In these days of corporate scandal, who can argue against full disclosure on financial statements?  But now comes one cockeyed movement that pushes the concept to extremes.  It would require executives to guess potential liabilities from environmental and social problems that just might affect their companies, and list them on balance sheets.

 I can envision, for instance, that an oil company like Royal Dutch/Shell, as supplier of fuels that supposedly contribute to global warming, would have to report the potential environmental liabilities.  How much?  A ready estimate can be derived from the movie The Day After Tomorrow.  As the film ends, half the U.S. population lies frozen beneath a gigantic ice sheet.  So lets say $100 billion.  Or maybe $10 trillion is a better number.

 See how ludicrous this gets?  Remarkably, this movement is drawing support from Wall Street.  In June Goldman Sachs and Morgan Stanley endorsed a report of the United Nations Global Compact that calls upon regulators to require a minimum degree of disclosure and accountability on environmental, social and governance issues from companies, as this will support financial analysis.

 The Rockefeller Family Fund, the Turner Foundation and the United Steelworkers have also signed on to the balance-sheet responsibility movement. California Treasurer Phil Angelides wants his states public pension funds to push for accurate corporate environmental accounting.  The Rose Foundation for Communities & the Environment, in Oakland, Calif., has already asked the SEC to mandate disclosure of financially significant environmental liabilities.  These activists arent trying to improve the reliability of Moodys bond ratings.  They are out to influence corporate behavior.

 Yes, environmental and social liabilities can be hugewitness Superfund, asbestos and breast-implant costs.  In todays world of strict, joint and several liability, where almost anyone can be assigned fiscal responsibility for almost anything, conservative accounting would seem to require the disclosure of all the future damage that could be done by tort lawyers, The problem is coming up with a number.

 A federal judge in California just gave a green light to a class action on behalf of 1.6 million women who worked at Wal-Mart anytime since December 1998.  The plaintiffs accuse the retailer of denying women equal pay and opportunities for promotion.  Should Wal-Mart have anticipated this suit?  Should its 2004 balance sheet have included a liability of, say, $104 million (the amount Home Depot paid in 1997 to settle similar suits) or maybe $176 million (what Texaco agreed to pay out in 1996 to settle a race-discrimination class action)?  Wal-Marts bigger, though.  How about a few billion dollars?

 Note that American and United Airlines, Boeing and the owners of the World Trade Center are all being sued (by families who opted out of the September 11th Victim Compensation Fund) for failing to take measures to prevent the attacks.  Maybe juries will size up damages in the billions.  Should AMR, UAL, and Boeing be listing massive conditional liabilities on their quarterly reports?

 There are an infinite number of possible futures and thus an infinite number of possible asset/liability estimates.  Which of the myriad low-probability (but possibly high-cost) risks should be incorporated on companies balance sheets?  At what point does the noise introduced by adding more and more low-accuracy valuations destroy the informational value of accounting itself?  In mandating the disclosure of information about less-likely risks, dont we run the risk of omitting information about more-likely risks?

 Assets and liabilities that cant be connected to historical transactions or tradable contracts have no assignable market value.  Goodwill is like that.  If it isnt from an arms-length acquisition, the number you might put on this asset is entirely arbitrary.  So investors are better off if the asset is not counted.  So, too, for liabilities that are to be plucked from the air.  Accounting is not a field in which we want to encourage fanciful thinking.

Energy analyst Glenn Schleede has once again exposed the problems with wind power in comments he has submitted to the U.S. Army Corps of Engineers, which is conducting an economic and environmental analysis of a proposed offshore wind farm.

The wind farm proposed by Winergy LLC would be located five miles off the coast of the eastern shore of Virginia. In a preliminary analysis, the Corps determined that the project would not require an Environmental Impact Statement. Schleede disagrees, saying that the Corps has “underestimated the potential environmental impactincluding onshore impact” of the project.

The wind farm would produce approximately 2.5 billion kWh of electricity per year, assuming a generous 30 percent capacity factor. The wind turbines themselves would cover 57 square miles of the Atlantic Ocean, yet would produce slightly less electricity than a “new baseload 350 MW gas-fired combined cycle generating unit,” which would “occupy only a few acres.” Moreover, the amount of electricity produced would only equal approximately 3.3 percent of the total electricity produced in Virginia.

