Book 1 in the trilogy, Capitalism at Work: Business, Government, and Energy (2009), spends several chapters on best business practices and sustainable corporate culture under capitalism proper–and the perils for the same from political capitalism. It was through the wisdom of several books, beginning with Adam Smith’s The Theory of Moral Sentiments and continuing with Charles Koch’s Science of Success (2007) that I found the worldview that explained the why-behind-the-why of Enron’s collapse–the philosophic failure behind the financial failure).

AAAS Panel on Climategate Tomorrow

Today, a friend alerted me about the annual conference of the American Association for the Advancement of Science (AAAS) in San Diego and Friday’s panel on Climategate. One of the panelists is my friend Jerry North, who was part of two global warming debates we had here in Houston last month. (The Rice University debate between Richard Lindzen and North is online here.)

I was incited to write Jerry the email that is reproduced below. Perhaps this communication should have gone to the panel leader Ralph J. Cicerone, president of the National Academy of Sciences. It would certainly apply to the other three panelists in addition to North given their topics:

Francisco J. Ayala, UC Irvine, “The Practice and Conduct of Scientific Research”
Sheila Jasanoff, Harvard, “Science in Society”
Gerald R. North, Texas A&M, “The Data Behind Climate Research”
Phillip A. Sharp, MIT, “Data Use and Access Across Disciplines”

At Climate Audit, Steve McIntyre is critical of both North and the chosen panel for its lack of intellectual diversity. He wrote in part:

Gerry North told the Penn State Inquiry that he hadn’t read the Climategate emails out of “professional respect”. This apparently qualified him as an “expert” on the topic.

Cicerone appears to have been quite careful not to invite any speakers that actually knew anything about the controversy. It sounds like it will be totally uninformative – an ideal Sir Humphrey outcome.

Seven Questions for Climategate Discussants

Here is my email to Dr. North which he kindly responded to by saying that his presentation was narrow and already sent in. Still, there is plenty of discussion to come where these hard questions, in part or whole, can be brought up and debated.

Dear Jerry:

I see that you are going to be part of a panel at the Friday AAAS meeting on Climategate. Some of us fear too much downplaying. You were a consultant for me at Enron for several years on climate science and watched the fall of the company with great interest. So I would like to challenge you to interpret Climategate in terms of the fall of Enron.

Here are some themes from Enron to consider applying.

1) Slippery slopes where small deviations from best practices escalated into problems that were not anticipated at the beginning of the process.

2) A lack of midcourse correction when developing problems were not properly addressed.

3) Old fashioned deceit when the core mission/vision was threatened (for Enron it was ‘to become the world’s leading company’–for Jones et al., it was there is a big warming and a climate problem developing)

4) The (despised) short sellers busted the Enron mirage. Ken Lay at the last employee meeting even likened the short sellers to ‘terrorists” (this was just a few months after 9/11). Question: does mainstream climate science regard Internet ‘peer review’ of Jones et al. like the Enron faithful regarded the short sellers who first discovered the problems of Enron?

5) Enron suffered from the “smartest guys in the room” problem. Does Climategate reveal arrogance and a lack of humility among “mainstream” climate scientists?

6) Denial: we employees were almost all in denial when the problems at Enron first surfaced. Have you and others who are close to the scientists of Climategate been slow to recognize the problem? Has Nature and Science also been slow? If so, What does this say about human nature.

7) Taking responsibility. Skilling and Lay never did and, in fact, they joined together in a legal cartel where the unstated strategy was to not blame each other for anything and sink or swim together. Has this happened, or is it still happening, with Climategate if you believe that scientific protocol and/or legal rules were violated?

I will post a more refined version of these questions at MasterResource soon, but I invite you to at least consider them for your panel discussion. You might say that the analogy is not a good one, but they do represent hard questions that should be considered in a “challenge culture.” And I certainly hope you have gone through the emails to properly judge them–or that you will do so and give us a more in-depth opinion. I believe that your stature and seniority–as well as your longstanding claim to be a middle-of-the-roader–make you a valuable person to do all of us this favor.

I have cc’d Roger Pielke Jr. who to me is acting as the ‘conscience of the profession’ right now on such issues.

- Rob

Climategate 2 (Circling the Wagons)

I do leave Dr. North with the challenge to more forthrightly deal with Climategate, which he has failed to do to date. I am very discouraged about the circle-the-wagons mentality of too many academic scientists who are covering for each other (many are long time personal friends, and they are united in THE CAUSE of climate alarmism).  As I complained to North in another email:

To me more humility is in order with ‘mainstream’ climate science. There is a pretense of knowledge that they have answers when they do not. I think too many have have been corrupted by government money, the Malthusian virus (nature is optimal, man is bad), and groupthink. Your own reaction to Climategate has shaken my faith a bit when you say it is no big deal and then you haven’t read the emails.

Conclusion: Towards a ‘Challenge Culture’

I recently posted about the importance of having a challenge culture where we question what we believe rather than get comfortable believing what we want to believe. I am certainly open to that challenge myself. But can those emotionally tied to the climate cause show some humility and admit that the climate system is far too complex for social engineering and geoengineering?

