Waxman-Markey

Today’s excerpt from CEI’s film, Policy Peril: Why Global Warming Policies Are More Dangerous Than Global Warming Itself, rebuts the argument that regulatory climate policies can’t be bad for the economy because so many big businesses support them.

This is an odd argument coming from people who are usually suspicious of big business, or even hostile to corporations. When did they decide that corporate support is some kind of good-housekeeping seal of approval?

To watch today’s film excerpt, click here. To watch the entire movie, click here. The text of today’s film clip follows.

Narrator: Some big corporations call for caps on CO2 emissions. Supposedly, this proves such policies won’t harm the economy. In fact, all it proves is that special interests can make windfall profits from energy rationing schemes.

Remember that $5 trillion loss the Lieberman-Warner bill would inflict on the economy? Well, that’s only half the story.

Dr. David Kreutzer (Heritage Foundation): The Lieberman-Warner bill also enacts a huge transfer from the consumers of energy to groups that are picked out–special interest groups–that Congress would designate. So after America has lost $5 trillion in income, there will be another $5 trillion taken and transferred from energy consumers.

Commentary

A corporation may lobby for cap-and-trade for various bottom-line reasons unrelated to environmental concern:

• In a carbon-constrained world, a company like GE, which makes nuclear reactors and wind turbines, can expect to sell more of its products.  
• Utilities like PG&E that generate most of their electricity from hydro-electric dams, natural gas, or nuclear power can make a killing in the carbon market if the emission allowances are allocated for free based on a firm’s historic electricity output rather than historic emissions.
• Conversely, utilities like Duke Energy that generate most of their electricity from coal can make a killing if the emission allowances are allocated for free based on a firm’s historic emissions.
• Wall Street firms like Goldman Sachs salivate at the prospect of a new, multi-trillion-dollar market in carbon permits, futures, and derivatives. They can make big bucks as brokers and carbon portfolio managers.

The last bullet merits additional comment, because if there ever was a policy issue that pits Wall Street against Main Street, cap-and-trade is it. The Breakthrough Institute summarizes the key finding of a non-public Goldman Sachs report titled “Carbonomics: Measuring impact of US carbon regulation on select industries”:

In a section titled “Carbon exchanges — build it, and they will (must) come to trade,” it estimates the bill [Waxman-Markey] would grow the global carbon market to become one of the biggest in the world, with trading volume of 175 to 263 million contracts per year – larger than the oil and gas markets combined and approximately the third-largest commodity market in the world after U.S. interest rates and stock indexes. The analysts estimate the profit margin for financial firms resulting from the new carbon market could reach $2 billion annually.

 Baptists and Bootleggers

Corporate support for cap-and-trade should really come as no surprise, because nearly all “public-interest” regulation depends on marriages of convenience between the high-minded (or lofty-talking) and the narrowly interested–between those who seek regulation based on some moral, religious, or ideological concern and those who seek regulation to rig the market in their favor.

Economist Bruce Yandle of Clemson University was among the first to develop the theory of the Baptist-Bootlegger coalition as an explanation of public policy change. 

“The theory,” says Yandle, “draws on colorful tales of states’ efforts to regulate alcoholic beverages by banning Sunday sales at legal outlets. Baptists fervently endorsed such actions on moral grounds. Bootleggers tolerated the actions gleefully because it limited their competition.” 

Baptists provided the moral justification–the public-interest rationale–for restricting the sale of alcoholic beverages. Bootleggers provided the filthy lucre–the campaign contributions to politicians supporting the restrictions (known as ”blue laws“). 

Nothing better illustrates the “bootlegger” role of big business in advancing the climate policy agenda than Enron’s lobbying and PR campaign for the Kyoto Protocol.

Enron, that poster child of corporate fraudulance, was a leading advocate of cap-and-trade in the climate treaty negotiations culminating in the Kyoto Protocol. Enron was a natural gas distributor, and Kyoto would suppress (or kill) electricity production from coal, boosting demand for Enron’s core business. Carbon controls would also pump up the market for Enron’s wind turbines and energy management services. In addition, Enron’s energy traders  expected to make juicy commissions on the purchase and sale of emission allowances.

On December 12, 1997, the day after the Kyoto conference, Enron environmental affairs director John Palmisano, in a memorandum to colleagues, enthused:

If implemented, this agreement [the Kyoto Protocol] will do more to promote Enron’s business than almost any other regulatory initiative outside of restructuring of the energy and natural gas industries in Europe and the United States. The potential to add incremental gas sales, and additional demand for renewable technology is enormous. In addition, a carbon emissions trading system will be developed.

For both its high-profile and behind-the-scenes lobbying for Kyoto, Enron became the darling of green groups (a fact many prefer to forget). Palmisano elaborated:

Through our involvement with the climate change initiative, Enron now has excellent credentials with many “green” interests including Greenpeace, WWF [World Wildlife Fund], NRDC [Natural Resources Defense Council], German Watch, the U.S. Climate Action Network, the European Climate Action Network, Ozone Action, WRI [World Resources Institute], and Worldwatch. Such praise went like this: “Other companies should be like Enron, seeking out 21st century business opportunities” or “Progressive companies like Enron are…” or “Proof of the viability of the viability of market-based energy and environmental programs is Enron’s success in power and SO2 [sulfur dioxide] trading.” 

