Unpacking the Climate-Industrial Complex

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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).
  6. 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.

By | 2017-11-04T18:02:19+00:00 Tuesday, 26 May 2009|