The good news is that Climategate is forcing a very reluctant mainstream to reconsider their groupthink. That even the AAAS (a very politicized organization) is having a Climategate panel, however one-sided, is a start. But there is much more yet to confront and rethink in the post-Climategate era.

[This excerpt from Capitalism at Work: Business, Government, and Energy prefaces a five-chapter review of energy Malthusianism from the time of Thomas Robert Malthus in the late 18th century through the Julian Simon/Paul Ehrlich debate of the late 20th century.]

“Here is a planet, whirling in sunlit space,” reads the opening of Rose Wilder Lane’s The Discovery of Freedom: Man’s Struggle against Authority, penned during the dark days of World War II. “The planet is energy,” she continues. “Every apparent substance composing it is energy. The envelope of gases surrounding it is energy. Energy pours forth from the sun upon this air and earth.”

Energy is pervasive and liberating. It moves people, makes things, and provides incalculable services. It vanquishes darkness, literally and figuratively. “Since early men ignited the first fires in caves,” it has been noted, “the unleashing of energy for light, heat, cooking, and every human need has been the essence and symbol of what it is to be human.” 

In economic terms, energy is the resource of resources, the master resource. Energy transforms mineral and natural resources from their raw form into consumable goods. Energy must be expended to create more energy and to refine energy into more usable forms. Thus, energy can be considered the fourth factor of production, in addition to the textbook triad of land, labor, and capital.

In business terms, energy has been and will likely always be the world’s biggest enterprise. The energy sector has spawned some of history’s great entrepreneurs. John D. Rockefeller shaped the American and world oil industry more than a century ago. Mr. Petroleum was one of the greatest business doers in U.S. and world history, if not the greatest.

Second to Rockefeller in the history of the U.S. energy industry is Mr. Electricity: Samuel Insull. An émigré who teamed with Thomas Edison to build the company that emerged as General Electric, Insull ventured on his own and built America’s largest gas and electricity entity. But his fortunes spectacularly reversed in the early 1930s. The dramatic rise and fall of the father of the modern electricity industry, “the Babe Ruth, the Jack Dempsey, the Red Grange of the business world,” is still the subject of contemporary books and articles.

In the 1980s and 1990s, another figure cut a unique path in the energy sector: Mr. Natural Gas, Kenneth L. Lay. He made a case for methane as the economic and environmental answer to America’s energy challenges and positioned Enron as the world’s first natural gas major. Lay’s star power put him in a league with the biggest names of the industry at the time, such as Lee Raymond of ExxonMobil and John Browne of BP. In early 2001, Paul Portney, president of Resources for the Future, declared, “In his role as chairman of Enron Corp., Ken Lay has almost singlehandedly made the world rethink what it means to be a modern energy company.”

But Ken Lay was a shooting star. He was no Samuel Insull, much less a John D. Rockefeller. Still, he was an industry driver and energy changer, as evidenced by Enron’s role in restructuring the natural gas and electricity markets in the U.S. and Europe. History should also note that Enron helped resuscitate the ailing domestic windpower industry, however unproductive this may turn out to be in the sweep of history.

The energy world is different today because of Ken Lay.

For Rockefeller, Insull, and (for the most part) Lay, energy was a far different commodity from that utilized during all of mankind’s previous history. The energy of old was renewable—falling water, burning wood and plants, harnessed wind and sunlight. The new energy, which powered the machines of the Industrial Revolution, and which today has an 85 percent share of the global energy market, is fossil fuel, which in its different varieties is vastly more concentrated, powerful, reliable, and transportable than what it replaced.

The carbon-based energy era began with coal and its derivatives, coal gas and coal oil. Petroleum and natural gas joined in. These energies came from the sun’s ageless work, creating a mineral stock far superior to the irregular, dilute energy of the sun’s flow. Little wonder that the new energy overwhelmed what came before to power the machines of industrialization and accelerate the capitalist-led transformation to modern society.

                            ———————————————–

Free minds and free markets created an energy boom that is now in its third century.

It began in England in the eighteenth century, and it continues today worldwide with ever greater quantities of carbon-based energy produced and consumed. But therein lies a peculiarity. In a physical sense, oil, gas, and coal are nonrenewable, with each extraction from a “known” supply leaving less for the future. As nature’s hydrocarbon glass is emptied, the thinking goes, extraction costs and selling prices must increase.

History tells a different story. As more oil, gas, and coal have been produced, more has been found. New substitutes within the carbon-based fuel family have emerged. So-called depleting resources have been replenished—and more. This paradox of plenty is a fact that few people, even economists, have been able to understand, much less explain.

In fact, the experts have told us time and again that energy demand will outrace supply, pushing prices up and stalling modern society. More often than not, such alarmism has been the conventional wisdom. Times of energy plenty are just temporary, it is warned. Optimists are like the man who jumps off of a tall building and gives a good report on the way down.

The “coal panic” of the 1860s is the “peak oil” debate of today—nearly a century and a half later. Samuel Insull feared coal depletion during his reign as “The Chief” of the U.S. electricity industry in the first third of the twentieth century. Coming out of the 1970s energy crisis, Robert Herring, chairman of Houston Natural Gas Corporation—a predecessor company to Enron—sought a “versatile substitute” for natural gas. At Transco Energy Company, Jack Bowen and his protégé, Ken Lay, looked to coal gas as the future for methane.

