By Jad Mouawad & Jeremy W. Peters New York Times
Published: September 1, 2006
After becoming chief executive of PG&E last year, Peter Darbee met with a large number of leading climate scientists, he said, to make up his own mind about global warming.
As a result of his wide inquiries, PG&E, the parent of the Pacific Gas and Electric Company, which serves Northern California and is one of the nation's largest energy utilities, broke away from the industry pack to support sweeping efforts to reduce the greenhouse-gas emissions that are widely blamed for global warming.
"The evidence in the scientific community is lopsided - it's not even close," Mr. Darbee said. "Climate change is a problem."
California is once again at the forefront of the nation's environmental policy, with a far-reaching pledge to curb carbon emissions by 2020. But the deal struck on Wednesday between Democratic legislators and the Republican governor, Arnold Schwarzenegger, has divided businesses and industries in California.
While high-technology companies have lined up behind the move, arguing that it will put California at the forefront of alternative energy development, most of those representing basic industries contend that it will retard the economy, force energy-intensive businesses out of state and increase costs for all Californians.
Mr. Darbee, a former investment banker and financial expert who brings an outsider's perspective to the inbred utility industry, cuts across those lines, pointing to a potential advantage for business in California: predictability.
"The incentives really aren't there for the creation of new technologies and investments to reduce carbon dioxide unless mandatory caps are put in place,'' he said. "Now, that creates an element of certainty."
The California plan, which won final legislative approval yesterday but faces a battle in the courts before it can go into effect, calls for a 25 percent cut in carbon dioxide emissions by 2020. It envisions controls on some of the largest industrial groups - including utilities, oil refineries and cement plants.
While many of the details remain to be worked out, the law will include a mixture of mandatory regulations, incentives and market-based mechanisms, including a so-called cap-and-trade system allowing companies to buy and sell carbon allowances. The California Air Resources Board has until 2009 to draft regulations that are to become mandatory in 2012.
"The United States is the world's biggest carbon emitter, and California is a big part of it," said Jim Marston, who runs the state global warming initiative at the activist group Environmental Defense, which has played a big role in California and elsewhere in promoting alternative energy use. "The key aspect of the law is that it's multisector and it imposes hard caps."
Given a lack of national policy toward global warming, local and state authorities are increasingly taking the matter into their own hands, creating a patchwork of competing rules that will be potentially harder for businesses to navigate. Seven states in the Northeast, for example, have proposed to reduce carbon emissions from power producers 10 percent by 2019.
Mr. Marston acknowledged that a system adopted by the European Union in response to the Kyoto Protocol to curb global warming gases had not been very effective.
"No system we have works perfectly," he said. "The cap-and-trade system in Europe has some flaws because they didn't do a great job with the baseline. California will learn from what went wrong in Europe."
California has had a long tradition of leading the way in environmental regulations that in time are adopted by other states and cities across the country. The federal Clean Air Act of 1970, for example, originated in efforts starting in the 1960's to limit smog in Southern California.
In 2004, the state became the first to adopt regulations intended to limit greenhouse gas emissions from automobiles. Several states in the Northeast, including New York, have followed suit. A coalition of the world's largest automakers, which opposed the regulations from the beginning, is suing many of these states to prevent the laws from taking effect.
The restrictions, scheduled to go into effect on 2009 model vehicles, roiled the global auto industry because automakers would have to increase fuel economy to meet them.
Unlike smog-forming pollutants, carbon dioxide and other emissions from vehicle tailpipes that are linked to global warming cannot be filtered. Reducing those emissions would therefore require redesigning engines, which would increase the cost of building a vehicle.
But for Jack Stewart, the president of the California Manufacturers and Technology Association, an industry trade group, California's go-it-alone approach risks harming the competitiveness of the economy.
"We think it is draconian,'' he said, "for the state of California to put these California-only rules when companies outside of the state will not have the same restrictions and costs imposed on them."
It is not clear how California will accomplish its goals. Companies have traditionally found that reducing their carbon emissions could be best achieved by improving energy efficiency. Large corporations, including I.B.M., DuPont and Johnson & Johnson, have found that steps to curb energy use through efficiency gains not only cut their power bills but often led to overall gains in productivity.
Mr. Stewart, though, argued that such "low-hanging fruits" were harder to find in California today because the state had long been at the forefront of the energy-efficiency effort. "California's energy costs are the highest in the country," he said. "Most manufacturers who use a lot of energy have already done a lot of conservation. This law puts us at a huge disadvantage."
Myron Ebell, director of energy policy at the Competitive Enterprise Institute, a conservative research group in Washington, and a prominent critic of efforts to curb global warming, also dismissed the California plan.
"We cannot reduce our carbon emissions by making ourselves poorer,'' he said. "That is not acceptable in a democratic society. It might work in North Korea, but it will not work here. If global warming turns out to be a problem, we have to work on technological changes. All of that is something California has tremendous capacity to do - not by going on an energy diet."
But the backers of the law said that developing new energy sources and emphasizing efficiency would actually help expand California's economy.
They cited a recently published study by researchers from the University of California, Berkeley, which argued that cutting carbon emissions back to 1990 levels would add $74 billion in value, or 3 percent, and contribute to the creation of 89,000 jobs.
"There is a great deal of energy efficiency still left in California that will produce both lower greenhouse gases and lower the consumption of fossil fuels," one of the Berkeley researchers, Alexander E. Farrell, said.
Jim Wunderman, president and chief executive of the Bay Area Council, a coalition of businesses in and around San Francisco, said the new emissions legislation would allow California businesses to be at the forefront of developing energy technology, much as they were with personal computers, semiconductors and the Internet.
"We think this is going to contribute to a boom in industries focused on alternative energy development,'' Mr. Wunderman said. "Enlightened businesses can participate in an economic boom that's going to serve both the business interest and the public's interest."
And a leading venture capitalist, John Doerr, a partner in the firm of Kleiner Perkins Caufield & Byers in Palo Alto, said the new rules would force corporations to innovate.
"The folks who don't change, they lose, they die," he said. "I do not see it as a system that's going to encourage businesses to leave California."
Still, adapting to such new regulations should be easier for companies that make semiconductors and computer keyboards than for those that make cement or refine oil. Mr. Doerr predicted that most industries would come around in the end because they would be squeezed by the costs associated with not complying.
"Manufacturers are going to go green," he said.
There is already evidence of this in the oil industry, he continued, with companies investing in alternative forms of energy like biofuels. And technology companies are in a strong position to innovate.
"High-tech industries thrive on innovation and new technology," Mr. Doerr said. "Already, it's even easier for them to be nimble, and shift and respond to different market mechanisms."
In the end, he predicted, it will make more sense for most businesses to stay and adapt.
"It doesn't matter where they make this stuff, '' Mr. Doerr said, "because if you put the gasoline refinery across the border in Nevada, the same law applies. If you want, you can decide you don't want to sell gasoline in the sixth-largest economy in the world, but I guarantee you won't do that."
And if California succeeds, Mr. Doerr said, the rest of the nation will follow.
"Every new, important, environmentally sustainable policy has come from California and spread to other states,'' he said. "Then the federal government decides we ought to consolidate this."
http://www.nytimes.com/2006/09/01/business/01energy.html?_r=1&oref=slogin
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