Friday, July 20, 2007

Enron on Cap-and-Trade

Posting Eileen Claussen's op-ed piece (below) reminded me that the Pew Center had invited Enron's Ken Lay to join their Business Environmental Leadership Council, which invite he jumped at, Enron was going to make a killing in post-Kyoto cap-and-trade.

That leads me to one of my favorite links in the vault, the transcript of a March 3, 2000 (21 months to the really big bankruptcy filing) roundtable discussion "Domestic Emissions Trading of Greenhouse Gas Credits". Batting lead-off, the Senator from GE's home state, Joltin' Joe Lieberman. More interestingly though (sorry, Joe it's true), batting cleanup, the Enron representative really does come across as "The Smartest Guy in the Room" (that ENE link is kinda funny, in a morbid sort of way)
  • II. Opening Remarks
    Senator Joseph Lieberman (D-CT)

  • III. Presentations by Panelists
    Dan Lashof, Natural Resources Defense Council
    Joe Goffman, Environmental Defense
    John Palmisano, Enron Corporation
    Jon Naimon, Light Green Advisors
    Ray Kopp, Resources for the Future
    Sue Gander, Center for Clean Air Policy

  • John Palmisano, ENE:

    MR. PALMISANO: I'll choose to sit and I'll choose to be brief.

    Let me make some quick comments on the general subject of early crediting. Sometimes we confuse the words "crediting," "allowance trading," and "emissions trading." In fact, in the PPI paper, "credit" is used when the right word should be "quota," "allowance," or "allocation." Clarity in language is important because credit and allowance systems develop according to different regulatory paths.

    Both "credit" trading systems and "quota" trading systems produce very good environmental and economic results, end of story. However, with these programs, we are creating property rights, we are creating money, and that's a fact. The companies that will receive the allocations are going to have an off-book asset, and that is a fact too. That is why care in describing these systems is important we are creating the environmental equivalent of money.

    I'd commend everyone to look at the Heinz Center study that was done about two- and-a-half years ago. This study was funded by a variety of different sources and looked at, among other issues, the question of what the potential windfall profits could be for selected companies and sectors. No company today has greenhouse gas credits or quotas on their financial books, to the best of my knowledge. Greenhouse gas quotas will be an off-book asset, so some companies are going to get a windfall financial gain.

    Is that a bad thing? I don't think so, because in the long run we're probably going to achieve a good environmental outcome. However, in the short-run, a lot of money on the table certainly attracts lots of people's interest. That's the political reality in the world that I live in. And when you're allocating a $100 billion pie, or in fact, a potentially larger pie than that, even a small slice of that pie is pretty valuable.

    Let me speak quickly about the whole issue of early crediting, then I'll get to the PPI and RFF proposals. First, a general observation, unwise early crediting is probably the greatest threat to a domestic greenhouse gas emission trading system. What do I mean by that? Notice the modifier "unwise." When companies start developing their own emissions trading program, they are printing their own money, right? That's what we're talking about here. And the question comes up: against what baseline are you creating your "credits," and the allocations? When we talk about the fact that there have been emissions trades, one has to ask against what rules were these trades applied. "Credits" can only be obtained when a firm does better than its regulatory obligation. Since no firm today has a legally defined greenhouse gas control obligation, no firm can create domestic "credits!" Firms, however, can create emission reductions, but reductions do not automatically become "credits." Firms are now trading reductions with the hope that they become tradable credits. Thus strong vested interests develop to support already achieved reductions. These interests can be in conflict with the efficiency and equity needs of an official, legally binding, future regulatory system. Think like businessmen. In business you have to be very careful about what's backing up the "emissions credit" money.

    Another potential problem with some early crediting programs, and it's a corollary to the credit-integrity problem, is whether the implied status quo has changed. My company is thinking about developing an emissions trading program, and we're looking at that quite seriously. Imagine we do develop an early trading program and so does a second, third, and fourth company. We all might trade within our own companies before regulations are developed. What happens when we say, "Maybe we should be trading among ourselves?" Imagine Enron and Exxon, and many other big companies start early greenhouse gas trading among ourselves, before regulations are developed. And now we have $100 billion or maybe $500 billion worth of companies trading among ourselves. Well, that looks like a potentially powerful political coalition that would certainly be interested in "grandfathering" ourselves into having official emission credits instead of just reductions, right? Then other companies, non-early traders, might have to buy their way into the future regulatory system at some later point in time because the "early credits" came out of the non-participants future greenhouse gas budgets. I'm not suggesting any malevolence; I'm not suggesting anything really, other than looking before one leaps into a complex regulatory system that creates what is akin to money. This is a simple issue of looking before one leaps.