Schleede points out several potential adverse effects that should be mitigated as a condition to awarding any permits, including impacts that would not be limited to the 57 square miles of ocean. “Feeding such a potentially large (975 MW, at times), highly variable (from 0 to 975 MW), and often unpredictable amount of electricity into an onshore transmission line and electric grid would be a significant burden on existing onshore transmission capacity and the stability of a regional electric system that must be kept in balance (e.g., voltage, frequency).”

The addition of wind capacity would likely “impair rather than enhance electric system reliability,” says Schleede. The Corps should also take into account the need for backup generation and transmission capacity as part of the full costs of the wind farm.

The Corps should also have a firm grasp of wind energy economics and especially the role of federal subsidies, says Schleede. “In some cases, the value of the subsidies may exceed the revenue wind farm owners receive from the electricity that they sell. Schleede estimates that Winergys proposed wind farm would receive an annual tax credit of more than $46 million. The project would also qualify for accelerated depreciation and would be able to write off the entire $900 million in estimated capital costs in 6 years. Yet the annual revenue from selling electricity would be only a little over $52 million. Schleede also notes that tax sheltering through accelerated depreciation often leads to early sale or abandonment of wind farms.

Finally, Schleede argues that rather than being environmentally benign, wind farms entail significant environmental costs. He notes the opposition to wind farms is growing around the world, “often due to the adverse impact of wind farms on environmental, ecological, scenic, and property values.”

On Nov. 20, Stanford University announced the creation of the Global Climate and Energy Project (G-CEP). The purpose of the project is to “engage in research to develop technologies that foster the development of a global energy system where greenhouse emissions are much lower than today.” It may also be seen as addressing the challenge posed by the article in the November 1 issue of Science, which we reported in the last issue.

Funding commitments from three major corporations totaling $225 million over the next 10 years were also announced, with several other corporations expected to make additional commitments in the near future. ExxonMobil, the worlds largest publicly-traded petroleum company, plans to contribute up to $100 million; General Electric, the world leader in power generation technology and services, $50 million; and Schlumberger, a global technology services company, $25 million. Stanford engineers and scientists will do much of the research, but will be joined by other major institutions in North America, Europe and Asia.

The project was immediately criticized as inadequate, and ExxonMobils role was attacked. “Im somewhat skeptical, given the history of some of the companies involved in this, that it represents a dramatic change in their resistance to aggressive federal and state policy action on the issue,” said Alden M. Meyer, director of government relations for the Union of Concerned Scientists.

“This could be seen as another effort [by ExxonMobil] to say, Were doing something, but this is a complex problem thats going to take decades to solve and, in the meantime, lets not do anything aggressive with fuel economy standards or anything else that actually reduces oil use today,” he said (Los Angeles Times, November 21, 2002).

Lee Raymond, chairman of ExxonMobil, responded that, “Our investment in G-CEP is a demonstration of our long-held belief that successful development and global deployment of innovative, commercially viable technology is the only path that can address long-term climate-change risks while preserving and promoting prosperity of the world’s economies.”

Following a major referendum last year in which San Francisco residents approved a $100 million bond measure to install as many solar panels in the city as the rest of the nation does all year, Mayor Willie Brown announced a $7.4 million project to install solar panels on the roof to the Moscone Convention Center. “The Moscone Center project itself couldnt be better. It is a gem which should make city leaders across the country salivate,” said Brown. “It would be fiscally irresponsible not to do a project like this” (Associated Press, November 22, 2002).

The economics of the project dont look good, however. The project, which will also include retrofitting for energy efficient fixtures, will save the city a mere $210,000 per year, meaning it will take more than 35 years for the project to “pay for itself (San Francisco Chronicle, November 22, 2002).” Several other cities are considering following San Franciscos example. Brown says that he has heard from 15 other cities that are considering similar programs, including San Diego, Denver and New York (Los Angeles Times, November 22, 2002).

The project, known as the New Mexico Wind Energy Center, will be located in Quay and De Baca counties 20 miles northeast of Fort Sumner. It will cost $200 million dollars and will include 136 wind turbines that will reach 240 feet into the sky. The turbines will be the tallest structures in the state and will sprawl across 9,600 acres.

