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Andrew Chang & Company, LLC

1301 H Street Sacramento CA 95814 916-538-6091

The Fiscal Impact of the California Global Warming Solutions Act of 2006 on California’s Fruit and Vegetable Processors

July 2012

 

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About the Report Sponsors:

The California Manufacturers & Technology Association works to improve and enhance a

strong business climate for California's 30,000 manufacturing, processing and technology based

companies. Since 1918, CMTA has worked with state government to develop balanced laws,

effective regulations and sound public policies to stimulate economic growth and create new

jobs while safeguarding the state's environmental resources. CMTA represents 600 businesses

from the entire manufacturing community – an economic sector that generates more than $200

billion every year and employs more than 1.2 million Californians.

About Andrew Chang & Company, LLC:

The professionals at Andrew Chang & Company work with our clients to achieve tangible

results by combining our best-in-class research and analyses with unique insights into public

policy and business and government strategy and operations. Using advanced economic,

statistical and business administration techniques, we provide strategy and operations

consulting to Fortune 1000 firms and provide policy, economic, fiscal and operations consulting

for public sector agencies and non-profit organizations to improve operations.

 

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The Fiscal Impact of the California Global Warming Solutions Act of 2006 on California’s Fruit and Vegetable Processors

(Table of Contents)

Section Page

Key Findings 3

1. Introduction 4

2. AB 32’s Impact on California’s Fruit and Vegetable Processors 5

3. Case Study: Pacific Coast Producers 12

4. Conclusion 20

Appendix A: Electricity Usage 21

Appendix B: Bibliography 22

 

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The Fiscal Impact of the California Global Warming Solutions Act of 2006

on California’s Fruit and Vegetable Processors (Key Findings)

California’s fruit and vegetable processing industry will incur increased costs amounting to

$151.4 million cumulatively by 2020 and $34.5 million annually as a result of increased

electricity costs associated with the California Air Resources Board’s AB 32 program.

These burdens on California’s fruit and vegetable processing industry will result in an

additional $1.0 billion in lost GSP by 2020 and destroy 2,000 jobs.

In addition, working California families will lose approximately $76.6 million in earnings by

2020 as a result of ARB’s AB 32 program.

Pacific Coast Producers, a grower-owner cooperative that processes apricots, peaches,

pears, grapes, and tomatoes in the northern Central Valley, will incur $5.9 million in

cumulative costs and $1.4 million in annual costs by 2020 as a result of ARB’s AB 32

program.

These costs will affect Pacific Coast Producers’ ability to spend on capital projects to

increase the efficiency of their production lines and increase the cost to their business at a

time when China and other foreign producers emerge as global competitors in tomato

production. The costs to this industry will ultimately be borne by consumers in increased

food prices and decreased economic benefit to their communities.

 

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1. Introduction

“The Fiscal and Economic Impact of the California Global Warming Solutions Act of 2006 on

California’s Fruit and Vegetable Processors,” by Andrew Chang & Company, LLC is a white

paper in a series detailing the precise impacts from the earlier “The Fiscal and Economic Impact

of the California Global Warming Solutions Act of 2006” study of the total fiscal and economic

impacts of AB 32 as it has been specified by the California Air Resources Board. In an effort to

highlight the impacts to private companies, this report details the fiscal impact and economic

repercussions that will occur under the law for California’s fruit and vegetable processing

industry from increased electricity costs as well as the cost of Cap and Trade.

The report found that the cumulative GSP loss between 2012 and 2020 will be $85 to $245

billion between the Low and High Case. In the Optimistic Case, the total impacts to California

consumers and the economy in the year 2020 are significant:

Direct cost to California consumers is $35.3 billion

Net effect on Gross State Product (GSP) is a 5.6 percent loss with 262,000 jobs lost

$7.4 billion in lost state and local revenue

$12.3 billion in lost statewide earnings

Average family costs of over $2,500 a year, in addition to over $900 in lost annual family

earnings

This report details the impacts these policies will have on a specific private industry. This

includes the impact of increased electricity costs and lost economic output, earnings, and

employment from decreased economic activity. We also illustrate the impact to a specific

company, Pacific Coast Producers (PCP), on its canning and processing operations for

peaches, pears, apricots, grapes, and tomatoes in the northern Central Valley.