But when natural gas shortages turned to surpluses in the 1980s (the so-called “gas bubble”), the outlook shifted. Lay, now CEO of Enron, brandishing his Ph.D. in economics, became a national voice for resource optimism. Countering skepticism about the long-term gas supply was a key part of Enron’s natural gas strategy.

                            ———————————————

The following five chapters revisit the perennial issue of energy pessimism versus optimism. The fixity-depletion view of fossil fuels was popularized by William Stanley Jevons in the 1860s, mathematically explicated by Harold Hotelling in 1931, and geologically quantified by M. King Hubbert in the 1950s and 1960s. The budding environmental movement gladly seized upon Hubbert’s analysis to warn of an impending crisis and urge a government restructured ecological society. “What will we do when the [gasoline] pumps run dry?” asked Paul and Anne Ehrlich back in 1971.

But some hearty souls championed a quite different view. To them, energy was a growing, not depleting, resource. The concept of resource expansionism was conceived by Erich Zimmermann in the 1930s, documented by resource economists beginning in the 1950s and 1960s, and codified into a general view by Julian Simon thereafter. Simon, originally a Malthusian, changed his mind after being contradicted by the statistical record. Simon put a theory to the data, concluding that human creativity had kept and would keep the cupboard full, given free minds and free markets. Human ingenuity—what he called the ultimate resource—was not a depletable resource but an expanding one, with each invention setting the stage for new breakthroughs. “I’m not an optimist, I’m a realist,” he would plead to the neo-Malthusian holdouts.

                              —————————————————–

Resource adequacy is part of the wider environmental issue of sustainable development, defined as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” A sustainable energy market is one in which the quantity, quality, and utility of energy improve over time. Sustainable energy becomes more available, more affordable, more usable and reliable, and cleaner. Energy consumers do not borrow from the future; they subsidize the future by continually improving today’s energy economy, which the future inherits.

The energy sustainability debate relates to Enron is several important ways.

The depletionist mindset that became a political force during the 1970s energy crisis created a movement to husband “dwindling” fossil fuels, over and above the behavior engendered by the price signals of the marketplace. Conservationism, or conservation for its own sake, became a mantra of environmentalists, and it continued unabated despite energy surpluses in the 1980s and 1990s. Government at all levels enacted mandates and subsidies to reduce energy usage. Nowhere was this done more than in California, a pivotal energy market in Enron’s history.

Riding the conservationism wave, Enron became the nation’s largest provider of energy-efficiency services—to great applause. This was part of a new genre of capitalism—natural capitalism—environmentalists thought. But energy outsourcing, whereby large commercial and industrial businesses turned over their energy operations to Enron Energy Services (EES), turned out to be a billion-dollar bust. EES’s advertised energy savings of 10 percent (or more) savings—making firms “Kyoto compliant” under one EES marketing scheme—was fiction. Driven by the profit motive, its corporate customers had already achieved most of the potential energy savings themselves. Most – if not all – of EES’s contracts (as those of other so-called energy service companies, or ESCOs) were unprofitable.

This case study in entrepreneurial error and public-relations overreaching in the name of environmental correctness was a cost of the creed of conservationism, which in turn came from the mindset of depletionism.

Enron was an energy company at heart. Ken Lay declared victory on three successive visions, which were to become

· the leading integrated natural gas company in North America;

· the world’s first natural gas major;[1] and

· the world’s leading energy company.

Enron focused on natural gas throughout, touting the fuel’s environmental and economic advantages over coal, in particular. But under its third mission, Enron set a vision within a vision—to become the world’s leading renewable energy company. Enron’s positioning as a “green” energy company, however, was at odds with other company priorities and would result in financial losses and even criminality.

Enron was at the pinnacle of the energy sustainability debate, with its Ph.D. economists and MBAs preparing energy outlooks, organizing conferences, and writing articles and books on resource availability, climate change, and national energy policy. Dr. Kenneth L. Lay actively participated in energy debates as a board member of Resources for the Future and the American Enterprise Institute; a keynote speaker at major conferences worldwide; a member of the Clinton administration’s President’s Council on Sustainable Development (1993–99); and a popular panelist at the World Economic Forum in Davos, Switzerland. Enron representatives set the agenda within various industry trade associations and pushed legislation at all levels of government in the United States and Europe. Thus, the big picture of energy thought and policy is fundamental to the Enron story in many and varied ways, as it will be to the other industry case studies in Book 2 and Book 3.

[Editor note: Pierre Desrochers, who guest posts with us for the first time, is Associate Professor of Geography at the University of Toronto.]

Paul Ehrlich’s best-seller The Population Bomb  turned 40 last year. The latest issue of the peer-reviewed (and somewhat iconoclastic) Electronic Journal of Sustainable Development is devoted to the book, its impact, and the validity of its main message. It features contributions by both Paul and Anne Ehrlich, who mostly stand by their original analysis, and some of their critics who challenge their basic premise and supportive evidence.

