26 May 2009 
The House Energy & Commerce Comittee reported legislation last Friday that would create a cap-and-trade system for greenhouse gas emissions in the United States. I’d like to expand a bit on some recent writings by Bjorn Lomborg and Greg Mankiw about this topic. Dr. Lomborg wrote in last Friday’s Wall Street Journal about a developing “Climate-Industrial Complex,” and Greg has proposed a Fundamental Theorem of Carbon Taxation:
cap-and-trade = carbon tax + corporate welfare
Why would a firm support legislation that would raise power costs, increase regulatory burdens, and slow GDP growth? I can think of six reasons:
- We are noble and altruistic: Your firm’s leadership is genuinely concerned about the threat of severe climate change and what it could mean for the world.
- We need to buy a seat at the legislative bargaining table: You believe that legislation is likely to happen and directly affect your firm, probably in a bad way. You think that by publicly supporting legislation, you will be better able to influence the legislative process. You are trying to buy access to the key Members and Congressional staff so you can get emissions credits or avoid pain. This is Greg’s corporate welfare point, and a core element of Mr. Lomborg’s Climate-Industrial Complex argument.
- We make money if carbon is more expensive: If you produce wind turbines or build nuclear power plants, then a carbon price is good for business. If you’re a power company that produces relatively low-carbon fuel relative to your competitors, then you benefit from a high carbon price. Or if you’re a manufacturer that gets its power from a low-carbon source, and your competitors are in coal country, then they are harmed and you are (relatively) helped by a carbon price.
- We make money if power costs increase in the U.S.: You’re a foreign firm with operations heavy in European countries that already have a carbon price. You would like to level the playing field by creating a carbon price in the U.S.
- We make money off trading, so we make money in a cap-and-trade system: If you’re a financial firm that would make money off establishing or participating in a trading system for emissions credits, then a cap-and-trade system is good for business (but a carbon tax is not).
- Green is good marketing: Green is popular. Being green helps sell stuff, even if your stuff has nothing to do with energy or climate. This can apply both at the firm level and at the CEO level. Some CEOs may want to personally position themselves as leading their firm in a green direction.
Every firm that supports a carbon price proposal, or any specific bill (including Waxman-Markey) will, of course, claim they are noble and altruistic and therefore motivated primarily by reason 1. We can neither prove nor disprove these other, more self-interested reasons for supporting legislation. But at a minimum, we can identify possible additional motivations for the firm’s position.
In theory a carbon tax could be just as vulnerable to legislative rent-seeking (reason 2) as a cap-and-trade: you could send your lobbyists to try to get your firm exempted from the first N years of a carbon tax, or to get a special rule that would exempt existing power production capacity. It’s sometimes easier to build a coalition by allocating carrots rather than sticks, and a cap-and-trade allows the legislative authors to allocate carrots.
Note that reasons 3, 4, and 6 exist for any positive carbon price. The form (carbon tax or cap-and-trade) is not relevant to these motivations.
When you hear that businesses like X and Y are supporting the Waxman-Markey bill, or that firm Z supports cap-and-trade because they care about the planet, run through these five other possible motivations and see if any also apply. They may provide a more credible explanation for the firm’s position.
Forget taxing carbon, or cap-and-trading it, at the source. Tax or otherwise limit it when the product is consumed. China, et al, will not have to impose anything – if we Americans buy their stuff, we would have to pay the tax or have its carbon-cost deducted from out allocation. Presto! A level playing field for manufacturers, etc. If going with the allocation (not tax) concept, give the allocations to everyone and allow them to trade them. Reduce the allocations over time to accomplish the carbon goal. Placing the tax or limitation on the source rather than on the consumer will drive only political needs.
So can I infer from your list that except for reason #5 Mankiw’s theorem does not apply? It would seem that it makes no difference whether the regime is cap-and-trade or a carbon tax in a company’s motivations.
Am I the only person out here who is troubled by the FACT that all of this proposed action is being taken to fight a problem that does not exist? Statistics clearly show that the world has been in a cooling cycle for the last 10 years, which is why the “global warming” nuts had to adopt “climate change” as their pet phrase, since the public was beginning to see through their whole “warming” scam. The real reason behind behind these dishonest environmentalist wackos and our “boy president” pushing this crisis is that it gives them an excuse for another tax and to use their scheme to control more aspects of our lives. Corporations are rolling over on this issue to either make money or avoid the criticism of the incompetent journalists that some people refer to as the “mainstream media”. It is disgusting to me that no one seems to have the guts to stand up to these worthless, dishonest, environmental extortionists!
Please consider a point #7, which I guess may actually be a corollary to, or expansion of, #2. The unholy alliance between big business and government is often an attempt by big business to gain an advantage through legislation that will make some aspect of competition cost-prohibitive. For example, Jeff Immelt at GE may push some element of this bill that they can afford but their smaller competitors can’t, thus allowing GE to potentially increase market share and thereby recover the cost. One example of this would be regulations that kick in when companies reach a certain size (e.g., affirmative action, ADA, OSHA, FMLA). The regulations are often so potentially or actually expensive that it makes sense for a small business owner to maintain a company below a certain number of employees or to sell to a larger competitor in order to expand.