 

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2. AB 32’s Impact on California’s Fruit and Vegetable Processors

AB 32 will increase the cost of electricity for all consumers including private enterprise, and

some of those private industries will face costs associated with Cap and Trade credits and

offsets. Moreover, the economic slowdown caused by AB 32 will adversely affect the state

economy and cause a decrease in economic output and state employment. For this study, we

examined the impact to the fruit and vegetable processing industry in the state.

Agriculture is an integral part of the California economy and its history – indeed, California is

the largest agricultural state in the union, growing over 400 crops. California is the world's fifth

largest supplier of food and agriculture commodities. One of the key components of that industry

is the fruit and vegetable processing sector, providing grapes, lettuce, strawberries, tomatoes,

pears, oranges, broccoli, garlic, carrots, apricots, lemons, avocados, olives, peaches, and a

host of other fruit and vegetable products to the rest of the United States and foreign countries.

In particular, California processes one-third of the world’s supply of tomato products, nearly all

of the country's canned peaches and frozen peaches.

All told, the food processing industry generally accounts for more than 3 percent of the

entire Gross State Product, and the fruit and vegetable processing sector specifically ships out

$13.1 billion in product annually. A significant percentage of that money comes directly to

California from outside the state and funnels economic benefit and tax revenue into the

communities that produce these products.

However, the food processing industry as a whole has been doing more with less. Gross

product has been increasing for last decade while total employment in the industry has been

declining. Since the 1970s, processed fruit and vegetable consumption among American

families has decreased by almost 3 percent despite overall fruit and vegetable consumption

increases over the same period. The industry tends to fare well during times of economic

slowdown as people rely on their goods compared to additional costs of fresh fruit and

 

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restaurant dining, but the cost impact of AB 32 will make domestic processors more costly

compared to their overseas competition. Due to these factors, in addition to increased

competition in the foreign market, several analytical reports expect a gradual but persistent

decline in revenue and profit.

The direct AB 32 costs will come primarily from increased electricity costs and the cost of

credits and offsets under Cap and Trade. The cumulative fiscal impact to fruit and vegetable

processing from 2012 to 2020 will be $151.4 million. The increased electricity costs and costs

from Cap and Trade will significantly increase costs for processors, as shown in Figure 2.1.

Figure 2.1 Cumulative Costs for Fruit and Vegetable Processors

SOURCE: U.S. Census Bureau, "2010 Annual Survey of Manufactures," November 15, 2011; U.S. Department of Energy, "Table 5.1. End Uses of Fuel Consumption," 2006 Manufacturing Energy

Consumption Survey, February 2010; California Air Resources Board, "Mandatory GHG Reporting Data Emissions Reported for Calendar Year 2010," March 12, 2012; Main Report, Appendix D, I

It is important to note that AB 32 programs choose industries that are winners and losers,

and the money that is being extracted from these companies has no guarantee of being

recycled into the industries that have been most harmed. The costs of the law could have much

greater impacts than even analyzed here. Costs such as implementation of the law, hiring

 

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outside contractors to process Cap and Trade credit and offset sales, and other administrative

burdens are not shown here, but could easily double the annual costs to industry.

In Figure 2.2, we describe the annual additional electricity costs for processors they will

have to bear under AB 32. In 2020, the additional cost increases to $18.2 million across the

industry. The impact of the increased cumulative electricity cost of $84.4 million will amount to

approximately 56 percent of the increased costs over the implementation period. The annual

cost in 2020 is also the equivalent of more than 420 average employees across the industry, a

1.4 percent reduction in the industry’s total statewide workforce.

