Leading world politicians and industrialists have reached a new, non-binding agreement at a meeting in the United States on tackling climate change.
Delegates agreed that developing countries will have to face targets for cutting greenhouse gas emissions as well as rich countries.
The non-binding meeting in Washington of the G8+5 Climate Change Dialogue also agreed that a limit should be decided for maximum acceptable carbon dioxide levels in the atmosphere, the NBC reported. A global market should be formed to cap and trade carbon dioxide emissions, they also said.[...]
Jim Rogers, the chief of Duke Energy, applauded the mandatory cap-and-trade approach, and stressed that if the United States did not act soon to cut greenhouse emissions, fast-developing China and India probably would not participate in any global emissions-cutting program.
The forum's closing statement yesterday said man-made climate change was now "beyond doubt".
From: The new bootleggers: A U.S. climate alliance pushing a 'cap and trade' emissions regime is lined with cartel-creating firms that get money for nothing (Fred L. Smith Jr., Financial Post, February 15th, 2007)
We are all indebted to Professor Bruce Yandle of Clemson University for introducing us to the concept of "Baptists and Bootleggers." His theory's name, first elucidated in 1983, is meant to evoke 19th-century laws banning alcohol sales on Sundays. Baptists supported Sunday-closing laws for moral and religious reasons, while bootleggers were eager to stifle their legal competition. Thus, politicians were able to pose as acting to promote public morality, even while taking contributions from bootleggers.
Something similar seems to be going on here in the Climate Action Partnership of environmental groups and corporations. The environmental pressure groups are the Baptists, providing a moral screen to the bootleggers, in this case the energy and manufacturing companies. The policies laid out in the partnership's "Call for Action" actually stand to benefit the companies at a cost to the economy and consumers. By their actions and in their own words, the partnership's commercial members are fully aware of this.
At the heart of the partnership's plan is the regulatory capping and trading of greenhouse-gas emissions. Cap and trade, as it is known, is often described as market-based, because there is buying and selling involved. This is a misnomer. In fact, cap and trade is an ugly combination of two of the greatest ills to affect the market economy over the past 200 years: cartelization and central planning.
Let us turn to the companies involved in the Climate Action Partnership, beginning with Duke Energy Corp., which formed in May, 2005, when Duke Energy merged with Cinergy. In 2004, 97% of Cinergy's emission reductions came from efficiency improvements in its overwhelmingly coal-fired electric generating stations. Cinergy's investment of US$1.94-million in efficiency upgrades reduced the company's carbon- dioxide emissions by 349,882 tonnes. This works out to a cost of US$1.11 per tonne of CO2 reduced. If CO2-equivalent permits sell for US$15 a ton in 2010 and US$45 a ton in 2025, as estimated by the Energy Information Administration, Cinergy would reap a windfall profit of between 1,263% and 3,990%.
One of the perennial weaknesses of the right is that we tend to accord an integrity and directness of purpose to big business that can be as simplistic as the mirror stereotypes of the left.
In 1980, when everyone in the West was paranoid about energy security and certain the price of oil would rise forever, the Canadian Government enacted a defiantly statist near-expropriation of the oil industry that alienated Western Canada bitterly and which so ruined public finances that the country ultimately came close to calling on the IMF for help. Called the National Energy Programme, it was a highly complex tax-and-grab assumption of industry direction and oil ownership that assumed control over oil exploration and development and mandated a 50% “back-in” for the government in development profits in exchange for public funding for the bulk of exploration costs. Western governments, especially Alberta, and small to medium-sized oil companies howled incessantly in angry protest, but multinationals like Esso and Shell seemed surprisingly calm about it all, and some of their executives even defended it.
Here’s why: in non-provincial lands over which the Federal Government had complete control, particularly the offshore High Arctic, Ottawa granted exploration licenses to the large multinationals, the only companies big enough to bear the huge costs in that forbidding region. Ottawa refunded 90% of exploration costs in exchange for a 50% stake in any consequent development. The civil servant architects of the plan had the simplistic idea that these companies would move as fast as they could and as directly as they could to find and develop recoverable oil.
But that is not the way the oil multinationals work. Its members are in for the long haul and for them, finding inventory and reserves for development in the decades to come is just as important as pumping lots of oil today. Having suffered similar mad schemes from tinpot dictatorships elsewhere in the world, the companies knew it was so market-insensitive and fiscally insane that it simply couldn’t last for very long. From their perspective, they were being offered whopping subsidies in the short term to explore in the most expensive, high-risk, forbidding area in the world. It was in their direct economic interest to take full advantage of the scheme to try and get as accurate a picture of reserves in the whole region. Ottawa wanted oil as fast as possible, but the companies were getting near-free mapping and exploration for a rainy day, and that suited them just fine.