As a former small business owner and employee at a large corporation, I’ve seen this in action from both sides. The hiring and promoting decisions large corporations make in order to comply with the government policies they support would by themselves bankrupt a small business.
The business influence in the Waxman-Markey bill is evidenced by the fact that permits will not be auctioned initially. I still believe this is about wealth redistribution to the groups Obama and his mates prefer, along with themselves. If you ever have any questions about what a politician or a CEO is doing (they’re essentially the same beast), view their actions through the filter of self-interest.
Here is a great resource for drilling down on the details of the Waxman bill and some observations from others both conservative and liberal
http://publicaffairs.fleishmanhillard.com/?p=680
Waxman bill
http://energycommerce.house.gov/Press_111/20090331/acesa_discussiondraft.pdf
Daniel Lashof’s comments were interesting:
?Lashof: A carbon auction will generate $100 billion per year, and should be distributed in three ways: the largest share to consumers (especially low-income families) to offset increased energy prices, a secondary share to new technology research and development, and the smallest share toward helping adapt to international and domestic effects of climate change.
?Lashof: Cap-and-trade has an economic advantage over a carbon tax because the system would mirror the economy: during a recession energy demand would be lower and less emissions would be created so credit prices would drop.
Keith’s reason #2 is probably the most important and relevant. Lomborg said in his editorial
“American electricity utility Duke Energy, a member of the Copenhagen Climate Council, has long promoted a U.S. cap-and-trade scheme. Yet the company bitterly opposed the Warner-Lieberman bill in the U.S. Senate that would have created such a scheme because it did not include European-style handouts to coal companies. The Waxman-Markey bill in the House of Representatives promises to bring back the free lunch.
“U.S. companies and interest groups involved with climate change hired 2,430 lobbyists just last year, up 300% from five years ago. Fifty of the biggest U.S. electric utilities — including Duke — spent $51 million on lobbyists in just six months.”
Lomborg is warning us of an Information Cascade http://en.wikipedia.org/wiki/Information_cascade and http://tierneylab.blogs.nytimes.com/2007/10/10/schopenhauer-on-cascades/ This stampede of herd behavior is being exploited by those who can whisper in the ear of power and avoid the worst aspects of this herd behavior. You can view all those who have assets at risk as being not a part of the herd behavior but looking down at the stampeding herd and wondering how can I not get trampled. This is all taking place quite apart from whether the science is true or not. It doesn’t matter at this point all that matters is that we are in the grip of an information cascade and how can we navigate it with minimum pain. This neatly explains why the tent just got bigger. A good sign that the Waxman bill probably won’t do as much harm as everyone claims is that Greenpeace is against it. See: http://www.greenpeace.org/usa/news/greenpeace-waxman-markey-clim
Jefferson
You are right. I used to decry the fact that the environmentalists were misusing science, and they were. But it’s not because they misunderstand it, it’s because they don’t care. The science isn’t the point. Thomas Pynchon said in Gravity’s Rainbow that “If you can get them asking the wrong questions, you don’t have to worry about the answers”. While we were arguing science,they were setting up the regime we are witnessing today.
There are two major elements of liberal philosophy which guide modern environmental thought. The first is post-modern relativism, which posits that truth (they always view truth as a parenthetical whether literally or implied) is not provable or observable on its own but is a relative concept based on who is considering it and when it is being gauged. The second is situational ethics which is concerned with the outcome or consequences of an action (the ends) as opposed to an action being intrinsically right or wrong.
Therefore, to environmentalists science is based on what the truth should be, based on their own interpretations; it is important that the lay public accept this scientific truth in order to be able to effect appropriate policy outcomes; therefore, whatever is required to convince the public to believe that version of science is valid and ethical.
Since there is no truth, science, what is, has no primacy over an idealistic conception of what should be. We have, therefore, the truth as preached by environmentalists who see the protection of nature to revolve around protecting it from man, not for man. Environmentalism insists that we give up the value of material comfort and the expectation of material progress. We must distrust modern science and modern technology, since they only distance us from nature. We must live “in harmony” with nature. And this has been largely accepted and sold by the general Progressive intellectual set.
Why is it that a supposedly highly educated subset of the American public has accepted such a defensibly weak conceptual view of science in the face of the model which has provided all of the material advancements of society through the past 500 years of the enlightenment? In my estimation we have come to this sorry state as a result of laziness in thought and practice (and, likely, 40 years of liberally controlled education based on emotion and feelings rather than reasoned thought). A population incapable of critical thought is a population uniquely susceptible to the siren songs of snake oil salesmen who tell us we are better off with less, materially and intellectually; just close your eyes and listen to the soothing music. Pay no attention to the faint cries and bellows up ahead.
