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IN THIS ISSUE – “These Are Jaw-Dropping Numbers”
UNDER THE DOME: STATE BUDGET & BIG ISSUES PERCOLATE
- Senate Budget Committee Approves $214-Billion Spending Plan for 2019-20
- Assembly Outlines Its Version
- Governor Launches Homelessness Task Force With LA, Sacramento Officials
- 300 Public Systems Need Drinking Water Clean-Up
- Tesla Stock Decline Reflects Investor Concerns
- Warren Buffett Likes Fossil Fuels
Capital News & Notes (CN&N) harvests California legislative and regulatory insights from dozens of media and official sources for the past week, tailored to your business and advocacy interests. Please feel free to forward.
Stay current daily! For our focused updates via Twitter: @jrgualco / @robertjgore / @gualcogroup
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FOR THE WEEK ENDING MAY 24, 2019
Senate Budget Committee Approves $214-Billion Spending Plan for 2019-20
California wants to give more benefits to people living in the country illegally as lawmakers in the state Senate advanced a $214 billion spending proposal Wednesday that would expand health coverage and tax credits for immigrants.
The proposal would let low-income immigrants living in the country illegally get government-funded health coverage if they are 65 and older or between the ages of 19 and 25.
The Senate’s budget writing-panel also agreed to let some people who don’t have Social Security numbers qualify for the state’s earned income tax credit — a program for the poor that boosts people’s tax refunds. The credit would apply to people who have an individual tax identification number, which includes immigrants in the country legally and illegally.
“These are people who are working, who are paying taxes,” Senate Budget Committee chairwoman Holly Mitchell, D-Los Angeles, said. “That’s a population we ought not leave behind.”
Some Republicans have opposed the proposals, especially since the state is also considering imposing a tax penalty on people in the country legally who refuse to purchase health insurance. But they likely don’t have the votes to stop it.
The proposals build on the spending plan Democratic Gov. Gavin Newsom released earlier this year that would extend Medi-Cal eligibility to young adults and double the tax credit to $1,000 for every family with at least one child under the age of 6, making about 3 million households eligible to receive it.
Newsom’s proposal did not include expanding eligibility for the tax credit to immigrants. It’s unclear how much money that would cost.
Newsom wanted to pay for the expanded tax credit by selectively conforming California’s tax code with portions of the tax changes President Donald Trump signed into law in 2017. That would have generated about $1.7 billion in new revenue for the state, mostly from businesses taxes.
The Senate rejected those tax changes.
“We’ve just got to figure out where else to get that money from,” Mitchell said.
The Senate proposal is the first indication how the Democratic-controlled legislature will react to Newsom, who took office in January. The Assembly plans to finalize its budget proposal on Friday, which trigger negotiations with the Newsom administration.
Lawmakers must pass a budget by June 15. If they don’t, state law requires them to forfeit their salaries.
https://apnews.com/45c3fb4dcda74c69987ca8d98acba15f
Assembly Budget Subcommittees’ Report:
http://budgettrack.blob.core.windows.net/btdocs2019/624.pdf
Senate Majority Media Release:
“California At Spending Peak,” Legislative Budget Advisor Cautions
Through the adoption of countercyclical fiscal policies, California is better able to navigate the business cycle within the constraints of its constitutional balanced budget requirement. The idea here is that in good times—when revenues are strong—the state spends somewhat below its capacity, sequestering the difference in reserves. Later, when the economy and tax receipts weaken, the state can draw upon its accumulated savings to fund a spending level above what revenues would otherwise support. Exercising spending restraint during good times promotes fiscal sustainability and dampens the need for austerity in subsequent recessions, thus, facilitating policy stability. The more robust California’s countercyclical fiscal policies are, the more the state can avoid boom-and-bust budgeting, which most policymakers view as anathema.
At a moment when the state anticipates $22 billion in discretionary resources (for example, its surplus), few would dispute that California is in the midst of “good times.” Yet, while the notion of countercyclical fiscal policy may be agreeable in principle, the policy trade-offs it requires—particularly when times are good—can be difficult in practice.