Despite a now widespread popular perception that The Population Bomb was a pioneering work, it originally drew little attention. In fact, it was just the latest in a long line of books, reports, essays and pamphlets on the population issue published in post-World War II America.

Ehrlich’s success, it turns out, owed more to his alarmist rhetoric and a lucky break on Johnny Carson’s “The Tonight Show “ (on which he would eventually appear several times) than to any original insight or idea.

The real roots of what is sometimes referred to as modern “neo- Malthusian ecology” in the United States long predates the Stanford’s biologist contribution. It can be ultimately traced back, at least in terms of reaching a large popular audience, including a young Paul Ehrlich himself, to two now largely forgotten best-sellers published in 1948: Fairfield Osborn’s Our Plundered Planet and William Vogt’s Road to Survival.

Following important promotional efforts that included selections in popular book clubs, Our Plundered Planet had already been reprinted eight times by the end of the year in which it was published and was eventually translated into thirteen languages. For its part, Vogt’s book was translated into nine languages, while a condensed version (eventually translated into eleven languages) was published in Readers’ Digest. According to one estimate, it eventually reached between twenty and thirty million individuals and was the biggest environmental best-seller of all time until the publication of Rachel Carson’s Silent Spring in 1962.

William Vogt’s best-seller, Road to Survival, in turn, profoundly trouble and inspired the businessman Hugh Everett Moore to write and publish in 1954 a twenty-two page pamphlet, “The Population Bomb!” (Moore would later give Ehrlich permission to use his original title.) So influential was Vogt, Moore and other overpopulation activists’ crusade that the issue even graced the cover of Time magazine in 1960.

Cover of Time Magazine, January 11, 1960

Conclusion

The Malthusian scares of recent decades (mineral depletion, pollution, climate change) can be better understood in terms of a longer (falsified) record. Robert Bradley’s Capitalism at Work: Business, Government, and Energy, containing an excellent five-chapter history of Malthusianism from Malthus through Simon (see below), did not include the Osborn/Vogt link between Malthusianism and neo-Malthusianism. The current issue of EJSD fills that gap.

Appendix A: Electronic Journal of Sustainable Development

Volume 1, Issue 3: “The Population Bomb Four Decades On”

CONTENTS
Editorial
The Persistence of Population Pessimism, Julian Morris

Articles
The Population Bomb Revisited, Paul R. Ehrlich and Anne H. Ehrlich

Have increases in population, affluence and technology worsened human and environmental well-being? Indur Goklany

Population Growth, Increases in Agricultural Production and Trends in Food Prices, Douglas Southgate

Julian Simon and the “Limits to Growth” Neo-Malthusianism, Paul Dragos Aligica

Land Conflict and Genocide in Rwanda, Karol Boudreaux

The Post War Intellectual Roots of the Population Bomb, Pierre Desrochers and Christine Hoffbauer

Population Growth and Cities, Randal O’Toole

Review Essay
Review of “Fatal misconception: the struggle to control world population” by Matthew Connelly (Harvard University Press, 2008), by Heli Kasanen

Appendix B: Bradley History of Malthusianism/Neo-Malthusianism

Part III: Energy and Sustainability

Chapter 7: Malthusianism

From “Misery or Vice” to “Moral Restraint” [T. R. Malthus]
“The Coal Panic” [W. S. Jevons]
Energy Sustainability: First Views
Anatomy of a False Alarm
Second-Generation Alarm [Herbert Stanley Jevons]
U.S. Coal: From Plenty to Problems

Chapter 8: A Joined Debate

“Resources are Not, They Become”: Erich Zimmermann
The Calculus of Depletion: Harold Hotelling
Zimmermann Stalls Out
Hayek on Conservation
Paley Commission
Resources for the Future
An Eye Trained on Scarcity: M. A. Adelman

 

 

 

Chapter 9: Neo-Malthusianism

Dismal Geology: M. King Hubbert
Small as Beautiful: E. F. Schumacher
Doomsday! Paul Ehrlich & John Holdren
Earth Day, 1970
The Limits to Growth: Club of Rome
Changing Times

 

 

 

Chapter 10: The Dark 1970s

Fathering a Crisis: Richard Nixon
Ford Foundation Energy Policy Project
“Soft Energy” Paths: Amory Lovins
Presidential Alarmism
The Great Turn: Hotelling’s Hour
Daniel Yergin
Daisy Chaining: The Great Oil Trading Boom
Media Alarmism
International Alarmism
Industry Alarmism
Voice of the Market
Trinity of Dissent: Adelman, Simon and Robinson

 

 

 

Chapter 11: New Light in the 1980s

Doomslayer: Julian Simon’s Paradigm of Expansionism
A Slow Retreat
The Creed of Conservationism: Amory Lovins
A Cul-de-Sac: Harold Hotelling Rejected
Two Revolutions: Reagan and Thatcher
A Nuanced “Energy Problem”

“If there is one thing I have been impressed with over the last decades, it is that when the environmental community defines a number one priority, something happens. Not always something good—but something.”1

Dr. Kenneth L. Lay, Chairman, Enron Corporation, June 1997 (1)

Who was the late Ken Lay, the architect and chairman of Enron throughout its 16-year history? All parties to the current legislative debate on a CO2 cap-and-trade bill should know. After all, Lay’s tireless efforts to promote CO2 regulation and enact renewable energy quotas make him a father figure for HR 2354, the Waxman-Markey climate bill, what I have called the Enron Revitalization Act of 2009.

