March 2008

In his latest column, former CEI Warren Brookes Fellow Tim Carney looks at how rent-seeking opportunities based on  feel-good environmental campaigns, which are currently in vogue among some large corporations, can backfire, hurting shareholders, in this case those of Pepsi.

“Last spring, PepsiCo bought “renewable energy certificates” covering all the energy consumed in its manufacturing, distribution and corporate facilities. In effect, Pepsi is indirectly paying someone, anywhere, to generate electricity from windmills or solar panels.

But Pepsi is not just changing it’s behavior — it’s trying to use government to change everyone else’s too. Last May, PepsiCo joined the United States Climate Action Partnership, a coalition of environmental pressure groups and corporations united to lobby the federal government to impose regulations that curb greenhouse gas emissions in the form of a “cap-and-trade” scheme….

PepsiCo may think it can make a profit from these restrictions: The firm can seek CO2 credits for the renewable energy certificates it has bought; also the company outsources its bottling, including some to other countries that have no greenhouse restrictions. At the same time, new CEO Indra Nooyi is hoping the public image of Pepsi as an environmentally friendly company will generate good will and thus business.

But Pepsi is learning that the environmental game — both on its PR front and its lobbying front — is full of pitfalls. Pepsi has firmly come down in support of the notion that industrial activity contributes to harmful climate change — the very argument that lies behind the current crusade against bottled water products.

Pressure groups have started anti-bottled-water campaigns, and the mayor of San Francisco has prohibited city employees from buying bottled water. The top-selling brand of water in the United States — and thus the chief target — is Pepsi’s Aquafina.

The regulatory front is more treacherous. Any cap-and-trade legislation will be complex and nuanced, with the details determining who gets rich and who suffers, meaning he who has the best lobbying team usually wins.”

Pepsi may have plenty of resources to hire good lobbyists, but so do other large corporate players in the Washington rent-seeking game, so even getting into this game can be said to create unnecessary risks for shareholders.

Today, EPA Administrator Stephen Johnson announced that EPA would respond to the Supreme Court global warming case, Massachusetts v. EPA, by issuing an Advance Notice of Proposed Rulemaking (ANPR) to solicit public comment on a range of complex issues. 

Before finalizing its response to the Court, EPA must figure out how recent statutory changes in EPA’s responsibility regarding fuel economy and renewable fuel standards would affect the setting of auto emission standards for carbon dioxide (CO2) and other greenhouse gases–a possible outcome of Mass v. EPA.

Above all, EPA must sort out how setting CO2 tailpipe standards might affect “many sources beyond just the cars and trucks considered by the Court, including schools, hospitals, power plants, aircraft, and ships.”

Indeed, as CEI and several of its free-market brethren explained in a recent amicus brief and in coalition letters to President Bush and Senator Dianne Feinstein, EPA regulation of CO2 from new cars and trucks under Section 202 of the Clean Air Act could compel the agency to regulate CO2 emissions from potentially hundreds of thousands of small- to mid-sized farms, factories, and buildings under the Act’s Prevention of Significant Deterioration (PSD) program–a result Congress clearly did not intend when, in 1970, it enacted Section 202, a provision dealing solely with emissions from new motor vehicles.

Congressional reaction to EPA’s decision to proceed with the “appropriate care and attention this complex issue demands” rather than “rushing” to regulate CO2, was predictable.

Senate Environment and Public Works Chairman Barbara Boxer (D-CA) stated:  ”For nearly eight years, this Administration has tried to duck its obligation to address global warming pollution. A year ago, the Supreme Court ruled that greenhouse gases are covered under the Clean Air Act. Now, instead of action, we get more foot-dragging.” 

Two quick comments. First, as a technical matter, EPA did not receive an official remand from the Court of Appeals, where the case originated, until September 14, 2007.  Second, and more importantly, it wasn’t until December or thereabouts that EPA began to understand the enormity of the regulatory burden it might inadvertently unleash by rushing to set CO2 standards for motor vehicles.

The first wake up call came from attorney Peter Glaser in testimony (November 8, 2007) before the House Committee on Oversight and Government Reform. The U.S. Chamber reinforced Glaser’s message in a December 12, 2007 open letter to Congress. The free market coalition also weighed in via the aforementioned letters to President Bush (Dec. 16, 2007) and Sen. Feinstein (Feb. 20, 2008).

You’d think by now Sen. Boxer would get it. Maybe she does. Maybe what really bugs her is that the Bush administration today narrowly avoided a public policy disaster. Just think, if EPA had rushed to set CO2 standards for new cars and trucks, the ensuing regulatory cascade could have given us the equivalent of a dozen Kyoto Protocols, yet without Sen. Boxer or any of her allies on the Hill voting for it or taking responsibility for the economic fallout.  It would all have been George Bush’s mess. How convenient for them!

Thanks to Administrator Johnson’s decision, Boxer can no longer pretend that Mass v EPA is just about minor tweaks in new-car fuel economy standards. If she wants to regulate auto emissions, she must also accept responsibility for the broader and heavier regulatory burdens this could impose on the U.S. economy. No wonder she’s irked!

Ed Markey (D-CA) responded flippantly to Johnson’s ANPR letter: “The ‘A’ in this document should stand for ‘absurd.’ … This cynical step by EPA to announce an ‘Advanced Notice of Proposed Rulemaking’ in the coming months should be seen for what it is: an “Aspirational Notice of Procrastinational Rulemaking’.” Markey has no excuse for spouting such drivel. He understands full well the regulatory morass EPA could create if it followed his advice, because Peter Glaser explained it to him in testimony just two weeks ago. 

McCain and Warming   [Iain Murray]

With the Presidential election looking closer than would have been thought possible a few months ago, it is worth examining just where Sen. McCain stands policywise on global warming at the moment.  An IBD article today looks at his position and how it leaves both sides of the debate cold.  The article quotes McCain's policy chief, Douglas Holtz-Eakin, who is a smart guy, as saying that a detailed proposal is months away, but it would contain two main elements: a cap n' trade plan and a Kyoto II that would include India and China.

The latter is, at the moment, politically infeasible if it includes mandatory reductions from those countries, while the former is either going to be an ineffective subsidy to energy companies that manages to increase prices to the consumer, as has been the case in Europe, or the equivalent of a disguised carbon tax, with significant penalties on the red states (as discussed earlier), depending on whether permits are allocated or auctioned.  Moreover, if you look at the last bill Sen. McCain proposed with Sen. Lieberman that included a cap n' trade element, it would have very little effect on climate, at high cost.  Marlo Lewis worked out that the bill would avert at most 0.03 degrees C warming by 2050, at a total cost to the economy of $776 billion.

Nevertheless, as my colleague Myron Ebell pointed out in the IBD article, a President McCain would have a very good chance of getting his proposal through Congress:

"The Republicans in Congress will not be able to oppose a President McCain. The leadership in both Houses will follow him," Ebell said. "If it is a President Obama or Clinton, Republicans will have every reason in the world to say, 'We're gonna fight this.'"

Finally, I think it's worth saying that, just as subsidies to oil companies should be opposed, McCain's proposal for a $3.7 billion subsidy to the nuclear industry is objectionable.  The nuclear industry would be better served by reducing the irrational regulatory barriers that prevent nuclear competing properly with coal, natural gas and other renewables rather than bribing it to put up with them.