The Legislative Analyst’s Office (LAO) has sought to assist the Legislature with balancing this tension in our The 2019‑20 Budget: The May Revision—LAO Analyses. Having evaluated the Governor’s proposals with an eye toward the state’s longer term fiscal structure, we arrived at two overarching conclusions: (1) the amount of new ongoing spending proposed by the Governor in the May Revision is approaching the upper limit of what is consistent with prudent countercyclical policy and (2) larger discretionary budget reserve deposits than what the Governor proposes are warranted at this time.
Sections and link:
New Ongoing Spending in the May Revision Is Nearing the Sustainable Limit
Larger Discretionary Reserves Are Warranted at This Time
Now Is the Time for Countercyclical Fiscal Policies
https://lao.ca.gov/Publications/Report/4051?utm_source=laowww&utm_medium=email&utm_campaign=4051
Governor, Legislature Study Housing Shortage Solutions Still Alive
After California’s most sweeping housing reform proposal died in the Legislature last week, Gov. Gavin Newsom has few options as powerful as Senate Bill 50 to fulfill his campaign pledge to address the state’s affordability crisis.
SB 50, authored by state Sen. Scott Wiener, was the only legislation that aggressively tackled zoning restrictions to force local governments to authorize taller buildings and other multi-family housing near “transit-” and “jobs-rich” areas.
Newsom said he was “disappointed” with the decision by the Senate Appropriations Committee to set aside the measure for the year.
“California must address the housing supply shortage head on,” he said, “and we need to be able to use every tool in the toolkit to address this systemic crisis.”
The new governor prioritized housing and homelessness solutions in a $1.75 billion budget proposal earlier this month, calling California’s slow construction “deplorable.” He set a target during his campaign last year for the state to build 3.5 million new residences by 2025.
This year, he urged lawmakers to support his efforts and deliver a legislative package he could sign.
But the Democratic governor’s options have narrowed.
While several housing reform measures remain alive this year, there’s “not really a Plan B on zoning reform,” said .David Garcia of the Terner Center for Housing Innovation.
“There’s still plenty on the table, which can be very impactful for the state of California,” Garcia explained. “But SB 50 was the most significant, transformational bill. Now you don’t have any vehicle moving forward.”
RENT CONTROL AND TAX CREDITS
A handful of remaining bills chip away at local regulations, and a few promise tenant and affordable housing protections.
One proposal by Sen. Nancy Skinner, D-Berkeley, for instance, bars local governments from “downsizing” by replacing multi-unit buildings with ones for fewer residents. Her Senate Bill 330 also bans the demolition of affordable units unless residents are offered accommodation.
A joint effort by Rob Bonta, D-Alameda and David Chiu, D-San Francisco, would substantially increase renter protections. Bonta’s Assembly Bill 1481 establishes a just-cause eviction mandate and allows tenants to contest a decision to throw them out. Chiu’s Assembly Bill 1482 prohibits “egregious rent increases” by capping how much landlords can raise rent.
Rent control faces an uphill climb to pass a floor vote. Last year, California voters rejected a rent control initiative, Proposition 10.
Another bill by Chiu would expand tax credits for low-income housing, adding about $324.5 million in new development incentives.
And Senate Bill 5 by Sen. Jim Beall would pull $2 billion from property tax revenue to pay for local affordable housing and infill projects.
“My bill goes toward creating a partnership with local governments,” the San Jose Democrat said, describing SB 5 as a “financial stream” that gives local agencies power to spearhead their own housing initiatives. Housing advocates say those bills don’t collectively deliver the punch of SB 50, which threatened to supersede city rules and spur housing across the state.
Although the bill was crafted to spark construction in urban centers, it also imperiled zoning laws in cities from Davis to Clovis. Local leaders from the Central Valley joined city officials in the Bay Area and Southern California to complain, arguing Wiener’s legislation undermined their own carefully built housing plans.
“By allowing developers to override state-approved housing plans, SB 50 seriously calls to question the need for cities to develop community based plans in the first place,” Riverbank Mayor Richard O’Brien wrote in an opposition letter on behalf of Central Valley cities.
Fresno Mayor Lee Brand said his city’s general plan serves as a growth blueprint that is “way ahead of all other cities” and he questioned what SB 50 could offer that Fresno wasn’t already doing.
“It’s got to be a region by region, not a shotgun approach,” Brand said, noting that SB 50 wasn’t built for the Valley, but for coastal cities with more transportation and job hubs. “There’s no one bill that is going to evenly impact the varying types of communities across the state of California.”