    Now, let me speak to the proposals that are before us. They are very interesting and I wish there would be more dialogue, serious dialogue, and serious analysis of these proposals. Most importantly, not just economic analysis, but also looking at the realpolitik of the situation. I used to work at U.S. EPA and some other people here also did. It takes at least five years for U.S. EPA to get out a major regulation. That's warp speed. That's fast. Are we talking about an "early" program, or are we talking about a regular regulatory program? Moreover, five years is when you don't have a couple hundred million dollars on the table. Therefore, whatever is developed, it has to be lean and mean and get out there fast, because the proposed regulation could be tied up forever.

    Look at the litigation we have right now in the Northeast dealing with nitrogen oxides. It's a DNA molecule twisted upon itself. There probably aren't 20 attorneys in the country who really understand the issue, and the amount of money on the table is much smaller than the amount of money on the table associated with greenhouse gas trading.

    Consistency with existing programs is another issue. The NOx trading program in the Northeast will probably be extended to the Midwest. The SOx and NOx trading programs are run in a slightly different way than are total loadings programs; the SOx and NOx trading programs referred to before use a rate-based approach. Most people imagine a greenhouse gas trading program to be a total loadings program. Consistency among programs is important; I would certainly like to speak extensively to people in the power industry to see how you integrate these different approaches. I'm not saying it's a problem and I'm not saying it's a facilitator. Nevertheless, linkages among different emission control programs might be very important.

    Another point is to look at business realities. The energy business is changing so fast we're all getting whiplash. One analyst has talked about 50 big generating companies in 5 years; there could be 30 companies in 5 years. What kind of a market do you have when it's oligopolized? This is a serious question. It is a different kind of market than when you have 1000 small little actors out there instead of 30. A program that works for 1000 actors could have unintended consequences for 30 actors, consequences that you can't imagine right now.

    Also, look at the way the power industry and the fuel industry is working today. Many companies use long-term power contracts and long-term fuel contracts. What happens when an implied tax is imposed upstream or downstream? How many billions of dollars of force majeure provisions would you trigger and could we have contracts severed if an implied tax for greenhouse gas was not contemplated by existing contracts? Will such actions create chaos in the fuel industry, chaos in the power trading industry, or price spikes? I don't know, but that is a serious question, because 10 years ago we didn't have this problem. Ten years ago the simple solution to adding environmental costs was just "pass it through to the rate payer." That's what many state Public Service Commissions did. I shouldn't say that, but in many cases that is what PSCs did. It was kind of a simple model that traded off certain benefits against other benefits associated with having a regulated monopoly. That was the regulatory compact that we had.

    But today, we live with a competitive fuel and power industry. And there are long-term power contracts that are indexed against fuel contracts, and fuel contracts connected to power. In addition, there's a lot of money in energy derivatives that are providing good environmental benefits and good energy benefits for everybody in this room. Power prices have gotten lower, service is better, but still, what would happen if and when we develop a greenhouse gas control program?

    These are serious questions, and there needs to be more than one businessperson at the table. There needs to be more than one or two people who understands more than just the Clean Air Act, because we're talking about complicated energy issues, and we're moving rapidly to a new energy paradigm, not only in the United States, but internationally.

    So let me put it together. We support baseline protection in any early crediting program, baseline protection! No good deed should be punished, but the question is how do you structure a baseline protection program. I think everybody would agree to that. There are some issues where you have agreement and some issues where there is disagreement. I'd like to know what percentage of the population believes good deeds should be punished. A very small percent. So if we cannot create a baseline protection program, it's probably going to be a lot more difficult to carve up $100 billion.

    When we think about the different kinds of crediting and allocation programs we have to be honest with ourselves and honest with the public. We are creating rights to pollute and I don't have a problem with that, because we're going to create those rights pollute, and we're going to reduce them in number and reduce them, and reduce them, until we achieve our environmental objectives. But, we can't camouflage "rights" with clever words.

    Lastly, we clearly support truth in trading. Trades that take place today, I believe, should be consistent with the Kyoto Protocol. Since there are no domestic programs anywhere in the world, there is some danger in developing a domestic program after implied trades have been given legal status, and we have to be honest with ourselves and honest with the public.

    The worst thing we could do is oversell emissions trading. Emissions trading is not a cure for baldness, psoriasis, or cancer, or anything like that. But it does produce really, really good environmental and economic results. And "hyping" it up too much could be deleterious in the long run.

    Thank you.

    MS. KNOPMAN: Thanks, John.