, M. (2000). Working for the Environment: A Growing Source of Jobs, Worldwatch Institute, Paper no. 152
Stavins, R. (2007).  Too Good to be True? An Examination of Three Economic Asessments of  California Climate Change
       Policy, American Enterprise Institute—BrookingsInstitute Joint Center for Regulatory Studies.
      http://www.rff.org/documents/RFF-DP-07-12.pdf [online].

Table 1:
Cleantech Industry Categories for Venture Capital (VC) Spending in California