Those frustrations are what drove Senate Appropriations chair Anthony Portantino, D-La Cañada Flintridge, to kill SB 50 until 2020. Portantino said Wiener needed to consider questions raised by local officials and before that happens, the legislation is not “ready to go to the floor.”
MORE APARTMENTS
But not every city official scoffed at Wiener’s idea.
Sacramento Mayor Darrell Steinberg said he was an enthusiastic supporter of SB 50. Linking housing and transportation policy has long been an interest for Steinberg, who has framed political cartoons on his office wall referencing policies he pushed in the Legislature to encourage housing near transit.
“It could have a significant impact,” Steinberg said. “But to me it’s a positive significant impact because Sacramento needs more affordable housing.”
Middle class residential neighborhoods in East Sacramento along the Gold Line, Land Park and Curtis Park, would be newly eligible for multi-family homes under SB 50, Steinberg said.
Wiener found another ally in Stockton Mayor Michael Tubbs, who said the affordability crisis in coastal cities has a “ripple effect” that increases pressure on his own city’s housing market.
“Part of the issues we have with housing in Stockton is because folks aren’t building the types of housing people need in the Bay Area and L.A.,” Tubbs said.
Wiener said he’s “100 percent committed” to moving the legislation forward next year.
“We need to do things differently when it comes to housing,” Wiener wrote. “We’re either serious about solving this crisis, or we aren’t. At some point, we will need to make the hard political choices necessary for California to have a bright housing future.”
https://www.sacbee.com/news/politics-government/capitol-alert/article230539129.html?#storylink=cpy
Governor Launches Homelessness Task Force With LA, Sacramento Officials
Gov. Gavin Newsom called growing homelessness in California a national disgrace as he announced he is launching a task force to find solutions amid a housing crisis in the most populous state.
The Democratic governor said the state has lacked a strategy to curb homelessness but argued that answers will come from the local level. He said the group will work with cities and counties to develop regional plans for addressing the issue.
Newsom made the announcement in Oakland, where county officials said the number of homeless people rose 43 percent over the last two years. Recent data from other counties has shown large increases, too.
“These are jaw-dropping numbers,” Newsom told reporters at the Henry Robinson Multi-Service Center, which provides transitional housing for people facing homelessness.
Newsom has proposed spending about $1 billion in the state budget on programs to tackle homelessness, including providing $650 million to local governments for emergency shelters and other services. He also wants to spend money on programs for homeless college students and legal protections for people facing evictions.
Meanwhile, major housing legislation has faltered in the Legislature in recent weeks.
A measure to expand rent control stalled, and the chairman of a key Senate committee held back a closely watched proposal that would have waived zoning rules in some neighborhoods to allow for more housing, such as around public transportation.
Supporters argue that such measures are key to preventing homelessness and creating more housing.
Newsom told reporters that he is talking with Senate President Pro Tempore Toni Atkins and legislative leadership about the development measure. But he did not take a position on whether it should get a vote on the Senate floor.
During his campaign last year, Newsom proposed creating a cabinet-level secretary of homelessness, a post he has yet to fill.
Newsom tapped Sacramento Mayor Darrell Steinberg and Los Angeles County Supervisor Mark Ridley-Thomas to chair the new Homeless and Supportive Housing Task Force. The governor’s office said he will appoint other members later.
The group will meet around the state to see best practices and gather input to propose solutions, Newsom’s office said. The task force will issue at least one report a year to the governor.
Republican Assemblyman Devon Mathis questioned the need for a new task force, arguing Newsom’s administration is not doing enough to address the state’s high cost of living.
“Every month, families sit around the kitchen table and have to figure out how to make ends meet. Are we bringing down their cost of electricity?” He said. “Are we bringing down their costs in rent?”
https://apnews.com/6a4c5c0659bc42e6ad0431840357d6c9
300 Public Systems Need Drinking Water Clean-Up
Water is a currency in California, and the low-income farmworkers who pick the Central Valley’s crops know it better than anyone. They labor in the region’s endless orchards, made possible by sophisticated irrigation systems, but at home their faucets spew toxic water tainted by arsenic and fertilizer chemicals.