The media, despite their vaunted and jealously shielded position as guardians of objective information for the general public, who all view themselves as courageous investigative reporters backed up by layers of fact-checkers and relentlessly-vigilant editors, have done an abysmal job of identifying the weaknesses and fallacies of the environmentalist argument. Many are far from objective reporters, others have no background in the appropriate fields and most are simply recorders masquerading as reporters. In the end, the hype is news; the refutation isnt. Therefore the lies live and the respect for science and scientific advancement withers. The political summary in the United Nations report on climate gains wide credence; the dissent of scientists that contributed to the main body of the report is hidden. Polar bear populations expand; they are included on the threatened species list; Wolf populations explode; environmentalists fight their removal from the list; Ospreys are as common as house flies and the new problem is that Bald Eagles are killing the Great Cormorants; always a crisis, never a solution.
The lay public, betrayed by the educational system and the media are required to accept the pronouncements as received wisdom to be taken on faith and, for those that have yielded, to once more adopt superstition to stitch together the holes in those theories. And so we have come to a new Dark Age where real science is blasphemy and the wisdom of our betters is to be accepted as a form of religion.
Think back. How many catastrophes can you remember that environmentalists predicted or identified and how many of them were eventually found to be real? A quick Google search will reveal that most of the famous environmental controversies were eventually proved to be false, out of context, misinterpreted, and constructed of whole cloth.
We had better wake up because we are being sold down the river, bankrupt and passive.
@ Dennis
That’s a rather thorough and scathing attack on… well, just about everybody. Scientists, educators, the media, and the “lay public”.
You’re conflating “tree-hugger” environmentalists with… hmmm… almost everybody who works in the climate science field, apparently. I have access to just about every peer-reviewed scientific journal in the world through two university websites, and I haven’t been able to find a published paper providing a serious critique of the currently accept AGW theory in the last decade. Of course, it’s certainly true that I’ve missed it, I’ll gladly accept a reference.
While you make some valid points, you’re clearly grossly overgeneralizing your conclusions.
For example, while it is certainly true that “the media” often report science badly, you fail to acknowledge that this swings every which way – a lack of scientific training means that pretty much anybody who can whip up something resembling “hype” is going to get reporting time. Wait… doesn’t this mean that we should see mainstream reporting on the Time Cube guy?
While it’s certainly true that the population of academic scientists in the country does skew towards a liberal viewpoint, it’s hardly a landslide, particularly in non-humanities studies, like science. So while I’ll gladly accept that there is an underlying institutional bias towards tree-hugging, it simply is not significant enough to explain the lack of anti-AGW climate science. Where are the climate scientists who are conservative or moderates, or even liberal climate scientists who won’t let their political ideology taint their understanding of their own field, and why haven’t they been able to publish any anti-AGW studies in the last decade?
@ Jefferson
> The real reason behind behind these dishonest environmentalist
> wackos and our boy president pushing this crisis is that it gives
> them an excuse for another tax and to use their scheme to
> control more aspects of our lives.
That’s an interesting hypothesis. It’s also a rather extraordinary claim, for which you provide… ah, nothing resembling supporting evidence. Are you saying, therefore, that everyone who is not a conservative must be liberal, an environmentalist, and a whacko?
Germane to the O.P. ->
That’s a fairly thorough list of possible motivations for business in the current political climate. My only critique of the list is that there’s a subtle failure to acknowledge unions and intersections. You’re also missing one case, and it’s a rather important one.
It’s quite possible that a corporation (or a government, or even an individual) can acknowledge a necessity without being either noble or altruistic. Nobility and altruism almost necessarily include the character trait of self-sacrifice. It can very well be that any agent is simply acknowledging reality (carbon emissions need to be reduced), without being willing to put itself at the forefront of the activity. It’s also possible for two agents, who both agree with a reality, to have different ideas about the best method to accommodate the consequences… *and* to both profit from their preferred strategy, without actually being biased. Rare, I’ll admit.
For example, an agent “Bob” may believe that some action R is the best way to approach problems of type Q. Another agent “Alice” may believe that some action R’ is the best way to approach problems of type Q. Given a *specific incident* q in Q, Bob may profit more from approach R and Alice may profit more from approach R’. This is indicative that there may be a bias… *however*…. it’s not complete evidence.
Now, if you have a q’ in Q, and in the case of q’, Bob suddenly decides that R’ is the best approach, and Alice believes that R’ is the best approach, and Bob profits more from R’ given q’, but Alice profits *less* from R’ given q’, then we see that Alice is a “true believer” in R’, and Bob is likely to be heavily biased by his own self interest.
Full truth tables left as an exercise to the reader.
Even if you agree with current AGW theory, reducing US CO2 production as is being proposed would have an almost unmeasurable effect, especially now as the rest of the world seems to be backing away from their plans. This leads to the obvious conclusion that there must be some other goal in mind and it’s reasonable to assume that the goal is more taxes or more control.
I would say that Mankiw’s theorem applies to point #5, which is a subset of the possible reasons one might support it. I agree with the theorem, and think there are other reasons as well.
No, you are not the only one. Besides the fact that climate change is not actually fact there is this fact: the proposals being bandied about to curb the growth of CO2 won’t make much of a difference to the overall amount of CO2. But, hey, when you have a picture of a polar bear jumping into the water and then have a crying Sigourney Weaver waxing poetically about how mommy’s minivan is making said polar bear commit suicide, well, I think you know where I’m going.