In his lifetime, Lay did not win CO2 regulation, but he got a very damaging renewable energy mandate passed in his home state of Texas. I asked:

How has Texas, which consumer choice made the leading oil and gas state, become the second most politicized energy state in the nation (after California)?

The regulatory spiral can be traced back  to Enron, which in 1999 spearheaded a provision in the state electricity restructuring law (Senate Bill 7, signed by governor George W. Bush) establishing a statewide renewable-energy mandate. Enron’s lobbyists had in mind the special interest of Enron Wind Company, which is now part of General Electric.

It was a double win for the politically connected company. First, as the leading power marketer, and with its eyes on becoming the leading electricity retailer as well, Enron coveted mandatory open-access of electricity in the state. Secondly, it needed a big market for its money-losing Enron Wind. Cloaking both corporate-welfare goals in the guise of a renewable mandate got media-worshipped environmental groups on board to help push SB 7 across the finish line.

Whether it was hiring John Palmisano, writing op-ed’s, working with Clinton/Gore, contributing $1 million to Resources for the Future in appreciation of their cap-and-trade work, or a myriad other things, Ken Lay worked a mile a minute to promote CO2 legislation, all to help a variety of Enron profit centers (see below).

Ken Lay as Political Capitalist

In my recent book, Capitalism at Work, I try to answer this question for readers in the introduction:

Who was Ken Lay, the architect and chairman of Enron from its formation in the mid-1980s until its bankruptcy? The once-celebrated visionary of the energy industry was not an engineer, as were most leaders in the energy sector. Lay did not possess an accounting or finance background, as did some senior executives. He never clawed his way up the corporate ladder in various operational divisions, much less built a company from scratch. No, Enron’s leader was a Ph.D. economist, interested in the big picture and the ways of political power. His résumé was top-heavy with Washington experience, acquired at three federal jobs, the last two regulating the energy industry.

Ken Lay’s interests and skill set dovetailed with the political-capitalist system he found when he became a Washington energy regulator in the early 1970s. Predictably, then, when Lay reentered the private sector after nearly six years of government service, his niche became running federally regulated interstate natural gas pipelines, assets that he knew well from his time at the Federal Power Commission (now the Federal Energy Regulatory Commission).

And when Lay got his own show as chairman and CEO of a Fortune 500 company, he lost little time in applying his academic training, considerable smarts, uncommon energy, keen ambition, and soulful persona to the government-opportunity/government-favor game. He was an extraordinary, mile-a-minute political capitalist (or rent seeker in the jargon of economics), eager to deploy the political means to propel Enron to the top of the energy industry—and then the whole business world.

Lay employed a political capitalism model for Enron:

Government favor propelled Enron’s profit-centers in domestic power plants, natural gas and electricity marketing, wind and solar power, infrastructure in underdeveloped countries, and unconventional natural gas production. Enron was all about complex federal laws and administrative regulations, such as special provisions within the Natural Gas Policy Act of 1978, Public Utility Regulatory Policies Act of 1978, Omnibus Budget Reconciliation Act of 1990, and Energy Policy Act of 1992—or FERC rulings such as Regulation of Natural Gas Pipelines after Partial Wellhead Decontrol (FERC Order No. 436: 1985), Pipeline Service Obligations and Revisions to Regulations Governing Self-Implementing Transportation Under Part 284 of the Commission’s Regulations (FERC Order No. 636: 1992), and Promoting Wholesale Competition Through Open Access Non-discriminatory Transmission Services by Public Utilities; Recovery of Stranded Costs by Public Utilities and Transmitting Utilities (FERC Order 888: 1996). The arcane was pure gold to Enron.

And then there was the legislative reform that Enron could not land. In the 1980s, Lay’s company failed to persuade lawmakers to enact a sizable oil tariff to reduce interfuel competition to the company’s natural gas operations. Enron also fell short in its 13-year drive to persuade the federal government to regulate greenhouse-gas emissions, particularly carbon dioxide (CO₂), an intervention that promised profit opportunities in no less than seven company divisions. Still, as an ex-Greenpeace official observed, Enron was “the company most responsible for sparking off the greenhouse civil war in the hydrocarbon business.”

Green Enron–As in Money

Enron’s climate alarmism was driving no less than seven profit centers:

Beginning in the late 1980s, global warming became a bread-and-butter issue for Ken Lay, Enron’s leader and up-and-coming industry visionary. Enron in the 1990s became a full-fledged “green” company, practicing “energy sustainability” with its investments in solar power, wind power, energy-efficiency services, and environmental services.