“Clean water flows toward power and money,” said Susana De Anda, a longtime water-rights organizer in the region. She is the daughter of lechugueros who worked in lettuce fields and helped make California one of the agricultural capitals of the world. “Homes, schools and clinics are supposed to be the safest places to go. But not in our world.”
As she spoke, Ms. De Anda drove through several towns where tainted water is a fact of life, here in the state’s agricultural center. In the foreground, along State Route 201, were miles of lush orange groves and dairy farms. Spotted out the passenger window of her silver Toyota was Stone Corral Elementary in the town of Seville, where century-old pipes contaminate the tap water with soil and bacteria. The school depends on grant money to pay for bottled water for students.
Today, more than 300 public water systems in California serve unsafe drinking water, according to public compliance data compiled by the California State Water Resources Control Board. It is a slow-motion public health crisis that leaves more than one million Californians exposed to unsafe water each year, according to public health officials.
Though water contamination is a problem up and down the state, the failing systems are most heavily concentrated in small towns and unincorporated communities in the Central and Salinas Valleys, the key centers of California agriculture. About half of all failing water systems are in the agricultural San Joaquin Valley, in the southern section of the broader Central Valley, said Ellen Hanak, the director of the Water Policy Center at the Public Policy Institute of California.
Gov. Gavin Newsom has proposed a tax of about $140 million on urban water districts and the agriculture industry to pay for redevelopment in districts serving unsafe water. That money would come in addition to $168 million he has allocated toward water infrastructure improvements from a bond proposition passed last year.
Some have bristled at the proposed tax, given already high tax rates in the state and a budget surplus of more than $21 billion. The Association of California Water Agencies — whose members provide an estimated 90 percent of water distributed in the state — has spoken out against the governor’s proposed solution, arguing it would affect the cost of living in already-expensive California.
“There’s agreement with everyone involved in policy that there is a problem and it needs to be solved,” said Cindy Tuck, the group’s deputy executive director for government relations. But, “we think it doesn’t make sense to tax a resource that is essential.”
State Senator Melissa Hurtado, a Democrat representing the Fresno area, whose district is severely affected by tainted water, said she would like to see more money allocated for infrastructure spending, but believes a tax on water is a nonstarter. Last week, the Democratic-controlled State Senate budget subcommittee voted against the governor’s proposed water tax, in favor of recommending funding from the state’s general fund. The Legislature is expected to work out the details as part of broader budget negotiations, which will come for a vote in June.
But the debate in Sacramento feels far away in East Orosi, a farmworker community of about 500 nestled along the foot of the Sierra Nevada that is surrounded by fields of oranges. There, residents complain of conditions that resemble the developing world, not the richest state in the nation. Fears of nitrate exposure in the tap water — which numerous studies have linked to an increased risk of infant death, and at high levels, an elevated risk of cancer in adults — compound other difficult realities like faraway grocery stores and doctors, grueling work conditions, and a lack of political clout.
Veronica Corrales, the president of the East Orosi water board, wonders why more people are not outraged that, in 2019, people living in a state as wealthy as California lack such a fundamental necessity.
“Everyone is saying ‘America First,’ but what about us?” she said.
Many factors have led to the groundwater contamination reflected in the state’s data, but public health experts say the region’s agriculture industry has played an outsize role. Chemical fertilizers and dairy manure seep into the ground and cause nitrate contamination, like the kind plaguing East Orosi. Such contamination, which is common throughout the valley, takes years to materialize and even longer to clear up.
Arsenic is naturally occurring in some areas but can become worse with exhaustive groundwater pumping, which has been a longstanding problem in the valley and accelerated during the drought between 2012 and 2016.
It is exceedingly difficult to say with certainty whether any illness is directly tied to specific environmental factors, including contaminated water. But an article published last month in Environmental Health, an academic journal, estimated that 15,500 cases of cancer in California could occur within 70 years because of unsafe drinking water.
For years, Martha Sanchez and her husband, Jose — who live in East Orosi and make their living filling crates with oranges or picking cherries — have received notices from the local water system that their taps are unsafe to drink from because of contamination. The family spends at least $60 a month for tap water they can’t use, Ms. Sanchez estimates, which is factored into the rent. To cook and wash dishes, Ms. Sanchez ladles bottled water into pots and pans from heavy blue jugs kept in the kitchen. She and her children shower using the water from the pipes, but she says it makes their skin itch.