It is estimated that the 204-MW plant will provide electricity for about 94,000 average-sized New Mexico homes, or about 4 percent of PNMs total power production. PNM readily admits, however, that wind is an intermittent energy source and that the project will not provide a steady source of electricity. In fact, the facility will operate mostly during the spring months when wind conditions are optimal, or about 30 percent of the time.

“The scale of this project will put New Mexico on the map as one of the nations leading producers of renewable energy,” said PNM Chairman, President and CEO Jeff Sterba. “As renewable technology continues to improve, and costs come down, it is clearer than ever that smart business decisions and environmental stewardship can successfully coexist. PNM is thrilled to play a role in making renewable energy an everyday reality in New Mexico.”

Despite Sterbas rosy outlook, the project will rely on a “green tariff,” a small monthly premium paid by participating customers, to cover its costs. It is still unknown how much the wind-generated electricity will cost New Mexicans. Charles Bensinger of the Coalition for Clean and Affordable Energy joined Sterba at the press conference to praise PNM and to encourage New Mexicans to participate in the project. “PNM has really challenged us to put our money where our mouth is,” said Bensinger. “We want to make that 200 megawatts go really fast.”

The New York Energy Plan estimates that the eight wind farms, with a combined 250 wind turbines, would produce approximately 900,000 kilo-watt hours (kWh) of electricity per year. But this is a drop in the bucket compared to the states total electricity demand. For example, this amount equals 58/100 of 1 percent of the total electricity imported into New York in 2000. It is only 15 percent of the energy that will be produced from a single gas-fired combined cycle plant that is scheduled to come online in Athens, NY in 2003.

The wind power industry often claims that “electricity generated by the wind turbines will displace on a kWh for kWh basis electricity that would be generated by fossil-fuel generating units and any associated emissions.” But that simply is not true, says Schleede. “Such claims are generally exaggerated. For example, they do not take into account that any fossil-fueled generating unit that is kept available to back up the intermittent electricity from the wind farm will be giving off emissions while it is running at less than peak efficiency or in spinning reserve mode. Nor do they take into account the fact that other alternatives for reducing emissions are likely to be far more cost-effective.”

New Yorkers should also be aware that there is growing opposition to wind farms wherever they are proposed, in Europe, Australia and in nearly every state in the U.S., says Schleede. “Opposition is due to a variety of reasons including scenic and property value impairment, noise, bird kills, flicker effects of spinning blades after sunrise and before sunset, potential safety hazards from blade and ice throws, interference with telecommunications, and higher costs of electricity.”

Several climate-related initiatives pose a serious threat to Americas economic future, according to Marlo Lewis, a senior fellow at the Competitive Enterprise Institute. One such scheme is President Bushs proposal to expand the Department of Energys Voluntary Reporting of Greenhouse Gases program to include the awarding of transferable carbon credits for voluntary greenhouse gas reductions.

Currently, the DOE program is a simple voluntary reporting program with no regulatory significance. But, says Lewis, writing for Tech Central Station (September 10, 2002), the addition of the awarding of credits to companies that report greenhouse gas reductions will corrupt the “politics of U.S. energy policy” and “grow the greenhouse lobby.”

Under Bushs proposal, companies that begin to comply with Kyoto before it is ratified would be awarded credits that they could sell or use to offset future regulatory obligations. In the absence of a regulatory cap on carbon emissions, the credits are worthless. Only if Kyoto or a similar regulatory program were enacted would the credits yield dividends. “Credit-holders thus acquire cash incentives to support Kyoto, or lobby for its domestic equivalent,” says Lewis.

A credit scheme would be a zero-sum game where one companys gain is anothers loss. Every credit awarded in the voluntary early action period is one that wont be available during the mandatory period. Companies that dont or cant “volunteer” to reduce greenhouse gas emissions now will be penalized later under the mandatory cap, which means that the program isnt really voluntary.

Lewis argues that the Bush administration should stop legitimizing climate alarmism by playing games within the Kyoto framework. Instead, it should embrace non-regulatory, pro-growth policies that would also have the side benefit of reducing carbon intensity. Bush should lower tax barriers to investment by allowing companies to “deduct from current-year revenues, the full cost of capital investment,” says Lewis. Replacing the current system of capital depreciation with full expensing for all types of capital investment would eliminate barriers to economically efficient capital turnover.