No U.S.-based company sounded the tocsin over climate change more than Enron. What John Browne did as head of the international energy major BP, Ken Lay did in the United States, working with interest groups and political leaders to push the energy industry and public toward CO₂ regulation. Lay had his reasons—seven in terms of company profit centers, all of which stood to gain from government restrictions on carbon emissions. They involved:

· Natural gas production (relative to oil and coal),

· Natural gas transmission (relative to oil and coal),

· Natural gas-fired electric generation (relative to oil and coal),

· Energy outsourcing (a/k/a energy efficiency) services,

· Renewable energy generation (wind and solar),

· CO₂ emissions trading (joining company trading in sulfur dioxide and nitrogen oxide), and

· Environmental outsourcing (a/k/a environmental services).

Of these, Enron’s natural gas activities were core, profitable activities (and “win, win” economically and environmentally, in their important applications). But the last four areas were problematic from the start and never profitable, even with special government favor. In retrospect, almost no amount of government subsidy would have been enough for these nascent businesses.

Enron and Environmentalists

Enron under Lay worked closely with environmentalists:

On the environmental front, Enron practiced sustainable development by sounding the alarm over man-made greenhouse-gas emissions beginning in 1988, supporting Clinton/Gore’s 1993 proposal for a Btu tax, aggressively investing in solar power in 1994, jump-starting the U.S. wind industry with the purchase of Zond Corporation in 1996, spearheading the effort behind what became the nation’s strictest renewable-energy mandate (in Texas in 1999), and lobbying the Bush/Cheney administration (unsuccessfully) to regulate CO2 emissions. Enron received a climate-protection award from the EPA and a corporate-conscience award from the Council on Economic Priorities. The company advanced the interventionist agenda of the President’s Council on Sustainable Development, Business Council for Sustainable Energy, Pew Center on Global Climate Change, and Heinz Center for Science, Economics, and the Environment, as well as sponsoring Earth Day events in Texas, California, and Oregon. Ken Lay’s Enron was pointing the way to a sustainable-energy future—or so it was thought.

Enron and Social Corporate Responsibility

Enron also preached social corporate responsibility:

In the fall of 2001, Ken Lay’s words set the tone for what would be Enron’s last Environmental, Health, and Safety Management Conference:

“We believe that incorporating environmental and social considerations into the way we manage risk, govern our projects, and develop products and services will help us maintain our competitive advantage. As we move forward, we will leverage our intellectual capital and innovative capabilities to promote sustainable business practices around the world.”

At this meeting, Enron’s CSR task force listed its “Accomplishments to Date,” which are reproduced verbatim below:

• Secured board oversight of social/environmental performance
• Expressed support for Universal Declaration of Human Rights
• Completed corporate responsibility task force
• Developed and pilot-tested human rights audit
• Developed security and human rights guidelines
• Established formal partnerships with WBCSD [World Business Council on Sustainable Development], IBLF [International Business Leaders Forum], and CI [Conservation International]
• Identified language to strengthen code of ethics
• Providing project support—Calypso, Transredes, Dabhol and Cuiabá
• Responding to stakeholder concerns on an ongoing basis

The goals for 2002 included:

• Formally adopt CERES Principles
• Complete indigenous peoples’ policy
• Specify social/environmental expectations in formal relationships with vendors and contractors
• Review results of stakeholder survey and develop strategy to address outcome
• Create awareness of social/environmental trends among [Enron’s] origination and investment groups
• Add corporate responsibility performance attribute to PRC [Performance Review Committee] process
• Present task force recommendations to Dr. Lay and senior management

Make no mistake—Enron was trying to practice CSR, so that it could monetize its “green” energy model. This had been Lay’s strategy for a decade with natural gas, as well as internationally, as with Enron Global Affairs’s 1999 launch of the Social and Environmental Responsibility Program.

Enron’s CSR initiatives came to a screeching halt in December 2001, along with all of the company’s other discretionary activities. The company was out of money and out of time. But the ship went down with its green lights on.

Conclusion: An Anti-Capitalistic Company

What is my book’s conclusion?

The fundamental lesson from Enron is this: Capitalism did not fail. The mixed economy failed. The capitalist worldview is stronger, not weaker, post-Enron. But there is another, deeper lesson that explains Enron and the mistakes of the intellectual mainstream before, during, and after Enron’s active life. It is that arrogant behaviors, or what in the Enron vernacular is called the smartest-guys-in-the-room problem, can strike anytime and anywhere. Whether in business or academia—or any profession or association—conceit, deceit, and dogmatism are the bane of personal, intellectual, and organizational success.

And the smartest-guys-in-the-room problem plagues the Obama approach to energy, which will be the subject of a future post.

—————————————————

(1) Ken Lay. Quoted in “The Energy Industry in the Next Century: Opportunities and Constraints,” in Irwin Stelzer. ed., Energy After 2000 (VIII Repsol-Harvard Seminar, June 1997), 21.

“Since 1976, Enron [and predecessor company] employees have been at the forefront of developing air credit trading policies for governments and businesses…. Enron today is the largest and most sophisticated air emissions credit and allowance trading organization in the United States. Since 1990, Enron has participated in over 80 SOx allowance transactions and has also been active in establishing policies for trading NOx in the United States and carbon [dioxide] world-wide.”

- “Enron Corp.’s Participation in Air Trading,” Enron Capital & Trade Resources, November 4, 1996 (copy in files).

