Energy

Up In Smoke

Energy executives join environmentalists in opposition to Bush

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President George W. Bush has spent much of his short tenure in office being pilloried by organized environmentalists as a marionette of energy producing industries. Now, even some of Bush's supposed puppeteers are complaining that they too are on the wrong side of closed doors when it comes time to formulate environmental and energy policy. "What businesses want is certainty," an anonymous environmental manager for an unidentified international energy firm complained to The New York Times. "Bush has injected only turbulence." Bush's sin in this case: refusing, at least for the time being, to regulate carbon dioxide emissions.

The Times story exposes a curious rift among energy companies and an emerging coalition between some of them and environmentalists. On one side are environmentalists and some energy execs that support a regulatory regime on carbon dioxide emissions from power plants; the regime would create caps on levels and then issue tradeable permits to companies. On the other side are energy execs who are absolutely opposed to such a scheme. A May 10, 2001 Wall Street Journal story on the same topic characterized the pro-regulatory energy executives who were working with environmentalists for a carbon dioxide trading system as "sensible" and "farsighted." Yet that story failed to ask a basic question: Why would folks who earn a living in the energy industry be peeved at a president who refuses to impose tighter regulations?

There's a simple explanation: the profit motive. The technical economic term to describe what happens when companies seek regulatory changes to benefit themselves at the expense of their competitors is called rent-seeking. There's even a catchy phrase, courtesy of Clemson economist Bruce Yandle, to describe the odd political coalitions that often emerge from such "farsighted" behavior: Baptists and Bootleggers. Those two had an interest in pushing Prohibition, albeit for very different reasons. So it is with pro-regulation energy execs, who see a carbon dioxide permit plan as a way of getting a leg up on the competition, and environmentalists who want to just cut emissions.

"All you need to do to see whether an energy company will embrace a greenhouse-gas control regime is to look at the company's investments and figure out whether it will be helped or harmed by the regime," says Kenneth Green, director of the environmental studies program at Reason Public Policy Institute, a market-oriented think tank that is part of Reason Foundation, the nonprofit that publishes REASON. Energy companies that have already made a move to natural gas, are heavily invested in alternative power, or have large operations in countries that expect to receive generous emissions quotas support a regime of carbon dioxide emissions trading (Enron is in this camp). Companies that rely on coal and can't easily cut emissions are opposed to the plan (think Southern Company and major coal producers).

The environmentalist and energy executive coalition's position is made attractive by its insistence on a permit trading system—a market mechanism—and a voluntary one at that. Market-based permit trading systems are certainly preferable to across the board command and control regulation. Under such systems, a regulatory body sets the total amount of pollution allowed (the "cap"), but then allows companies allocate among themselves the quantities of pollution that each company emits. A system set up to reduce sulfur dioxide, a cause of acid rain, set up by the first President Bush has been hailed as a success.

But a regulatory fix to a perceived problem in a free market—that the costs associated with emissions aren't born by either the buyer are sellers of the product—ought not to be confused with a free market.  And as Fred L. Smith of the Competitive Enterprise Institute and Robert Crandall of the Brookings Institution pointed out recently in the Wall Street Journal, there are plenty of practical problems with any proposed carbon dioxide cap-and-trade regime.

The issue, then, is whether or not the goal of significantly reducing carbon dioxide emissions into the atmosphere is worthwhile. And if so, at what cost? Despite many press reports, even among scientists who agree that global temperatures are rising, there is still considerable uncertainty as to the real-world effects of carbon dioxide emissions into the atmosphere.

 Bush has put himself in an awkward position by promising to come up with something when he pulled the United States out of the Kyoto Protocol. So far, he's stood firm in his opposition to regulating carbon dioxide. But it remains to be seen if that position can withstand a coalition of environmentalists and Bush's old pals in the energy industry.