“Some people around here drink it,” Ms. Sanchez said. “Here at home, I don’t use it at all for cooking, not even for beans.”
Her husband, who is a supervisor in the fields, pays for clean water out of pocket for the employees he manages, because the farm does not provide it. Sometimes he brings in about $80 for a full day of work.
These problems are not new. The failing infrastructure at the heart of the potable water crisis in these communities is tinged with the legacy of rural redlining, said Camille Pannu, the director of the Aoki Water Justice Clinic at the University of California, Davis, who likened the situation in the valley to the one in Flint, Mich. “Flint is everywhere here,” she said.
“The fact that more than a million Californians in 2019 have been left behind is really appalling,” said Jared Blumenfeld, the secretary of the California Environmental Protection Agency. “I’ll never forget talking to people in Imperial and Coachella Valley who are like, ‘You know what, it’s amazing when we go back to Mexico, the water is better.’”
Mr. Blumenfeld said the “vast majority” of water systems with unsafe water are in small communities where there are too few customers to cover the cost of water treatment and maintenance. Laying even short distances of pipe can cost millions of dollars, which is sometimes feasible when costs are spread out among many people but not so for individual families, or when towns are especially remote.
Many families who live in those areas use water from private wells because their homes are not connected to public water systems. The number of people exposed to dangerous water statewide could be even higher than the data shows: The state does not regulate private wells and does not monitor systems with fewer than 15 connections.
One solution for expanding potable water access could be for larger systems to absorb smaller systems, which would allow them to spread infrastructure costs across more customers. In the San Joaquin Valley, nearly 80 percent of disadvantaged communities without potable water are less than one mile away from other communities with safe drinking water, according to a 2018 report by the U.C. Davis Center for Regional Change.
But larger water systems are often wary of absorbing the smaller systems. In part, they do not want to absorb the costs that come with overhauling dilapidated infrastructure, said Ms. Hanak, the Water Policy Center director.
Many families who live in those areas use water from private wells because their homes are not connected to public water systems. The number of people exposed to dangerous water statewide could be even higher than the data shows: The state does not regulate private wells and does not monitor systems with fewer than 15 connections.
One solution for expanding potable water access could be for larger systems to absorb smaller systems, which would allow them to spread infrastructure costs across more customers. In the San Joaquin Valley, nearly 80 percent of disadvantaged communities without potable water are less than one mile away from other communities with safe drinking water, according to a 2018 report by the U.C. Davis Center for Regional Change.
But larger water systems are often wary of absorbing the smaller systems. In part, they do not want to absorb the costs that come with overhauling dilapidated infrastructure, said Ms. Hanak, the Water Policy Center director.
“Because Orosi has clean water, they don’t want to take on rate payers from East Orosi who they think are so poor they’ll skip out on their bills,” Ms. Pannu said. “Unfortunately, you have poor people versus poorer people.”
- Joaquin Esquivel, the chairman of the State Water Resources Control Board, said the gaps in potable water access were unacceptable, and promised that the state would continue using its consolidation authority to ease disparities. But he added that sustained funding for infrastructure and maintenance projects would be crucial for long-term solutions.
Ms. Corrales, a nurse, stepped in as the president of the East Orosi water board several months ago. There was no one else who wanted the job, she said, and she was voted in at a community meeting almost without realizing it.
Sometimes she is not sure whom she should be fighting: the state, the farm owners, the skeptics in Orosi. She just wants clean water.
https://www.nytimes.com/2019/05/21/us/california-central-valley-tainted-water.html
California Bank of Cannabis Advances
Shut out of the traditional banking system by federal laws, the country’s largest legal marijuana market in California could benefit if the state approves a measure creating a special class of banks to handle pot money.
The state Senate voted 35-1 on Tuesday to pass a bill that would allow people to start banks and credit unions that could accept cash deposits from marijuana retailers.
Those banks could issue special checks to the retailers that could only be used for certain purposes, including paying taxes and California-based vendors.
State lawmakers also say such banks would make it easier for licensed pot retailers to pay their taxes, which fell far short of expectations in the first year after legalization.
“This is as close as we can get until the federal government changes its policy,” said Sen. Bob Hertzberg, a Van Nuys Democrat and the author of the bill that now goes to the Assembly.
