“Business that is everything to everyone is not anything at all in itself.”

 - Elaine Sternberg,  Just Business: Business Ethics in Action. Oxford University Press, 2000, p. 33.

No doubt his handlers have given Al Gore the word: go easy on climate warming (aka climate change). The issue has little traction. You are the wrong voice for the cause. Solyndra. Climategate 2.0. Winter snows…. Not now, Al.

Take it up a notch! they must be telling him. Think bigger. Subsume the issue…. And so Gore’s new piece in the Wall Street Journal barely mentions his pet issue of (man-made) climate change but something much larger and amorphous.

“A Manifesto for Sustainable Capitalism,” coauthored with David Blood, calls for “abandoning short-term economic thinking for ‘sustainable capitalism’.” Such is code for that subjective, holistic, anything goes doctrine of corporate social responsibility, which I elsewhere questioned as follows:

The discipline of business ethics should be reoriented around a more sophisticated understanding of capitalism proper. Business ethicists should also respect methodological individualism given that in both the primary and final analyses, businesses do not act, individual businessmen and businesswomen do. Because corporate social responsibility (CSR) speaks to the elusive whole more than to the parts, much business-ethics thinking has become prone to a central- and social-planning mentality.

Think Enron! As I wrote in this rebuttal letter published yesterday in the Journal:

Al Gore and David Blood’s “A Manifesto for Sustainable Capitalism” (12/14/11) reminded me of nothing so much as Enron Corporation, whose demise ten years ago is still the topic of debate and learning.

“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,” Ken Lay stated Gore-like. “As we move forward, we will leverage our intellectual capital and innovative capabilities to promote sustainable business practices around the world.”

Enron had divisions in wind, solar, emissions trading, and energy efficiency services–pillars of sustainable capitalism in Gore and Blood’s calculus. Enron, according to Greenpeace official Jeremy Leggett, was also “the company most responsible for sparking off the greenhouse civil war in the hydrocarbon business.”

Enron’s “green” bets proved quite unsustainable. The company’s renewable energy ventures never turned a profit, and its energy efficiency services via Enron Energy Services was an accounting fraud.

“I have never known much good done by those who affected to trade for the publick good,” Adam Smith cautioned in 1776. “It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.” Remember Enron, and beware of ‘sustainable capitalism’.

[Ed. note: This week marks the 10th anniversary of Enron's bankruptcy filing (December 2, 2001). Enron's view of energy sustainability drives the Obama Administration today. Yesterday, this series looked at Enron's Kyoto moment.]

 In the fall of 2001, Ken Lay 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 Corporate Social Responsibility (CSR) task force listed its “Accomplishments to Date,” which were:

• 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.

Shhhh! A Little Coal

“I have never known much good done by those who affected to trade for the publick good,” Adam Smith cautioned in 1776. “It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.” Milton Friedman said the same in his 1970 essay on the social responsibility of business.

And on close inspection, Enron was trying to eat its cake and have it too. The company was building oil-fired power plants internationally and erecting (sans press releases) a profitable coal subsidiary. This created internal tensions, but Enron president Jeff Skilling assuaged the concerns of one of his coal executives with the words: “Mike, we are a green energy company, but the green stands for money.”

Still, with $300 million (and counting) invested in coal properties, and the imminent prospect of becoming the world’s leading coal trader, coming on top of a decision to sell the solar division, Enron’s head of European government affairs warned in 1999, “Our position as a ‘green’ company is getting thin.”

It was not easy being green in other ways too. Environmentalists lambasted Enron for building energy projects in pristine areas, even wind turbines in southern California. Wind (when blowing) was mostly backing out natural gas, the cleanest of the fossil fuels, which created a financial downside for natural gas giant Enron.

Enron stayed silent on the patent disadvantages of wind relative to natural gas in terms of cost and reliability. Wind is a free energy source, but turning wind into electricity is very capital intensive compared to generating electricity with relatively BTU-intensive fossil fuels. Wind power has been propped up by disproportionate tax subsidies, as well as by state-level mandates requiring that utilities buy renewable energy whether or not they need it.

In particular, the windpower boom in Texas was not about economics. It was about a successful lobbying effort by Enron Wind Company in 1997 to include the nation’s strictest renewable quota mandate in an electricity restructuring bill. Texas Governor George W. Bush aided Ken Lay on that one.

————–

This excerpt is taken from Robert Bradley, Capitalism at Work: Business, Government, and Energy (2009), pp. 309–310.

