Kyoto's 'Capitalists'

Wall Street Journal (Lead Ed)
Dec. 13, 2004

As the world gathers in Argentina this week for its latest group hug over the Kyoto Protocol, joining in the merrime As the world gathers in Argentina this week for its latest group hug over the Kyoto Protocol, joining in the merriment are a few new faces: U.S. energy companies. We thought readers might want to know what's behind this budding corporate enthusiasm for mandatory reductions in greenhouse gases.

The Kyoto idea is 10 years old now, and no better for its age. The U.S. wisely chose to forgo the pact, as the long- term costs add up to hundreds of billions a year across the world economy, not to mention untold lost economic opportunities. The energy industry has heretofore backed this U.S. decision, noting that even Kyoto's defenders have admitted the pact wouldn't slow climate change.

Yet suddenly business pooh-bahs are claiming they've seen the eco-light. Cinergy, the big Ohio utility, issued a report this month fretting that human activity is "likely contributing" to global warming and endorsing a national CO2 program. The nation's largest utility, AEP, says what's needed to address this "serious challenge" is a "committed policy response." The media are meanwhile making hay about the self -- appointed "National Commission on Energy Policy," a panel containing energy executives from the likes of Exelon and ConocoPhillips, which last week called for CO2 limits.

These executives are thinking green all right�as in greenbacks. The real story behind their conversion is that the industry has figured out that a U.S.-based climate program holds profit opportunities, while any costs can be foisted on the backs of others -- consumers, taxpayers or competitors. This new cynical approach to regulation is worrying, if for no other reason than that the quickest way to bad policy is a co-opted business community.

What's changed the industry's tune at the broadest level may be the Bush Administration's Clear Skies program, a smart pollution- reduction proposal that may pass Congress next year. That program, about to be partially instituted via regulation, requires energy producers to reduce sulfur dioxide and nitrogen oxide emissions 70%. But a natural consequence of reducing those true pollutants can be fewer greenhouse gas emissions. A "cap- and- trade" program -- creating a property right in CO2 reductions that can be traded for cash -- would thus allow companies to get paid for simply complying with other air-quality rules.

For example, both Cinergy and AEP rely heavily on old coal plants that are big polluters and CO2 emitters. But many of those plants are nearing the end of their shelf lives, and will soon need replacing with cleaner alternatives. Since a climate program rewards companies that make the biggest CO2 reductions, Cinergy and AEP would stand to rake in cash from a cap-and-trade regime simply by enacting their business plans.

Other firms will benefit by virtue of their niche markets. Exelon CEO John Rowe is only too happy to root for a mandatory program, as his firm is a big nuclear producer that can watch more fossil-fuel- dependent competitors struggle to meet climate requirements. Wind and solar producers are also sitting pretty, since utilities will have to turn to these more expensive renewables to hit their targets.

Finally, many utilities that are still highly regulated by the states simply don't care. They know regulators will pass along any CO2 reduction costs to consumers via rate hikes. They also view public support of a CO2 program as a low- risk way of soothing environmental antagonists and "socially conscious" investors.

We have nothing against companies exploiting the business opportunities that regulation sometimes creates; that's capitalism. The difference here is that because CO2 isn't even a pollutant, and because no realistic program will even slow global warming, any market for trading CO2 emissions would be entirely unnecessary. There's nothing capitalist about lobbying government to erect a program that serves no other purpose than the redistribution of wealth, whether it be from one company to another, or from consumers to corporations.

These business potentates might also remember that, whatever the short-term gains for select players, the long-run costs to the economy will hurt everyone. As CO2 emissions targets are inevitably ratcheted down, all companies will eventually have to pay the piper.

If these CEOs get their way, they may also find that costs for a national program exceed anything imposed by the increasingly failing Kyoto rules. Much was made of Russia's recent decision to sign the pact, officially putting Kyoto into effect. But Russian officials made clear this was pure quid pro quo: its signature in return for European support of its WTO bid. Russia also stands to make an enormous amount of money from the pact in the short term.

As for the long run, let's not forget that all those supposedly enlightened countries that joined Kyoto also insisted there be no penalties for missed targets. Most are already failing to make promised cuts, with many actually increasing emissions. About the only effect the pact has had is to enrich thousands of consultants and companies whose job it is to advise and set up the program. Hmmm, more Kyoto capitalists. Anyone see a theme here?