“If implemented, [the Kyoto Protocol] will do more to promote Enron’s business than will almost any other regulatory initiative…. The endorsement of [CO₂] emissions trading was another victory for us…. This agreement will be good for Enron stock!”

- John Palmisano (December 12, 1997) from Kyoto, Japan. Quoted in Bradley, Capitalism at Work, p. 307

“If anyone has environmental credit needs, that’s what we do. We want to be to be the clearing house to monetize available credits or to manage risk.”

- Kevin McGowan, director of coal and emissions trading, Enron Corp., (Enron Biz, November 29, 2000, copy in files)

“We are a green company, but the green stands for money.”

- Jeff Skilling, CEO, Enron Corp., quoted in Capitalism at Work, p. 310.

Enron is Exhibit A against Waxman/Markey’s cap-and-trade proposal. Enron was poised to make money coming and going by being the nation’s and the world’s largest market-maker in CO₂ permits, and the “smartest guys in the room” were ready to game and game for incremental dollars (remember California?). Enron’s business model, in retrospect, had to do with regulatory complexity, as I note in the introduction to my book Capitalism at Work. Enron gamed the highly prescriptive accounting rules (GAAP), tax system (the corporate tax division was actually a profit center as told in an exposé in the Washington Post.

And so, happy-be-it that, in the words of a Ken Lay (with Roger Sant) editorial, “Controlling Climate Change: It Is Not a Sprint, It Is a Marathon” (Energy Daily: September 1, 1998). Such a “marathon” (and although not mentioned, complexity) is what Enron wanted and needed—to make money month after month, year after year in a political-market setting.

Enron, remember, was a green ( “we want cap-and-trade”) company, but the green stood for money, as Jeff Skilling deadpanned to a perplexed coal executive who encountered a “green” Enron memo on his first day on the job. (Enron quietly got into coal in its last years.)

All this confirms the fears and disdain of uber-vocal NASA scientist James Hansen, who complains in his recent commentary,  Worshipping the Temple of Doom:

“Governments are retreating to feckless ‘cap-and-trade’, a minor tweak to business-as-usual….

“Why is this cap-and-trade temple of doom worshipped?  The 648-page cap-and-trade monstrosity that is being foisted on the U.S. Congress provides the answer.  Not a single Congressperson has read it.  They don’t need to – they just need to add more paragraphs to support their own special interests.  By the way, the Congress people do not write most of those paragraphs—they are ‘ suggested’ by people in alligator shoes.”

Enron Lives! in Waxman-Markey. The sooner the public, media, and intelligentsia realize this, the faster cap-and-trade can be put in the dustbin of bad ideas.

The current debate has proven one thing very clearly. The U.S. climate debate is not about saving the climate.* It is about regulation for its own sake in the name of “saving the climate.” This fact should give pause to everyone who really cares about human welfare. Cap-and-trade is at odds with the economic wealth needed to adapt to a future that cannot be centrally planned by politicos.

* With Waxman-Markey’s aspirational goal of an 83% reduction of U.S. emissions of greenhouse gas emissions by 2050 reversing out only about 3 percent of the human influence on climate (according to IPCC model projections), equating to about 0.09°F, this is an insurance policy with virtually no redemption value.

The headline at Climate Progress, the blog site of Joseph Romm, senior fellow at the Center for American Progress, read:

MYSTERIOUS INDUSTRY FRONT-GROUP AFFILIATED WITH KEN LAY’S FORMER SPEECHWRITER LAUNCHES ANTI-WAXMAN-MARKEY ADS WITH PHONY MIT COST FIGURE

And here is what Romm specifically says about me:

Who is the [American Energy Alliance]?  Good question.  The AEA says on its website:

“AEA is an independent affiliate of the Institute for Energy Research (IER)….”Aside from the cryptic nature of the oxymoronic phrase “independent affiliate,” it is worth noting that the Institute for Energy Research “has received $307,000 from ExxonMobil since 1998.” The President of IER is one Robert Bradley “who previously served as Director of Public Policy Analysis at Enron, where he was a speechwriter for CEO Kenneth Lay,” who was “convicted on fraud and conspiracy charges on May 25, 2006.”

And here is what Romm said about me in March at Climate Progress:

So it is only fair to note that the myth articles were “produced with support from the Institute for Energy Research …. The President of IER is Robert Bradley ‘who previously served as Director of Public Policy Analysis at Enron, where he was a speechwriter for CEO Kenneth Lay,’ who was “convicted on fraud and conspiracy charges on May 25, 2006.”

’Nuff said on that.

His implication is that I am somewhere between a dunce and a fraud because of my association with Enron and Ken Lay. But Romm should know better. He and I had email wars when I was at Enron, and Joe was Enron’s cheerleader, even complaining to his “friends” there about me.

Here is the background, as told in my book Capitalism at Work (p. 311):

Turning from the supply side to the demand side, Enron excited environmentalists (as well as stock analysts) with Enron Energy Services (EES), known in the trade as an energy service company (ESCO). EES offered energy outsourcing services for large commercial and industrial customers under long-term contracts. Under these contracts, the company and Enron would split the energy-cost savings, at least theoretically. Who could complain about private-sector strategies that saved money and reduced energy usage and emissions at the same time?