Figure 2.2 Annual Additional Electricity Costs for Fruit and Vegetable Processors

SOURCE: U.S. Census Bureau, "2010 Annual Survey of Manufactures," November 15, 2011; U.S. Department of Energy, "Table 5.1. End Uses of Fuel Consumption," 2006 Manufacturing Energy

Consumption Survey, February 2010; Main Report, Appendix D

As an industry that faces capped carbon emissions, certain fruit and vegetable processing

facilities will need to purchase credits and offsets to meet state Cap and Trade standards. The

impact of these costs, as described in Figure 2.3, amount to $16.3 million annually in 2020 and

$67.1 million cumulatively over the implementation period. The cumulative impact represents

the other 44 percent of increased costs, and the annual impact in 2020 is the equivalent of a

 

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reduction in the industry’s workforce of 385 average employees, or nearly 1 percent of the state

workforce. When considering the cumulative costs of both impacts, the potential decrease in

employment would reach 3,500 jobs impacted, or more than 11 percent of the industry’s

workforce.

Figure 2.3 Annual Cap and Trade Costs for Fruit and Vegetable Processors

SOURCE: California Air Resources Board, "Mandatory GHG Reporting Data Emissions Reported for Calendar Year 2010," March 12, 2012; Main Report, Appendix I

Economic impacts will follow as well. The total lost Gross State Product from impacts to the

fruit and vegetable processing industry will reach $1.0 billion by 2020, a greater amount than the

annual gross product of California’s textile industry. That $1.0 billion impact to gross product is

also greater than the annual gross product of all food-related manufacturing in the San Diego,

Santa Barbara, and Redding metropolitan areas. This economic loss is important because it will

hit cities that are already high in unemployment and low revenues. Cities in California’s Central

Valley will face a significant burden and bear a disproportionate impact of these economic

losses.

 

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Figure 2.4 Lost California GSP from Industry Impacts

SOURCE: U.S. Department of Commerce, "Gross Output by Industry," Bureau of Economic Analysis, December 13, 2011; U.S. Census Bureau, "2010 Annual Survey of Manufactures,"

November 15, 2011; Main Report, Appendix C

Employment across the state will also decrease as a result of increased costs to the

industry. Employment across the state will decrease by 2,000 jobs in 2020, or would be the

equivalent of doubling the decline in fruit and vegetable processing employment from 2009 to

2011 in the state. These are not just job losses related to production and processing, but of

support industries such as skilled labor for maintenance and food and other service industries in

the area of each facility.

 

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Figure 2.5 Lost California Employment from Industry Impacts

SOURCE: U.S. Department of Commerce, "Gross Output by Industry," Bureau of Economic Analysis, December 13, 2011; U.S. Census Bureau, "2010 Annual Survey of Manufactures,"

November 15, 2011; Main Report, Appendix C

The lost earnings impact will reach $76.6 million for all Californians in the year 2020. This

impact will fall across an estimated 14.1 million households in 2020 and is the equivalent

salaries of 1,800 average employees in the fruit and vegetable sector – or 5.7 percent of the

total sector’s employment.

 

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Figure 2.6 Lost California Earnings from Industry Impacts

SOURCE: U.S. Department of Commerce, "Gross Output by Industry," Bureau of Economic Analysis, December 13, 2011; U.S. Census Bureau, "2010 Annual Survey of Manufactures,"

November 15, 2011; Main Report, Appendix C

 

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CASE STUDY: The Impact of AB 32 on Pacific Coast Producers

The impacts to the fruit and vegetable processing industry are going to be significant, as the

previous figures highlight. However, the impacts are going to be pronounced on individual

companies in the industry and will dramatically affect the way they are able to operate. The

Pacific Coast Producers (PCP) cooperative, which was formed in 1971 and been in constant

operation for more than 40 years, provides canned peaches, pears, apricots, grapes, and

tomatoes to customers across North America.

The company employs 3,500 individuals during growing seasons for their products, with

700 year-round employees working full-time in the off-season, and with unionized

employees having been with the company for an average of 12.5 years.

