Guest Column, Free Insights
The Business of Climate Change
By Pete Geddes, Foundation for Research on Economics & the Environment, Guest Writer, 4-08-10
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If Congress passes climate change legislation, someone must manufacture and sell products and services to help companies meet lowered carbon emissions targets. With this in mind a friend asked if I saw profitable opportunities. Surely there is money to be made in alternative energy sources like biofuels, wind, and solar? Perhaps arbitraging the CO2 markets is the way to go? While on the surface this seems like a target rich environment, I advise caution to investors considering this arena. Here’s why.
Global warming has created a breeding ground for political capitalists. These are businesses that are expert at manipulating the political process to gain profits they can’t make in the competitive marketplace. The opportunities for political capitalism increase with the size and scope of government. When government allocates resources and imposes constraints it is generally to serve the strong and entrenched; the weak and aspiring suffer. The recent health care reform clearly exemplifies just this sort of mischief.
Enron was the archetype of the political capitalist business. Its chairman Ken Lay, a Ph.D. economist with years of federal energy regulatory experience, devised a plan for profit predicated on currying government favor through rigging arcane federal energy regulations.
Enron actively supported the Clinton Administration’s BTU tax and lobbied hard for passage of the Kyoto Treaty, in anticipation of which it purchased renewable energy and carbon trading companies. An internal Enron memo stated, “If implemented, [the Kyoto Treaty] will do more to promote Enron’s business than almost any other regulatory business.” (It’s unsettling that key parts of the Obama Administration’s energy policy—a cap-and-trade bill and renewable energy mandates—are among the things Enron wanted most.)
While businesses frequently claim to support regulation out of concerns for safety or the environment, in reality they understand that the costs of regulatory compliance are often steep. This can work to their advantage as smaller competitors, unable to bear these costs, exit (or refuse to enter) the market.
This phenomena is not limited to the United States. European energy companies received free carbon emission allocations and made billions of euros trading them in the European carbon market. Bryony Worthington, the director of Sandbag, a nonprofit group based in London, said cap-and-trade in Europe “has become a kind of subsidy scheme for companies, ... and that was not the original idea....”
In 1961, President Eisenhower warned about the insidious nature of the “military-industrial complex.” This was a cozy relationship between arms manufacturers, the military, government agencies, and the congressional representatives whose districts benefited from military jobs.
There is now a “climate-industrial complex” —a cozy relationship between governments, NGOs, some scientists, and business groups who stand to gain. Al Gore is the poster child of this movement. It’s not an accident that his green private-equity firm, Generation Investment Management, stands to make big gains in a carbon-constrained world.
Political capitalism is an insidious force. It encourages special interests to acquire political power to gain advantage over the less powerful. It sets in motion a dynamic that progressively erodes respect for the rule of law, limited government, and private property. The difference between seeking profit through the market process and through the political process is like the difference between peaceful trade and robbery. Both require time, energy, and skill, but one creates wealth while the other destroys it. One encourages peaceful cooperation, the other undermines it.
My advice? When reviewing potential investments beware businesses whose financial success rests on a strategy of political capitalism. There are terms for such plans—exploitative, corrosive, abusive, and detestable—and ultimately unsustainable.
Pete Geddes is Executive Vice President of the Foundation for Research on Economics & the Environment (FREE), based in Bozeman, MT. Contact him at pgeddes@free-eco.org.
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Comments
Climate change being exploited by the likes of Enron, is trumped by the George Soros idealists and their race to a European style economy. Both are bad. The middle, whether they be a little left of center or a little right of center, should come together to defeat both. Obamaism is waking up this usually quiet, and bigger segment of our nation. In this fall's elections we have a chance to clean house in the US Congress to get rid of those congress persons who support either the political socialists or the neocons.
The cap and tax was the ultimate example of political leveraging for private gain. No wonder certain utilities tipped over...they could pass on any costs AND score an income stream from anything they had remaining.
In case you haven't noticed, most political-command-and-control societies are at or beyond the point of fiscal collapse. Cuba and the CIS come immediately to mind, Cambodge, whatever. Shining successes there.
Then we move up the food chain a little to the "moderate" welfare states, mostly western Europe/NATO and Greece comes to mind, then Italy....all are under significant if not catastrophic fiscal stress.
The root cause of these problems are fiscally-irrational decisions made by the polity and the bureaucracy which in turn clung to the misguided notion that politics could rewrite economics. In other words, if they twisted the incentives and punishments enough they could force outcomes.