EES co-chairman Thomas E. “Tom” White estimated the customer cost savings around 20 percent. Ken Lay put the energy-use savings near 10 percent, which inspired some within the company to advocate certifying customers as “Kyoto compliant” (the idea was ultimately rejected).

But such reductions were only the beginning, according to energy conservationists Amory Lovins and Joseph Romm. They preached in articles, books, and talks that so much more energy savings and greenhouse gas emission reductions were profitable that compliance with the Kyoto Protocol was possible, if not easy.

“ESCO’s are DEFINITELY the future,” Joe Romm emailed Enron. In his book Cool Companies (1999), Romm wrote: “Cool buildings that cut energy use—and hence greenhouse gas emissions—in half are increasingly commonplace.” He saw massive opportunities for easy savings. “The entire notion that low-hanging fruit is easily exhausted turns out to be a myth,” Romm wrote in italics.

EES bought 200 copies of Cool Companies to give to existing and potential customers. The respect was mutual. Enron is “a company I greatly respect,” Romm emailed.

Again, Romm was the  fan of Enron’s “energy sustainability” initiatives, not me. While he was lauding Enron to Enron, as well as to his external audiences, I was fighting Enron’s climate alarmism and “green” energy ploys (windpower, solar, etc.).  Some Enron executives wanted me fired, as documented in these  memos posted at Political Capitalism, and I paid the price for my views come compensation time.

So allow me to turn the tables. The public policies that Joseph Romm promotes today are the same ones that the late Ken Lay promoted during Enron’s heyday, as I have documented in Capitalism at Work. The party in power is also following the Enron playbook (see my Reason.tv video, Obama’s Enron Problem).

Romm Exaggeration and Enron Fraud

Romm’s Cool Companies was the calling card of one of Enron’s most fraudulent divisions, Enron Energy Services. EES was telling the world about all the energy savings they were capturing in their outsourcing contracts–savings that the customers themselves could not find with their own in-house energy engineering. But the contracts promised them savings, so many companies signed (see below). 

And sure enough, the easy fruit of energy savings was really not so easy to pick. Enron was manufacturing savings via “mark-to-model” accounting where arbitrary assumptions created paper (GAAP) profits that were net-present-valued and reported as current-quarter earnings. The grandiose claims in Cool Companies about easy costs savings (gee–the companies did not see it, but Enron’s smartest did!) were exactly what EES needed to get the customers–and analysts–to drink the Kool-aid.

And that’s why Joe Romm was Enron’s favorite, and Enron was Joe Romm’s favorite.

Mortgage-lending regulation is certainly the (sub)prime example in regard to the present financial crisis–coupled with the Fed’s easy-money policy, which sparked an artificial boom. But my essay also brings attention to  the most politically motivated company in the history of the energy industry–Enron. In its prime, this company was considered “innovative” and “progressive” on energy and environmental issues such as renewables and climate-change.

But Ken Lay’s company never turned a profit with its half-owned Solarex Corp. and with Enron Wind Corp. CO₂ trading never got off the ground. Enron Energy Services, an company to which firms could supposedly outsource their energy-management, lived off accounting tricks and was dismantled soon after the parent’s bankruptcy. The Left environmentalists’ favorite company imploded, but not before the company’s lobby machine had done its part to saddle Texas consumers with a renewable-energy quota. This law now accrues to the benefit of the purchaser of Enron Wind, General Electric.

My essay, which introduces some themes from my new book, Capitalism at Work, concludes as follows:

A new legal relationship between government and the economy is required — free-market capitalism in place of political capitalism. With this, should come a new understanding of the proper philosophy of entrepreneurial capitalism — tough-love prudence in place of the amorphous doctrine of “corporate social responsibility.”

The capitalist myth is lovely and youthful. It kicked off the industrial revolution, but maybe we need a new one.

Instead of looking for new government quick-fixes, business and government leaders need to discover (I wish I could say, rediscover) what is real capitalism–free-market capitalism–in theory and practice.

Today’s problems can be traced to the government side of the mixed economy, as well as a perverted capitalist ethic in the boardroom. (The two are related to each other.) Business prudence has been weakened by politically set and artificially low interest rates, by regulations, and by government jawboning for “common-good” lending.

Real capitalism is about government neutrality and noninterference in the economy. From the business side, it is about principled entrepreneurship ™, defined as “maximizing long-term profitability for the business by creating real value in society while always acting lawfully and with integrity” (see p. 79 here).  Such value creation can only be measured in a free market where consumers have choices, and where profits and losses are meaningful measures of business performance. And such wealth creation eschews political profiteering, which redistributes and destroys value rather than creates it. Thus political capitalism is discouraged in favor of free-market capitalism by the company practicing principled entrepreneurship.

The World Economic Forum has always been a haven for the political capitalists. In 2001, Ken Lay gave five talks at Davos on his views of Enron and corporate social responsibility (see the Epilogue in Capitalism at Work about Enron’s anti-capitalistic business model).

Indeed, a new business model is needed, and one quite different from what the participants are likely to hear.