Making big oil pay

The first major battle between the California oil industry and the burgeoning clean-energy economy is headed for the state November ballot—a battle so significant that, if the alternative-energy proponents are to be believed, it could determine the outcome of the whole war over our energy future. As a side effect, it could also have a potent influence on the outcome of the governor’s race.

Any day now, the secretary of state will announce whether the California Clean Alternative Energy Act has qualified for the fall election. With more than 1.2 million signatures submitted, and only 598,000 valid signatures needed, election analysts believe it is a statistically foregone conclusion that the measure will qualify.

If passed by voters, the initiative will place a 1.5-percent to 6-percent severance tax on California oil production to raise $4 billion over 10 years, with the proceeds being invested in alternative fuels and vehicles in order to reduce the state’s gas and oil consumption 25 percent by 2017. Currently, California oil companies pay the state a mere 5.3 cents per barrel of oil. Certainly, the oil industry expects the measure to qualify: It has already formed its opposition committee, Californians Against Higher Taxes. Represented by the Nielsen Merksamer government-affairs outfit, the oil industry also has retained the Woodward & McDowell campaign firm, which specializes in “the no side” in initiative battles. Thus far, Chevron, ExxonMobil/Shell and Occidental each have pitched in a quarter-million dollars to defeat the measure.

But this time, the oil companies will not simply be running a campaign against a measure backed by environmental groups. The rising price of oil, the oil supply’s increasing insecurity and concern over air pollution and greenhouse-gas emissions have created a fledgling alternative-fuel and alternative-vehicle industry that is staking much of its future on the initiative’s outcome. Adding serious financial, intellectual and political heft to the initiative are some Silicon Valley multimillionaires and a Hollywood mogul.

By most accounts, the Clean Alternative Energy Act is the brainchild of Vinod Khosla, the founding CEO of Sun Microsystems and an “affiliated partner” of the legendarily successful Silicon Valley venture-capital firm Kleiner, Perkins, Caulfield & Byers (KPCB). Among KPCB’s venture-capital successes is Google. Khosla himself has donated more than $1 million to the initiative, while two other KPCB partners have donated more than $1 million, and the wife of the Google CEO has pitched in $500,000 thus far. Hollywood producer Stephen Bing also has contributed $1 million. Unlike some other environmental measures, the campaign for this one will not be under-funded. Instead, it is shaping up to be a classic battle between an old industrial economy and an emerging new one.

If passed, the initiative will set up a California Alternative Energy Authority, run by a nine-member board, composed of the secretary of the state Environmental Protection Agency; the chair of the state Energy Commission; the state treasurer; and six “experts” in the energy, technology, venture-capital, consumer and public-health fields. As reported by the Legislative Analyst’s Office, this board will distribute the funds according to a formula, such that 57.5 percent will go toward incentives for producers, consumers and researchers of alternative fuels and alternative vehicles; 26.75 percent for grants to California universities developing renewable and energy-efficiency technologies; 9.75 percent for “start-up costs” in the production of alternative fuels and energy resources; 3.5 percent for public education, “oil market monitoring” and administration; and 2.5 percent for community-college job-training programs in the alternative-energy technologies. A cap of $100 million of the $4 billion may be spent for the Alternative Energy Authority’s administration.

Democratic gubernatorial candidate Phil Angelides came out in support of the measure during the primary election—his then-opponent Steve Westly never took a position. “It will be good for California both economically and environmentally,” Angelides declared in a statement to SN&R. Just days after the primary election, Governor Arnold Schwarzenegger came out in opposition to the measure.

“The governor is opposed to the initiative,” Schwarzenegger campaign press aide Julie Soderlund told SN&R. “The governor believes that taxes are detrimental to the economy. He believes oil companies should be encouraged to invest in alternative energy, and any gas-price gouging should be investigated.”

“This is classic Arnold Schwarzenegger,” Angelides told the Los Angeles Times on June 10. “He drives around the state this week in a big green bus, but then he sides with big oil and walks away from the fight against global warming.”

The initiative’s backers claim that this tax is unlike other business taxes, in that the measure strictly prohibits oil companies from passing on the costs to consumers. They cite previous U.S. Supreme Court cases declaring such a prohibition as constitutional. Furthermore, they claim that the price of oil is set by global markets, therefore preventing oil companies from passing it on. But the Legislative Analyst’s Office critique asserts that “it is unclear the extent to which the BOE [state Board of Equalization] would be able to enforce this statutory prohibition, given the difficulties in determining what portion of a potential price increase on oil and related products is due to the imposition” of the new tax “as opposed to other costs of production.” Even an analyst at a major environmental group backing the measure, Roland Hwang of the Natural Resources Defense Council (NRDC), admits that the oil companies’ books are “so opaque” that it may be impossible to ultimately demonstrate that consumers aren’t being forced to pick up the costs.

Even so, Hwang maintains that the global market price for oil will force the oil companies to take it out of their windfall profits rather than being able to pass on the cost.

But a spokesperson for the “No Oil Tax” campaign, Al Lundeen of the Woodward & McDowell campaign firm, asserts that “one way or another, consumers will bear the costs.”

The more difficult question, if the initiative passes, is whether the measure can actually achieve its goal of a 25-percent reduction in gas and oil consumption by 2017.

Hwang acknowledges that even with $4 billion, reaching the goal of transforming California’s 28 million vehicles will be a challenge “but is doable.”

Hwang says that there are some relatively easy, inexpensive steps that could help it succeed. “It costs just $100 or $150 [in] additional costs for the production of a ‘flex-fuel’ vehicle by GM or the other automakers, so that these cars could run on ethanol. This initiative hopefully will encourage the auto industry to produce 100-percent flex-fuel vehicles.”

A greater challenge is the production of alternative fuels and the creation of the infrastructure to deliver those fuels to vehicles. Right now, Hwang says, out of 10,000 gas stations in California, there is only one, located in San Diego, where someone can fill up with ethanol. The price of creating an alternative-fuel pump at a gas station ranges from $50,000 to $100,000, though the first $30,000 can be picked up by a federal tax credit. The initiative is aimed in part to solve this “chicken and egg” problem, since drivers will only buy alternative vehicles or use alternative fuels if the alternative fuels are widely available. To achieve this, a substantial portion of the oil-tax funds would need to go to creating an alternative-fuel industry and infrastructure.

The initiative backers believe that the $4 billion invested in California’s alternative-vehicle and -fuel future could do enough to create a “tipping point” for the rest of the market to go in the alternative-fuel direction. Vinod Khosla has in fact circulated a “white paper” that claims a measure like the initiative “will start our transition irrevocably” and “can replace all our oil imports and become the centre of our transportation fuels economy.”

Predictably, the oil-industry-funded opposition campaign says it’s unnecessary. “We agree that there’s not enough being done in pursuit of alternatives,” said Woodward & McDowell’s Lundeen. “We just don’t think this is the way to go. If this were needed, you wouldn’t already have hybrid cars, which were market-driven and are now commonplace.”

But NRDC’s Hwang asserts that oil companies have “no incentive to introduce a new fuel that competes with oil. Their future is a ‘brown path’ of turning coal, tar sands and oil shale into petroleum products, which is very damaging to the land and seriously contributes to global warming.”

Come November, for the first time in state history, voters will decide whether they want to continue with the oil economy that has fueled the state for a century or start driving down a different road.