[Ed. note: This week marks the 10th anniversary of Enron's bankruptcy filing (December 2, 2001). Enron's view of energy sustainability drives the Obama Administration's "green 'dream' team" today, so such a look back at Enron's crony capitalism is merited.]

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 carbon dioxide (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.

Kyoto Protocol To “Monetize” Enron ‘s Agenda

But there was always hope.

In late 1997, an elated Enron climate lobbyist reported that a climate-change accord was reached in Kyoto, Japan, among 38 Annex 1 countries (the developed world) to reduce their collective greenhouse gas emissions by 5.2 percent by 2008–12 compared to base 1990 levels. The United States, itself committed to a 7 percent decrease, at least in principle, would need new waves of government intervention to reduce its emissions, which meant more subsidies and new mandates for politically correct renewable energies (wind and solar, not hydropower) and energy conservation programs.

Thus Enron’s John Palmisano infamously wrote from Kyoto:

If implemented [the Kyoto Protocol] will do more to promote Enron’s business than will almost any other regulatory initiative outside of restructuring of the [electricity] and natural gas industries in Europe and the United States…. The endorsement of emissions trading was another victory for us…. This agreement will be good for Enron stock!!

It was time to turn deeds into dollars, he added:

Enron now has excellent credentials with many ‘green’ interests including Greenpeace, WWF [World Wildlife Fund], NRDC [Natural Resources Defense Council], GermanWatch, The US Climate Action Network, the European Climate Action Network, Ozone Action, WRI [World Resources Institute], and Worldwatch [Institute],” reported Palmisano. “This position should be increasingly cultivated and capitalized on (monetized).

Enron was popular at Kyoto. Palmisano spoke on panels and received an award from the Climate Institute on behalf of Ken Lay and Enron. And the praise continued. Worldwatch Institute’s State of the World 1998 identified Lay’s company as a key player in a coming “energy revolution.” The authors explained: “Enron, originally a large Texas-based natural gas company, has made a strong move in the renewables field with its acquisition of Zond, the largest wind power company in the United States, and its investment in Solarex, the second largest U. S. manufacturer of photovoltaic cells.”

While closely associated with both Bush Administrations, Lay was ideologically closer to another political figure on the issue of climate change. “In Earth in the Balance, Senator Al Gore stated: ‘Higher taxes on fossil fuels … is one of the logical first steps in changing our policies in a manner consistent with a more responsible approach to the environment’,” stated Lay. “I agree.”

————–

This post is taken from Robert Bradley, Capitalism at Work: Business, Government, and Energy (2009), pp. 306–308.

“They about had an orgasm in Biden’s office when we mentioned Solyndra,” read a Feb. 27, 2010, email from [Ken] Levit to [Steve] Mitchell. A follow-up email from Mitchell to Levit later that day responded, “That’s awesome! Get us a [Department of Energy] loan.”

- Quoted in “Emails Reveal Biden Team’s Enthusiasm Over Solyndra Loans,” Fox News, November 9, 2011.

Kids in the taxpayer candy store. That describes the heady days when Solyndra executives and lobbyists gleefully found out that the politicians loved their speculative, defective product. It turns out that Solyndra was a photo-op for President Obama and his “dream ‘green’ team”–one that may well end up being their undoing. (Does Obama use the term ‘green jobs’ anymore?.)

Enron was the canary in the renewable-energy coal mine. Ken Lay had a vision for Enron to become the world’s leading renewable energy company, part of the company’s green and Corporate Social Responsibility imaging. [1]

Enron’s investments in solar and wind produced financial losses in each year of operation, but many photo ops were generated, including a solar project that duped the New York Times.

Solyndra’s orgasmic glee in Vice President Biden’s office reminds me of the dreamy memo by John Palmisano, Enron’s lobbyist in Kyoto, Japan, written the day after the Kyoto Protocol was ratified in late 1997.

With the tenth anniversary of Enron’s bankruptcy filing just weeks away, this is an opportune time to remind one and all of just what the whole global warming crusade meant for the most rent-seeking of all rent-seeking companies, Enron. Excepts follow….

“ THIS AGREEMENT WILL BE GOOD FOR ENRON STOCK!!”