At the end of his memo, Palmisano exulted: ”I predict business opportunities within three years. . . This agreement will be good for Enron stock!!”

Many rent-seeking companies follow the trail that Enron blazed. For example, big-business lobbyists had a strong hand in crafting the Waxman-Markey cap-and-trade bill, the American Clean Energy and Security Act (ACES, H.R. 2454).

All the distinguishing features of the Waxman-Markey cap-and-trade provisions were spelled out months in advance of the bill’s introduction by the United States Climate Action Partnership (US-CAP), in a January 2009 report called A Blueprint for Legislative Action. Core US-CAP proposals incorporated into Waxman-Markey include:

1. Year 2020 emission reduction targets significantly less stringent  than those called for by the European Union (17% below 2005 levels instead of 20%-30% below 1990 levels).
2. Generous provision of free emission allowances (energy-ration coupons) rather than 100% auctioning as called for by President Obama (the Heritage Foundation’s August 6, 2009  analysis, p. 4, estimates that 85% to 101% [!] of the coupons will be given away in the early years of the program).
3. Generous ”carbon offset” provisions authorizing regulated U.S. firms to pay non-regulated entities to reduce, avoid, or sequester emissions in lieu of reducing emissions themselves (the Breakthrough Institute estimates that the Waxman-Markey offsets will allow U.S. emissions to increase through 2030).

A Carbon Cartel

In February 2007 testimony before the Senate Environment and Public Works Committee, CEI President Fred Smith noted that cap-and-trade “is an ugly combination of two of the greatest ills to affect the market economy over the past two hundred years–cartelization and central planning.” The emissions cap, which determines how much CO2-emitting energy society may use, is set by the government–that’s the central planning element. The provision of emission allowances under the cap effectively creates a cartel.

The emissions allowances (energy-ration coupons) function just like the production quota allocated among members of OPEC (Organization of Petroleum Exporting Companies), the only difference being that the ration coupons can be bought and sold. The economic effect, though, of both oil production quota and emission allowances is the same: restrict energy supply, raise energy prices, and create monopoly profits for a favored few.  Fred commented:

As a result of this cartelization, energy costs rise, real wages fall, and output and employment fall. We know these are the effects of cartels, which is why we used to put the people who set up cartels in jail. Yet the Climate Action Partnership wants legal blessing for this new cartel. Any legislation enacting cap-and-trade would actually ennoble a new generation of robber barons and provide legal protection for their profiteering activities.

A key point to bear in mind is that the amount of wealth transferred from consumers to cartel members can greatly exceed the overall loss to the economy. See the diagram below.

Figure description: 1.5 gigatons of carbon (GtC) is the hypothetical amount of CO2 emissions society produces in the absence of a cap. When there is no cap, the right to emit CO2 costs zero dollars per ton of carbon. The hypothetical cap requires a 20% reduction in emissions from 1.5GtC to 1.2 GtC. The right to emit CO2 now costs $50/tC. That increases the cost of energy, which then reduces economic output (the dark shaded triangle). However, the amount taken and transferred from energy consumers–the additional dollars they must spend for home heating oil, natural gas, electricity, and gasoline (the lightly shaded square)–can be much larger.

Think again of OPEC. As long as oil prices don’t get so high that they depress the global economy, the wealth transferred from consumers to OPEC members will exceed the overall reduction in global GDP.

In the European Emissions Trading System (ETS), utilities made out like bandits during the first two years of the program. Governments gave the utilities more free ration coupons than they needed. The utilities then passed their imaginary costs onto their customers by raising rates. Then they sold the surplus coupons they didn’t need to manufacturers whose electric rates they had raised. Thanks to the ETS, the utilities achieved a two-fold (albeit short-lived) windfall profit. Open Europe, the British free-market think tank, provides the gory details in this hard-hitting report.

In the run-up to Waxman-Markey, cap-and-trade proponents repeatedly said that they had learned from Europe’s mistakes, and here in the USA all emission allowances would be auctioned in competitive bids. Yes, your electric rates would “necessarily skyrocket,” Barack Obama said, when campaigning for the White House. But, he assured us, the revenues would be returned somehow to taxpayers. Cap-and-trade would become cap-and-dividend.

That, however, was unacceptable to US-CAP, and in the sausage factory known as the legislative process, they carried the day. The Heritage Foundation’s August 6, 2009  report describes what happened:

In order to get the Waxman-Markey cap-and-trade bill through the House Energy and Commerce Committee . . . Members of Congress promised generous handouts for various industries and special interests. In the near-term, the legislation promises to distribute 85-101% of the allowances to various interest groups at no cost . . . The biggest winners are the electric utilities, receiving 43.75% of the emission allowances in 2012 and 2013.

To read previous posts in this series, click on the links below.