Marijuana has been legal in California since January 2018, but it’s still illegal under federal law.
U.S. statutes also prohibit banks from handling money that comes from criminal activity. Banks that knowingly accept money from licensed marijuana retailers haven’t been able to get federal deposit insurance.
Meanwhile, pot businesses can’t get debit or credit cards or use checks, according to a report by legislative staffers.
The result, according to Hertzberg, is “millions of dollars buried in barrels.” He called it a public safety issue, putting retailers at risk of robbery.
Marijuana tax collections were $100 million short of expectations in August. Earlier this month, marijuana revenue projections by the state through June 2020 were cut by $223 million.
Republican Sen. Jeff Stone said the state is losing “probably hundreds of millions” of dollars in taxes each year because marijuana retailers can’t write a check to the state.
“They’ve got to come in with wheelbarrows to carry in all the cash,” he said.
Retailers have also blamed low tax collections on sluggish sales due to a still flourishing black market.
Last week, lawmakers rejected a bill that would have temporarily lowered taxes on growers in an effort to help licensed retailers compete with the illegal sellers.
http://www.capradio.org/134602
CARB Greenhouse Gas Credits Auction Strong Results
PoliticoPro, May 22
The latest sale of California greenhouse gas allowances fetched prices significantly above the state-set price floor, resulting in about $740 million for state coffers, officials announced today.
Last week’s auction for allowances to cover businesses’ current emissions settled at $17.45 per ton, $1.83 above the price floor, while allowances for 2022 emissions went for $17.40 per ton, according to results released by the Air Resources Board today.
One-quarter of the proceeds are used to fund the state’s high-speed rail system, which faces an increasingly murky future. Lawmakers are currently debating how to spend the portion of funding they have discretion over, estimated at $1.4 billion over fiscal 2019-20.
An environmental analyst said the high demand could be attributed to several factors, including the absence of previously unsold allowances coming back for sale and the expectation that prices will rise after 2020 as the state-set emissions cap ratchets down to 40 percent below 1990 emissions levels by 2030.
“They might be buying now in order to sort of be ready for that,” said Katelyn Roedner Sutter, a senior climate policy analyst with Environmental Defense Fund.
California Air Resources Board report:
https://www.arb.ca.gov/cc/capandtrade/auction/may-2019/summary_results_report.pdf
Tesla Stock Decline Reflects Investor Concerns
Wall Street Journal, May 21
After years as a market darling, Tesla’s share price had tumbled by nearly 40% this year and 22% in the last month as of Monday’s close. At least two prominent, formerly-bullish analysts have soured on the stock this week, and prices on its benchmark bond due in 2025 are flirting with record lows.
More alarming than the selloff itself is the absence of a clear catalyst. It was just this month that Tesla was able to raise a net $2.4 billion by selling shares and convertible debt. That should have softened the blow of dismal first-quarter results. In the past, fresh infusions of capital have tended to push Tesla stock higher.
A change in that pattern portends bigger issues than disappointing the investors who just showed faith in the company. After all, the infusion didn’t eliminate Tesla’s medium-term need for external funding. Those funds are earmarked for bondholders, banks, suppliers and the significant capital spending its business requires this year.
As a cash-burning operation, Tesla will continue to depend on the generosity of the capital markets to pay bills and attract talent via stock options. The easier it is to tap the market, the more ambitious it can be in setting its goals. Amid talk of a “spartan diet” by Chief Executive Officer Elon Musk, its horizons are now shrinking. Tesla has laid off employees, closed stores and cut prices this year.
Even after the recent tumble, there is a lot more sizzle than steak to Tesla’s story. Its shares still sell for more than 30 times next year’s earnings estimate of $6.47 a share, according to FactSet. Toyota andGeneral Motors fetch about 10 and 6 times, respectively—assuming, of course, that consensus earnings estimates hold firm. Analysts had penciled in more than $11 a share in 2020 at the start of this year.
Warren Buffett Likes Fossil Fuels
Commentary from Wall Street Journal, May 19
What’s Warren Buffett doing with a $10 billion bet on the future of oil and gas, helping old-school Occidental Petroleum buy Anadarko, a U.S. shale leader? For pundits promoting the all-green future, this looks like betting on horse farms circa 1919.
