California manufacturers weigh the costs of new greenhouse emissions rules

LOS BANOS, Calif. — The Morning Star Co.’s three plants in California emit roughly 200,000 metric tons of carbon dioxide into the atmosphere each year as they turn tomatoes into ketchup, spaghetti sauce and juice used by millions of consumers around the world.

Beginning Tuesday, under the terms of a California environmental law known as AB 32, Morning Star and 350 other companies statewide will begin paying for those emissions.

Companies are trying to figure out how this will affect their bottom lines and have lobbied state regulators to minimize the costs. In the meantime they are weighing their options. Should they stay and adapt or move operations? Should they retrofit and innovate to reduce emissions? Should they swallow the regulatory costs or pass them on to customers?

Each company’s calculus depends on its particular circumstance. Morning Star has to be near the tomato fields of California’s Central Valley, so relocating was never an option. Its biggest question is how to handle the extra costs.

The rules are relatively simple for producers like Morning Star. At the end of 2014, they must present stateissued allowances — one per metric ton of emissions — for the greenhouse gases they emitted in 2013.

For the 200,000 metric tons of carbon dioxide emitted annually by its three plants, Morning Star is being awarded about 192,500 free allowances the first year; the company must buy the remainder on the open market. In the first allowance auction in November, the allowance price settled at $10.09 a ton, meaning in the first year Morning Star has to pay roughly $75,000 to cover its emissions.

But over the next five years, the number of free allowances will decrease sharply to encourage further emissions cuts. At current rates, that means Morning Star will have to buy 100,000 allowances for both 2017 and 2018, by which time the prices may have doubled or tripled in an open market. The company estimates the law will cost it an extra $20 million over the next seven years.

Nick Kastle, a company spokesman, said it would almost certainly pass on the new costs to makers of ketchup and frozen pizza, which likely will share the extra costs with consumers. “People nationwide are going to be affected by AB 32,” he said.