BY John Palmisano, “Implications of the Climate Change Agreement in Kyoto & What Transpired” (12/12/1997)

“If implemented, [the Kyoto Protocol] will do more to promote Enron’s business than will almost any other regulatory initiative outside of restructuring of the energy and natural gas industries in Europe and the United States. The potential to add incremental gas sales, and additional demand for renewable technology is enormous. In addition, a carbon emissions trading system will be developed. While the trading system will be implemented by 2008, I am sure that reductions will begin to trade with 1-2 years. Finally, Enron has immediate business opportunities which derive directly from this agreement….

“I do not think it is possible to overestimate the importance of this year in shaping every aspect of the agreement. Three issues of specific importance to Enron are: (1)the rules governing emissions trading, (2) the rules governing joint implementation within Annex-1, and (3) the rules governing the proposed clean energy fund (which promises to dwarf the GEF as a fund for wind, solar, and power plant conversions.)….

“The clean development will be a mechanism for funding renewable projects. Again, we won. (We need to push for natural gas firing to be included among the technologies that get preferential treatment from the fund.)

“The endorsement of emissions trading was another victory for us.…

“I gave three speeches and received an award on behalf of Enron. The speeches dealt with emissions trading, energy efficiency/renewable, and the role of business in promoting clean energy outcomes. The award came from the Climate Institute and was for Ken Lay and Enron for our work promoting clean-energy solutions to climate change….

“Through our involvement with the climate change initiatives, Enron now has excellent credentials with many “green” interests including Greenpeace, WWF, NRDC, GermanWatch, the US Climate Action Network, the European Climate Action Network, Ozone Action, WRI, and Worldwatch. This position should be increasingly cultivated and capitalized on (monetized).

“(Parenthetically, I heard many times people refer to Enron in glowing terms. Such praise went like this: “Other companies should be like Enron, seeking out 21^st century business opportunities” or “Progressive companies like Enron are….” Or “Proof of the viability of market-based energy and environmental programs is Enron’s success in power and SO2 trading.”)….

“I predict business opportunities [for Enron] within 18 months. I predict this agreement will have very significant influences on the energy sector within OECD and transitional economies and will accelerate renewable markets in developing countries. This agreement will be good for Enron stock!!

—————-

[1] Bradley, Capitalism at Work: Business, Government, and Energy, (2009) pp. 8, 306–312.

Here is Ken Lay (with Roger Sant) a year later with more advice for California in its current debate over whether to pass California’s Prop. 23, a measure to suspend the Global Warming Solutions Act of 2006 (AB 32).

Enron had seven profit centers tied to regulating carbon dioxide (CO2). What ‘Enrons’ are involved in the climate scare today?

The op-ed from September 1998 follows:

Kenneth Lay & Roger Sant, “Controlling Climate Change: It Is Not A Sprint, It Is A Marathon.” The Energy Daily (September 1, 1998)

Man-made emissions of certain gases—primarily carbon dioxide from burning fossil fuels—could alter the world’s climate in the next century. The threat is long term and global, but the current debate is too narrowly focused on a 10 to 15 year target.

Although there is some disagreement among scientists on the rate at which climate change will occur or whether is already occurring, there is little doubt that world population growth, economic growth, inefficient energy use and heavy reliance on fossil fuels are a potentially disastrous mix.

As energy company executives, we are aware of the difficulty of meeting the climate change challenge. The good news is that we have time. The race, however, is not a sprint. It is a marathon. If we start sprinting—focusing primarily on emissions reductions in the next decade—we risk squandering our resources. But this is not a call for inaction. If we fail to start now, we will not finish in time.

One hundred energy and environmental leaders with very diverse views recently gathered at the Aspen Institute in Colorado to discuss climate change. We were encouraged to speak for ourselves and not be bound by our companies’ or organizations’ positions, and we were surprised at the level of consensus we reached.

We believe a broad bipartisan majority of Americans could agree with these eight conclusions of the Aspen group.

1. Take a long-term focus.

Climate change is a long-term problem, and the focus should be on achieving sustainable levels of greenhouse gas concentrations at the least cost, not merely on near-term emissions reductions. Nevertheless, certain early actions, based on industry and other public suggestions, are desirable to develop institutions, mechanisms, technologies and domestic and international support for long-term programs.

2. Do not reject the Kyoto Protocol nor seek its ratification now.

The protocol agreed to last December and signed so far by 49 countries would require the U.S. to reduce greenhouse gas emissions by 7 percent by 2008 to 2012. It is an imperfect agreement that cannot be accepted unless it is improved.