Meanwhile, broad market sentiment is decidedly bearish on hydrocarbons. The oil and gas share of the S&P 500 is at a 40-year low, and the first quarter of 2019 saw the Nasdaq Clean Edge Green Energy Index and “clean tech” exchange-traded funds outperform the S&P.
A week doesn’t pass without a mayor, governor or policy maker joining the headlong rush to pledge or demand a green energy future. Some 100 U.S. cities have made such promises. Hydrocarbons may be the source of 80% of America’s and the world’s energy, but to say they are currently out of favor is a dramatic understatement.
Yet it’s both reasonable and, for contrarian investors, potentially lucrative to ask: What happens if renewables fail to deliver?
The prevailing wisdom has wind and solar, paired with batteries, adding 250% more energy to the world over the next two decades than American shale has added over the past 15 years. Is that realistic? The shale revolution has been the single biggest addition to the world energy supply in the past century. And even bullish green scenarios still see global demand for oil and gas rising, if more slowly.
If the favored alternatives fall short of delivering what growing economies need, will markets tolerate energy starvation? Not likely. Nations everywhere will necessarily turn to hydrocarbons. And just how big could the call on oil and natural gas—and coal, for that matter—become if, say, only half as much green-tech energy gets produced as is now forecast? Keep in mind that a 50% “haircut” would still mean unprecedented growth in green-tech.
If the three hydrocarbons were each to supply one-third of such a posited green shortfall, global petroleum output would have to increase by an amount equal to doubling the production of the Permian shale field (Anadarko’s home). And the world supply of liquid natural gas would need to increase by an amount equal to twice Qatar’s current exports, plus coal would have to almost double what the top global exporter, Australia, now ships.
Green forecasters are likely out over their skis. All the predictions assume that emerging economies—the least wealthy nations—will account for more nearly three-fourths of total new spending on renewables. That won’t happen unless the promised radical cost reductions occur.
For a bellwether reality-check, note that none of the wealthy nations that are parties to the Paris Accord—or any of the poor ones, for that matter—have come close to meeting the green pledges called for. In fact, let’s quote the International Energy Agency on what has actually happened: “Energy demand worldwide [in 2018] grew by . . . its fastest pace this decade . . . driven by a robust global economy . . . with fossil fuels meeting nearly 70% of the growth for the second year running.”
The reason? Using wind, solar and batteries as the primary sources of a nation’s energy supply remains far too expensive. You don’t need science or economics to know that. Simply propose taking away subsidies or mandates, and you’ll unleash the full fury of the green lobby.
Meanwhile, there are already signs that the green vision is losing luster. Sweden’s big shift to wind power has not only created alarm over inadequate electricity supplies; it’s depressing economic growth and may imperil that nation’s bid for the 2026 Winter Olympics. China, although adept at green virtue-signaling, has quietly restarted massive domestic coal-power construction and is building hundreds of coal plants for emerging economies around the world.
In the U.S., utilities, furiously but without fanfare, have been adding billions of dollars of massive oil- and natural-gas-burning diesel engines to the grid. Over the past two decades, three times as much grid-class reciprocating engine capacity has been added to the U.S. grid as in the entire half-century before. It’s the only practical way to produce grid-scale electricity fast enough when the wind dies off. Sweden will doubtless be forced to do the same.
A common response to all of the above: Make more electric cars. But mere arithmetic reveals that even the optimists’ 100-fold growth in electric vehicles wouldn’t displace more than 5% of global oil demand in two decades. Tepid growth in gasoline demand would be more than offset by growing economies’ appetites for air travel and manufactured goods. Goodness knows what would happen if Trump-like economic growth were to take hold in the rest of the developed world. As Mr. Buffett knows, the IEA foresees the U.S. supplying nearly three-fourths of the world’s net new demand for oil and gas.
Green advocates can hope to persuade governments—and thus taxpayers—to deploy a huge tax on hydrocarbons to ensure more green construction. But there’s no chance that wealthy nations will agree to subsidize expensive green tech for the rest of the world. And we know where the Oracle of Omaha has placed a bet.
Mr. Mills is a senior fellow at the Manhattan Institute and a partner in Cottonwood Venture Partners, an energy-tech venture fund, and author of the recent report, “The ‘New Energy Economy’: An Exercise in Magical Thinking.”