June 2008

Mounting criticism over how some climate policies are adding to record energy and food prices threatens to distract UN-led talks on a new global warming pact, which resume this week in Bonn.

Dow Chemical Company announced this week price increases of up to twenty percent for their 3200 products.  Andrew N. Liveris, the chairman and CEO of America’s biggest chemical company, said that soaring costs for feedstocks and energy were to blame.  Dow’s feedstock and energy costs were 42% more in the first quarter of 2008 than a year ago.

The principal feedstocks Dow uses to produce most of its chemical products are natural gas and petroleum, so this is really all about oil and gas prices.  According to Bloomberg, “Liveris said today the U.S. government's failure to develop a comprehensive energy policy is causing the nation's chemical industry to lose ground to global competitors.  ‘The country now faces a true energy crisis, one that is causing serious harm to America's manufacturing sector and all consumers of energy,’ Liveris said in the statement.”

That’s true, but Liveris failed to go on to explain that he and his company are leading the effort to make our energy crisis much worse.  Dow is a founding member of the U. S. Climate Action Partnership, which supports federal cap-and-trade legislation.  Liveris has been one of the most visible big business cheerleaders for cap-and-trade. 

Cap-and-trade is designed to raise the price of lower-cost hydrocarbon fuels so that people and companies are forced either to use higher-cost alternatives or to just use less energy.  The first effect of cap-and-trade will be to reduce coal use because burning coal produces significantly more carbon dioxide per unit of energy than natural gas.  The only large-scale alternative to coal in the near term for producing electricity is natural gas.  So pushing coal use down will raise gas prices. So Liveris and Dow are working to enact policies that will exacerbate the problem they are complaining about.

Which leads me to the Lieberman-Warner cap-and-trade bill, S. 2191/S.3036 (it will be the latter bill number that comes to the floor).  As I reported last week, this energy-rationing monstrosity is now scheduled for debate on the Senate floor next week.  It’s still not clear how long Majority Leader Harry Reid (D-Nev.) will allow for debate or how many amendments he will permit to be offered and voted on.  I have produced some basic talking points on what’s wrong with cap-and-trade, which can be found here.

Longtime cap-and-trade advocate Jim Rogers – CEO of Duke Energy, before that of Cinergy (which merged with Duke), and before that protégé of none other than C)2 cap-and-trade pioneer Ken Lay – tells CNN that “he supports climate action but warns that Lieberman-Warner would have a ‘draconian effect’ on his customers and others in the 25 states that now burn 80% of the coal in the United States. It’s unfair, he argues, to place the burden of solving the climate-change problem on coal-burning states…‘I believe in cap and trade. I believe we ought to put a price on carbon [dioxide],’ Rogers says. But senators who want to auction permits, and then use the money for a variety of projects – ranging from deficit reduction to water projects to job training – threaten to turn the climate-change bill into the ‘ultimate in earmarking.’”

Rogers is even quoted by the Sunday Washington Post as saying “this bill raises too much revenue from coal users while diverting too much of it to other purposes. ‘Only the mafia could create an organization that would skim money off the top the way this legislation would skim money off the top,’ he said.”

This may be a little confusing to students of the issue, after all it is no secret what Vattenfall CEO Lars Josefsson also told the Post, last year, that “higher electricity prices are ‘the intent of the whole exercise. . . . If there were no effects, why should you have a cap-and-trade system?’” Possibly the point of contention is who gets the money?

To clarify what it is Rogers objects to, let’s turn to the Pew Center’s recent report addressing cap-and-trade, what with Duke being one of Pew’s flagship members (Enron was quickly airbrushed out of Pew’s hall of fame once the, ah, unpleasantness hit the papers, as I write about in my book). This paper, as I note in detail, here, reads very much like a long apology for “keeping” the original notion of giving the ration coupons away to covered parties (and a few others to get their buy-in, er, for them to sell, it is worth mentioning) – found in Duke’s own proposal, which the Senate elected to not adopt, much to Rogers’ chagrin and apparently contributing to his change of heart.

Free ration coupons are what generated the “windfall profits” of tens of billions of dollars for utilities in Europe so far under their version of McCain-Lieberman-Warner; the more that are “allocated” rather than auctioned, the greater the windfall profit. Either way, your rates go up the same amount. But, as noted if somewhat reluctantly by the Pew authors, “whether allowances are distributed for free or through an auction will typically have no effect on market prices in competitive electricity markets, although it will affect individual supplier profitability.” (p. 27)

That helps explain Rogers’ bemusement, even if couched in terms of concern for those poor folks who would have to pay higher rates under this scheme; it’s all good, up to the part where utilities don’t get to keep the rate increase. His newfound, if selective, candor is admirable. Yet, while we're happy to have him on our side against this particular version of energy rationing, if only until the putative windfallers can tweak the legislation, it does threaten to give rent-seekers a bad name.