Sure they could, and do, but the outcomes always have consequences that any RATIONAL person could anticipate. And the simple fact remains that you cannot continue to posit irrational responses to the outcome of irrational inputs and expect a rational outcome, any more than you can expect a "sustainable" society to result from inherently unsustainable policies, taxation, deficits et cetera ad nauseam.
Sorry you can't understand that.
So if we are really talking about the same "businesses that are expert at manipulating the political process to gain profits they can’t make in the competitive marketplace," shouldn't we consider eliminating the massive coal and gas subsidies and giving cleaner energy independence a chance in a fair marketplace? But why do that when we can have a system that "allocates resources and imposes constraints- generally to serve the strong and entrenched; the weak and aspiring suffer" ?
I hope FREE can endorse a more equitable distribution of subsidies ( our tax dollars) to diversify and domesticate our national energy and stop defending business as usual. Though your funding may dry-up, you would be doing the right thing.
Don't understand how our funding would dry up. Over 85% is from foundation support.
I’m opposed to all commodity subsidies on ethical and environmental grounds. When we subsidize things that trade in the market, we benefit the well off and well organized at the expense of the most vulnerable members of society.
I can't "endorse a more equitable distribution of subsidies ( our tax dollars) to diversify and domesticate our national energy and stop defending business as usual" well, because this is business as usual.
With the exception of natural gas, the popular alternatives (e.g., wind and solar) even with huge subsides are simply too expensive and limited by geography.
You think we can hasten this process by the government subsidizing the “right” fuels. Perhaps. But if a technology is not economically competitive, no amount of public subsidy or special political favors will make it so.
Isn’t it ironic that western environmentalists who spend their careers fighting the perverse environmental impacts of governmental subsidies (e.g., dams on western rivers) believe that government, rather than the market process, must guide our energy future?
How can they forget that the West best exemplifies the environmental harms resulting from the subsidized exploitation of the environment? This is a result of the alliance between big government and big business. Are they sure the government will get it right this time?
All energy production has environmental impacts. Our choices involve trading off among imperfect alternatives.
I'm really glad to hear that you are opposed to commodity subsidies as much as I am, but you are wrong in assuming what I think.
"You think we can hasten this process by the government subsidizing the “right” fuels. Perhaps. But if a technology is not economically competitive, no amount of public subsidy or special political favors will make it so. "
Actually I'm much more in favor of insisting that the government stop subsidizing the "WRONG" fuels and give cleaner alternatives a chance. We are always happy to run a needle through same old song that " the popular alternatives (e.g., wind and solar) even with huge subsides are simply too expensive and limited by geography". I will admit that this may be true for now, but how does an emerging technology stand a chance when a filthy fuel source like coal is getting a 6:1 head start?
Again, I respect your feedback (as well as your poke-check) and look forward to hearing back.
About the funding, you might just lose the Exxon Mobile $$$$$.
Hope to see you at PL this week.
In 2007, the Federal Government spent $16.6 billion in energy subsidies. This represents a doubling since 1999. Per unit of energy generated, solar and wind received the highest subsidies, between $23 and $30 per megawatt hour. Coal, natural gas, and petroleum received (again, per unit of energy generated) less than $0.45 per megawatt hour.
The search for our post fossil fuel energy future is fundamentally a discovery process. Affordable solutions emerge out of the decentralized work of many individuals. Perhaps it will be space-based solar power; or maybe nuclear with reprocessed fuel; or microbes genetically engineered to produce carbon-free biofuels; or things not yet imagined.
I appreciate your concern about those who might game the system. Would you be ok with Cap and Dividend or perhaps just a strong cap? Most of us who support strong comprehensive climate and Energy policy are most concerned with emissions reduction, without it your kids and mine are likely toast, literally. What is your solution?
The invisible hand of the market doesn't sense the PPM of CO2 in the atmosphere, and our species and political system, while good at dealing with immediate threats, is particularly bad at dealing with long term ones. How will your plan avert more global weirding and massive human suffering?
Final thought...Choosing not to avoid extinction because it is neither cost effective, nor fits our political worldview, seems a bit stubborn.
The world’s ten biggest problems as identified by the United Nations, are: civil conflicts, water and sanitation, communicable diseases, education, financial stability, governance, hunger and malnutrition, migration, trade reform, and climate change.
Climate change received the lowest ranking. Why? It takes enormous expenditures to achieve very small reductions in greenhouse gases—and the benefits are far distant in time and highly uncertain.