Operates six locations in the northern Central Valley (Lodi (3), Oroville, Woodland and

Palermo).

The company is actively involved in the communities they operate in, sponsoring local

charities, sitting on the boards of hospital associations and Salvation Army, and being active in

local events and sports leagues. The company is one of the largest private employers in Butte

County and hires locally, especially helpful considering their facilities are often located in areas

of high unemployment. Like most of its companions in the industry, the people of Pacific Coast

Producers strive to be good neighbors and good citizens.

The nature of their production is seasonal. In the case of tomatoes, the time from field to can

is typically less than 6 hours. Unlike traditional heavy and light industry manufacturing, products

cannot be stockpiled or otherwise stored for production at a future period where electricity

pricing may be more affordable or production conditions may be more favorable. During the

harvest season, out of necessity facilities operate 24 hours a day, 7 days a week with three full

shifts. And unlike other manufacturing, if the raw product is not used because of decreased

production, it typically rots in a field and is wasted or not grown at all.

 

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The additional costs for Pacific Coast Producers will come primarily from Cap and Trade

costs associated with their Woodland tomato facility, although all facilities will experience

increases in fuel and electricity costs. The facility, which provides canned peeled tomatoes

pureed and concentrated products of all types and tomato paste, operates above the threshold

CO2e limit set by the California Air Resources Board. As seen in Figure 2.7, our Optimistic

Case determines that the total impact from the cost of credits and offsets will reach $1.2 million

annually in 2020. Along with $0.1 million in annual increases in the cost of electricity and some

costs associated with an increase in transportation fuel prices, Pacific Coast Producers will pay

$1.4 million in additional costs in 2020 without any additional benefit or production to show for

the cost.

Figure 2.7 2020 Additional Costs for Pacific Coast Producers

SOURCE: Pacific Coast Producers, Electricity and Transportation Fuel information, accessed July 2012; California Air Resources Board, "Mandatory GHG Reporting Data Emissions Reported for

Calendar Year 2010," March 12, 2012; Main Report, Appendix I

When examining the cumulative impacts to the company between 2012 and 2020, the

numbers become even more staggering. By 2020, the company will have spent $5.9 million on

Cap and Trade, electricity, and transportation fuel costs combined. That figure represents real

 

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money that could be spent on improving their business. In addition, the uncertainty and

complexity surrounding the Cap and Trade process can prove incredibly costly for companies

that are not large corporations or financial institutions. Pacific Coast Producers is unsure about

participating in the November 2012 credit auction because of uncertainty surrounding the

program, and unsure if they should use a consultant for purchasing and accounting for credits

and offsets. Mona Shulman, vice president General Counsel with the company, has concerns

about competing with large financial institutions or other large entities on the credit market.

Figure 2.8 Cumulative Costs for Pacific Coast Producers

SOURCE: Pacific Coast Producers, Electricity and Transportation Fuel information, accessed July 2012; California Air Resources Board, "Mandatory GHG Reporting Data Emissions Reported for

Calendar Year 2010," March 12, 2012; Main Report, Appendix I

 

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Part of the reason the additional costs could be so frustrating is that the company has taken

it upon itself to operate in a highly efficient manner. And these costs do not take into account the

spending the company would have to undertake to increase mandatory efficiency levels. Using

research and consultants, the company regularly works in the offseason to improve the

efficiency of its natural gas-fired boilers and recover as much energy as possible.

For companies like these, efficiency is not just good for the environment, it is also good

business. Money saved on energy keeps costs and prices low, helping PCP compete in a global

market. As seen in Figure 2.9, the company uses computer automation as much as possible to

monitor boiler operations and interface with modern systems that allow even greater efficiency

in their operations than was even possible a decade ago – systems that can adjust water

recovery temperatures on the fly and increase or decrease boiler output so that no energy is

wasted. They have decreased the amount of steel used for their cans because it keeps costs

down, and they have reduced their water use by 50 percent in the last decade. As succinctly put

by Dan Sroufe, vice president of operations, “if you’re not progressive at lowering costs, you’re

not going to stay in business.”