These companies maintained huge offshore drilling platforms that may have had fixed costs of $5-10 million a day to sit inactive versus $20 or $25 million a day to be out drilling. In the latter case, they recovered 90% of the costs within weeks, but nothing in the former. No prizes for guessing what happened. In the words of one senior executive, “We used to drill for oil, but now we are drilling for money.”
In the end, the price of oil fell and there has never been a drop of oil produced from the Canadian High Arctic. The Conservatives won the next election and repealed the whole thing, but not before untold billions of dollars had flowed to the oil companies and federal finances were a complete mess. Another smashing socialist success story. The moral seems to be that, while free markets are to be respected and encouraged, as soon as we hear about subsidies, partnerships with government, joint ventures or, as in this case, artificial markets to solve imaginary problems, we should be as suspicious as leftists about the motives driving the captains of industry.
6 comments:
I agree with your larger point but not the second article. It is precisely because carbon credits are results and not mechanism that we avoid the problems of the motivations of big business. Duke Energy's "windfall profits" come from achieving actual carbon emission reductions, not researching ways to do it or following some arbitrary procedure. Even the second author admits the Duke Energy did, in fact, achieve the goal of the program. He's just upset that they made so much money doing it.
Certainly we should be suspcious of anything supported by big business, but that doesn't mean that the support of big business is an infallible mark of wrongness.
SH: But you would agree that Duke Energy's support for the program and their commitment to abating global warming is suspect, given that if the program doesn't pass, their reduction in carbon produced is worth nothing while if it does pass it is worth serious money.
David;
Yet isn't the lesson of Adam Smith that we must harness greed for public purpose? Of course DE's (Duke Energy) support is about cashing in, but that says nothing about the desirability of the policy. You're effectively making an "ad businessem" argument.
Mr. Burnett;
— but not results in doing what the comapny is in business to do —
And so? That sort of concern with what a company is "in business to do" is a root cause of the High Arctic exploration fiasco you describe. Proper policy focuses on results, not who creates them.
DE has not "manipulated the market", they have responded to market incentives and succeeded at the program goals. If those goals are "flavour of the month", that's hardly DE's fault, nor can DE solve that. If you don't like the artificiality of the market, object to that (which is, of course, a creation of government, not DE).
— Suppose they are polluting a nearby river to an appallingly fetid state. Would it not be very profitable for them to pay the best lawyers to fight off any efforts to rein them in while "investing" in cutting carbon emissions? —
No, those have nothing to do with each other. If hiring lawyers is cheaper than ameloriation of the pollution, then it's cheaper, regardless of what's going on with carbon emissions. Conversely, carbon emission reduction makes business sense or not regardless of the river pollution issue. You might want to pick up Bjorn Lomborg's book, which goes in to this issue in a bit more depth than I can here.
— buying up entitlements underpriced by the state —
Who underpriced those entitlements? Not the railroads.
It seems to me that in all these cases, the root is the government doing something stupid, not businessmen being greedy. I take away from this an opposition to government intervention, while you seem to object to big business. You might say "but Big Business may bribe legislators to create the programs" but so what? Basic opposition to such programs makes that irrelevant. Go for the source, Luke.
AOG: That's the lesson, but we have to know what we're doing. The market works brilliantly to allocate scarce resources. The problem here is that the scarce resource -- the right to push carbon dioxide into the atmosphere -- is an entirely artificial creation. There is only so much land available; there are only so many diamonds; there are only so many seats available on international flights. Having the market allocate them is better than having the government do it.
That's why I, like most economically minded people, like cap and sell regimes better than other types of regulation. But the cap and sell regime does not suffice to make the argument that regulation was necessary in the first place.
Absent regulation, the ability to pour carbon dioxide into the atmosphere is not scarce. The government now proposes to make it scarce through regulation. Why? Because of fear of global warming. How do they know what the cap should be? By pulling a number out of a hat. Duke Energy says that there should be a cap and that it should be aggressive. But if there is a cap, Duke will own a large supply of a scarce commodity: the right to sell the ability to emit carbon dioxide.
Now, as I say, if the need to cap is a given and the cap level is a given, then a cap and trade scheme is a good bet. But that doesn't mean that I can't be skeptical about Duke Energy's position; or, rather, that I should be swayed from my pre-existing position (global warming is not worth worrying about) because Duke Energy is lobbying the government for the right to make millions of dollars.
Isn't it a given that market forces and greed aka benign self-interest are a better determinant than government regulations.
I'm not sure Adam Smith would recognize the breed.
We must not be thinking of the same Adam Smith, then:
The proposal of any new law or regulation which comes from [businessmen], ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.
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