Expensive carbon is essential if we are to have any hope of reducing CO2 emissions. Yale economist Willam Nordhaus’ new book, A Question of Balance: Weighing the Options on Global Warming Policies, offers this advice for evaluating politicians’ solutions. He writes: “Whether someone is serious about tackling the global-warming...can be...gauged by...what he says...about the carbon price. Suppose...[he]...proposes that the nation...move urgently to slow climate change. Suppose [he] proposes regulating the fuel efficiency of cars, or requiring high-efficiency light bulbs, or subsidizing ethanol, or providing research support for solar power—but nowhere does [his] proposal raise the price of carbon. You should conclude that the proposal is not really serious and does not recognize the central economic message about how to slow climate change.... The rest is at best rhetoric and may actually be harmful.”
It sounds like you are in favor of a carbon cap, but not convinced that climate change is a real priority? Just trying to get a bead on your position.
About the funding, I agree that 30k from Exxon is not much in terms of your $700k budget. Any ideas on how much they gave Climate Solutions, NRDC or EDF? Just curious?
Here you go:
http://www.free-eco.org/articleDisplay.php?id=409
1. Unless I am misunderstanding the predominant scientific view, 2 degrees is the tipping point that sends us irreversibly toward 6 degree increase and higher (believed to be the point we can no longer adapt).
2. All the problems you mentioned as more important in the opinion of the panel are hugely exacerbated by climate change except maybe HIV. Therefore climate change mitigation help combat many birds with one stone.
3. Why the cheap shot at Gore? He's only been fighting for this since 1984. All proceeds related to this issue are donated. He's made plenty of money betting on Google and Apple and other tech companies. It would make sense that he would invest in technology he believes in. Its a pretty big leap to say his motives for championing climate change legislation are to make money by gaming the system. Have you read his book "Our Choice" yet?
4. what is your proprosed solution?
#1 It is not clear what the tipping point is. It is clear potential harms have been exaggerated. See:
http://www.spiegel.de/international/world/0,1518,686697,00.html
A Superstorm for Global Warming Research
Plagued by reports of sloppy work, falsifications and exaggerations, climate research is facing a crisis of confidence. How reliable are the predictions about global warming and its consequences? And would it really be the end of the world if temperatures rose by more than the much-quoted limit of two degrees Celsius?
# 2 This is not a given, and there are plenty of alternative view in the literature. See for example:
http://www.nature.com/nature/journal/v415/n6874/full/415905a.html
or
Science, Vol 306, Issue 5693, 55-57 , 1 October 2004
Climate Change and Malaria
Sir David A. King's claim that "Climate change is the most severe problem that we are facing today--more serious even than the threat of terrorism" ("Climate change science: adapt, mitigate, or ignore?", Policy Forum, 9 Jan., p. 176) is based, in part, on UK government-sponsored impacts analyses (1, 2) that estimate that by the 2080s, because "of continued warming, millions more people around the world may in future be exposed to the risk of hunger, drought, flooding, and debilitating diseases such as malaria. Poor people in developing countries are likely to be most vulnerable" (p. 176). But the very studies underlying the latter quote, and which King cites, show that, for the most part, many more millions would be at risk in the absence of climate change (2).
… malaria's current annual death toll of about 1 million could be halved at an annual cost of $1.25 billion or less, according to the World Health Organization, through a combination of measures such as residual home spraying with insecticides, insecticide-treated bednets, improved case management, and more comprehensive antenatal care (5). Clearly, implementing such measures now would provide greater malaria benefits over the next few decades than would climate stabilization at any level….
and
Nature
Climate change 2007: Lifting the taboo on adaptation
Roger Pielke Jr1, Gwyn Prins2, Steve Rayner3 & Daniel Sarewitz
During the early policy discussions on climate change in the 1980s, adaptation was understood to be an important option for society. Yet for much of the past two decades the mere idea of adapting to climate change became problematic for those advocating emissions reductions, and was treated "with the same distaste that the religious right reserves for sex education in schools….
But perspectives have changed. Adaptation is again seen as an essential part of climate policy alongside greenhouse-ga mitigation. Both the recent Stern Review on the Economics of Climate Change2 and the efforts of the Intergovernmental Panel on Climate Change3 demonstrate that adaptation is firmly back on the agenda.
#3 There is not "solution." Transforming our energy future requires multiple technological breakthroughs. Vaclav Smil of the University of Manitoba describes the significance: “We are now at a point in time comparable to 1850, which marked the outset of the last great energy transition. Then, about 85 percent of the world’s total primary energy supply came from biomass fuels. In 2005, about 85 percent of the total supply originated from fossil fuels.... A non-fossil world may be highly desirable, but getting there will demand great determination, cost and patience.”