Show me where else in the world an industry can make such a huge, vital contribution to the health of the world with less environmental impact. Essentially, what affects food processors, affects agriculture. The cost impact of the Cap and Trade on food processors threatens that relation, that productivity. Pacific Coast Producers is right to be worried.”

John Larrea, director of government affairs

California League of Food Processors,  

 

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Figure 2.9 Modern Boiler Control Panels

SOURCE: Andrew Chang & Company, courtesy of Pacific Coast Producers

Since the company sells roughly 90 percent of their products outside the state, Pacific Coast

Producers bring money directly into the California economy. They use energy to evaporate

water from tomatoes to make tomato paste, thus reducing shipping costs and the emissions

associated with it by decreasing the total amount of loads required to move the product by up to

80 percent.

Pacific Coast Producers understands that, ultimately, the consumer will choose the best

alternative tomato product supplier by price or choose a cheaper fruit or snack product. The

$5.9 million in cumulative costs will have to be passed along somewhere, and they worry that

the consumer will be unwilling or unable to absorb those additional costs. Since growers and

processors are so closely linked, the impact on the processing industry will naturally also impact

the growers. According to John Larrea, the director of government affairs with the California

League of Food Processors, the huge success of California agriculture is due to the cooperation

between growers and processors. He states: “The relationship between California’s agriculture

and food processing industries is symbiotic. Together our industries are one of the most efficient

and productive enterprises in the world. California agriculture and food processing produce

enough nutritious fruit, vegetables, olives, nuts, poultry, meat, dairy, cheese and other products

 

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to feed not only California, but the nation, as well as a significant portion of the world – both

safely and at a reasonable cost. When one measures the size of our combined production and

the efficiency of our operations here in California, the total of our production produces only

about 1.7 million tons of CO2 annually. That’s less than ½ of one percent of the total emissions

produced by all industry in California. Show me where else in the world an industry can make

such a huge, vital contribution to the health of the world with less environmental impact.

Essentially, what affects food processors, affects agriculture. The cost impact of the Cap and

Trade on food processors threatens that relation, that productivity. Pacific Coast Producers is

right to be worried.”

The rise of the Chinese agriculture and food production also worries Pacific Coast

Producers. China has begun making significant inroads into tomato canning and processing, an

area that has been led by California for decades. Leakage of business and equipment overseas

is a very real concern. Speaking about the need to upgrade or purchase new equipment,

Shulman said, “Our overseas competitors would be more than happy to take our discarded

equipment.”

The company has done a great deal to increase their efficiency. PCP has also undertaken

upgrades to equipment that are not required out of a desire to be a better steward to their

communities and the environment. For years, a small boiler, pictured in Figure 2.10, operated

without the need for environmental review because of its size. Despite the fact that undertaking

a capital project to upgrade it would bring it under environmental review by the local air board

and cost a fair amount of money, PCP implemented the project because “it was the right thing to

do.”

 

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Figure 2.10 Voluntarily Upgraded Small Boiler

SOURCE: Andrew Chang & Company, courtesy of Pacific Coast Producers

Capital and time willing, there are a host of other efficiency projects that the company plans

on undertaking. The customers of Pacific Coast Producers, too, are requesting that the

company increase its “green” footprint. Unfortunately, the off-season is typically the only time

that significant improvements can be made to equipment. The capital costs associated with

those improvements can be significant, and the limits on capital only allow for a few projects a

year. Some efficiency systems can run upwards of $900,000, which it should be noted is less

than the total fiscal impact from AB 32 to the company in 2020 alone.

The company does make those investments regularly, and the results are evident. As seen

in Figure 2.11, they upgraded one of their Woodland facility’s large gas boilers to reduce carbon

emissions, heat loss, and reduce nitric oxide and nitrogen dioxide emissions. The upgrade also

included an electronic panel that links in with their central computer system, allowing easier

regulation of temperature, water flow, and pressure. When purchasing upgraded equipment and

 

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boiler parts, they try to purchase from within California as much as possible. The company has

also implemented the latest technology in lighting, electrical distribution, equipment, process

equipment automation, water and fuel conservation, and waste mitigation. There are, however,

no new technologies available to significantly reduce carbon emissions further.

