History Shows Carbon Caps a Failed Policy

Published September 1, 2007

This is the second in a three-part series exploring how industry, and society at large, should respond to predicted climate change.

Climate change is the 800 pound guerrilla of energy policy in the United States and Europe, although the United States for the most part has kept the beast caged. This has been done despite business interests that have supported carbon dioxide restrictions when they could work it to their advantage.

In April 1992, for example, Natural Gas Week reported, “Enron Corp. Chairman Kenneth L. Lay pens ‘private letter’ to President Bush, urging him to attend global warming conference in Rio de Janeiro and agree to some limits on carbon dioxide emissions.”

Bush went, but he stopped short of agreeing to any form of mandatory carbon caps, and son George W. Bush has held the line as well.

Enron’s interest was to give an economic advantage to natural gas relative to oil, and to capture the market for new gas-fired electric generation capacity from coal and make inroads with natural gas vehicles.

Lay was an extraordinary political capitalist pushing hard through Enron for a variety of government favors–including a 13-year effort to price carbon dioxide. He was a get-out-in-front, get-to-the-table type guy when it came to government intervention, wise to the ways of Washington, DC.

Public Policy Déjà Vu

Next came the Clinton administration’s proposed tax on the heat content of fuels, the so-called BTU tax, which Enron also supported. Most of the rest of the energy industry opposed it, and the measure went down in the face of opposition by the U.S. Chamber of Commerce, National Association of Manufacturers, and National Federation of Independent Business, all of which urged federal spending reductions instead.

That sort of backbone will be needed to block energy rationing legislation once again.

There is much talk today about a federal cap-and-trade carbon rationing program. Many industry interests are lining up behind the idea (“getting a seat at the table”) in order to head off a straight carbon tax and skew the rules in parochial ways.

James E. Rogers, chief executive officer of Duke Energy and a Lay protege, is at this table with strong motives to protect Duke’s coal plants and maximize the value of its nuclear plants. But Rogers is also the past chairman of the Edison Electric Institute. One hopes EEI keeps its consumers in mind and takes the moral high ground to defend affordable, plentiful energy as the “master resource” for a better world.

Kyoto Failure

Any discussion of climate change policy begins with the Kyoto Protocol. A nonbinding international agreement that has never been ratified by the U.S. Senate, Kyoto is the most ambitious attempt to create a global consensus on climate change policy to date.

However, the hopes of 1997–when the treaty was opened for signature–have hit the twin obstacles of political reality and energy reality.

The failure of Kyoto is an open secret. “My thinking has changed in the past three or four years,” British Prime Minister Tony Blair said of the treaty at a climate conference hosted by former U.S. President Bill Clinton. “No country is going to cut its [emissions] growth.”

Pointing to fast-growing China and India, which refused to be part of the protocol, Blair added, “They are not going to start negotiating another treaty like Kyoto.”

Given Kyoto’s expiration date of 2012, and in light of its largely unfulfilled targets, United Nations negotiators are already scrambling to save face.

Technological Solutions

For the more realistic alarmists (if that is not an oxymoron), what is the way forward? Blair provided an answer. “What countries will do is work together to develop the science and technology,” he said. “There is no way we are going to tackle this problem unless we develop the science and technology to do it.”

Translated, the alternatives to oil, gas, and coal must be nearly as good, or political change will be limited. Citizens around the world know great quantities of inexpensive, reliable energy are the solution to, or insurance policy for, an uncertain future.

European Hypocrisy

The European Union (EU) has turned to cap-and-trade to help it meet its Kyoto reductions. But barely half its members–13 of 25–are expected to meet their 2012 targets.

Of the 15 nations that made up the EU before the inclusion of smaller states from Eastern Europe and elsewhere, only Britain and Sweden are set to meet their Kyoto targets. Major economies such as Germany, Italy, and France are off-course.

Predictably, EU-based companies are threatening to relocate to non-Kyoto nations where they can do business without the burden of carbon caps.

Although Europe’s energy utilities receive carbon permits free of charge, they have passed the market price of the permits on to industry and consumers, giving themselves a windfall at others’ expense. In Germany alone, carbon-related energy costs rose by almost $9.2 billion in 2005, a price tag that is expected to double in the next couple of years.

This makes EU economies–many of which already are struggling to compete in world markets–less competitive and encourages outsourcing of jobs and businesses to nations without carbon caps.

Price Crash

The EU cap-and-trade experience has exposed other weaknesses. Since, in the absence of a price mechanism, governments cannot know what price carbon permits should or will command, the EU massively overallocated the number of permits. This resulted in a carbon credits price crash in April 2006.

Instead of reducing emissions, businesses took advantage of the newly created market to make money. Existing emitters were given carbon permits based on the size of their carbon emissions, blunting incentives to cut back. This unintended consequence has made big business one of the biggest beneficiaries of the EU’s cap-and-trade scheme.

Robert L. Bradley Jr. ([email protected]) is president of the Institute for Energy Research (http://www.energyrealism.org) and the author of five books on energy, including Climate Alarmism Reconsidered and Energy: The Master Resource.