Figure 2.11 High-Efficiency Large Boiler

SOURCE: Andrew Chang & Company, courtesy of Pacific Coast Producers

Pacific Coast Producers is the model of a company that is doing everything that should be

expected of them: producing safe food products that provide economic and employment benefit

to their communities and California, while undertaking efforts to better the environment, improve

efficiency, and provide the most affordable cost to the consumer. But even with their

improvements and efficiencies, the company still stands to lose millions of dollars that would be

better served going towards projects that would make them a stronger company.

 

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3. Conclusion

The increased cost of electricity coupled with the costs from Cap and Trade upon fully

implementing AB 32 will create a $151.4 million cumulative impact to the fruit and vegetable

processing industry over the length of the implementation period, with a $34.5 million impact in

the year 2020. The state will also bear additional economic impacts from these costs. California

will face $1.0 billion in lost GSP by 2020, as well as approximately 2,000 jobs through the same

period. In addition, California earnings will decrease by approximately $76.6 million by 2020.

Pacific Coast Producers, a company that processes apricots, peaches, pears, grapes, and

tomatoes, is an example of how these impacts would drive down efficiency growth and affect

the lives of working men and women. The conservative $5.9 million cumulative cost will affect

their ability to spend on capital projects to increase the efficiency of their production lines and

increase the cost to their business at a time when China and other nations are beginning to

emerge as global competitors for one of the cornerstones of their business: tomato processing.

These costs will ultimately be borne by consumers or the company and its growers if production

is slowed, and the uncertainty with implementation of the Cap and Trade program could even

further increase the cost of doing business.

AB 32 chooses industries that are winners and losers, and the money that is being extracted

from these companies has no guarantee of being recycled into the industries that have been

most affected. The costs of the law could have much greater impacts than even analyzed here.

 

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Appendix A: Electricity Usage

2012 2013 2014 2015 2016 2017 2018 2019 2020

Additional Electricity Cost per GWh1 (Real $)

$1,121.2

$2,509.0

$2,300.2

$4,093.2

$4,847.7

$6,117.7

$7,819.1

$9,006.8

$11,313.8

Food and Vegetable Processing Usage2 (in GWh)

1970.9 1921.6 1873.5 1826.7 1781.0 1736.5 1693.1 1650.8 1609.5

                                                                                                                     1 See Main Report, Appendix D 2 U.S. Census Bureau, "2010 Annual Survey of Manufactures," November 15, 2011; U.S. Department of Energy, "Table 5.1. End Uses of Fuel Consumption," 2006 Manufacturing Energy Consumption Survey, February 2010

 

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Appendix B: Bibliography

California Air Resources Board, "Mandatory GHG Reporting Data Emissions Reported for

Calendar Year 2010," March 12, 2012

Cook, Roberta, "Tracking Demographics and U.S. Fruit and Vegetable Consumption Patterns," Department of Agricultural and Resource Economics, University of California, Davis, October 2011

IBISWorld Market Research, "Canned Fruit and Vegetable Processing in the US Industry Market Research," March 27, 2012

U.S. Census Bureau, "2010 Annual Survey of Manufactures," November 15, 2011

U.S. Department of Commerce, "Gross Domestic Product by State," Bureau of Economic Analysis, June 5, 2012

U.S. Department of Commerce, "Gross Output by Industry," Bureau of Economic Analysis, December 13, 2011

U.S. Department of Energy, "Table 5.1. End Uses of Fuel Consumption," 2006 Manufacturing Energy Consumption Survey, February 2010

U.S. Department of Labor, "Quarterly Census of Employment and Wages: California," Bureau of Labor Statistics, accessed July 2012