Submission to the Senate now for the promised quick rejection would remove the U.S. from a constructive political leadership role and put America at a competitive disadvantage in the development of a sustainable energy system. A delay offers an opportunity that should be attractive for both proponents and opponents to broaden the international base of support and participation, to begin to reduce the cost of compliance, and to take the issue out of the partisan political area in 1998 and 2000.

3. De-politicize the issue and educate the public.

U. S. political and intellectual leadership should undertake a high-priority effort to increase public understanding of the issues, moderate the political aspects of the debate and develop a broad public consensus that can be sustained through many electoral cycles.

One option for the administration to consider is the establishment, in consultation with Congress, of a bipartisan blue ribbon commission to lead in the development of a national consensus. Former presidents, Nobel Prize winners and leaders of similar stature could help put the debate on a constructive plane.

4. Establish bilateral programs with developing countries.

A major concern with the Kyoto Protocol is the failure of key developing countries to participate. As the expected largest emitters of greenhouse gases in the next century, they must be a part of any solution, yet their immediate economic needs make it difficult for them to commit resources to solving a future problem that they argue was caused by the industrialized nations.

The administration should work aggressively and quickly to establish bilateral carbon reduction programs with countries such as China, India and Brazil. A focus on an early start toward cost-effective energy efficiency and a long-term reduction in the dependence on fossil fuels would allow them to participate in an international climate change approach while also contributing to their economic development.

5. Increase R&D

To reduce the cost of eventual stabilization of greenhouse gas concentrations in the atmosphere, we should significantly increase public and private spending for research and development of lower carbon and carbon-free fuels, technologies and systems, including end-use efficiency and the capture and non-atmospheric disposal of carbon dioxide.

Such spending should build on the successes and failures of past programs. Coordination between public and private research efforts should be increased, and the commercial deployment of successful technologies should be left to the private sector.

6. Set the rules for crediting early voluntary reductions.

Many industries are ready and willing to make voluntary emission reductions now. They fear, however, that any future program will take their lower emissions as a new baseline. The government, with broad industry and other public involvement, should quickly establish rules for crediting these voluntary emissions reductions against any future requirements.

7. Review barriers to innovation.

Many lower carbon technologies and more efficient systems are available now, but long-standing laws and regulations often discourage their adoption. These barriers should be reviewed and, where more valuable objectives are not being served, should be removed promptly.

8. Ensure policies are flexible.

We know enough to begin action now, but we also know from experience that we should expect surprises. Any governance mechanisms and policies we adopt should be sufficiently flexible to adapt to changing scientific knowledge and to the lessons we learn during implementation.

Adoption of these Aspen recommendations will help prepare us to win the climate change marathon. It is a race we cannot afford to lose.

Lay is chairman and CEO of Enron Corporation; Sant is chairman of AES Corporation and of the World Wildlife Fund. The views expressed are their own.

“It’s time to stop debating the issues surrounding climate change initiatives and focus instead on simple, realistic, cost-effective solutions. This is one area where an ounce of near-term prevention will be worth considerably more than a pound of cure later on.”

- Ken Lay, “Let’s Have an Ounce of Global-Warming Prevention,” December 1997.

“An ounce of global warming prevention is worth a ton of CO2 cure.  There are no emergency rooms for a sick planet.”

- Edward J. Markey (D–MA), “Second Life Remarks to the Virtual Bali UN Climate Conference,” December 2008.

The New York Times and other media outlets have identified the principled free-market advocates Charles and David Koch as supporters of California’s Prop. 23, a measure to suspend the Global Warming Solutions Act of 2006 (AB 32).

Given this publicity, it is only fair to resurrect the argument used by the late Ken Lay for doing just what AB 32 supporters want. After all, Lay and his political capitalism model for Enron and America is just the opposite of the Koch’s  ideal of free-market economy and Principled Entrepreneurship™ for America and business.

Lay Op-Ed: December 1997

An op-ed published by Ken Lay in the Houston Chronicle on  December 5, 1997 (p. 47A–no longer available*) provides a case study of misdirection by a corporate CEO to benefit his profit centers. “Let’s Have an Ounce of Global-Warming Prevention” portrays Enron and like companies as having the climate solution at their fingertips when, in fact, a pound of government was not worth an ounce of prevention or cure. Indeed, in the most widely read post in the history of MasterResource, Chip Knappenberger calculated that an 83% reduction in U.S. CO2 emissions by 2050 (the aspirational goal of the Waxman–Markey bill) was worth less than one-tenth of one degree of avoided warming from the alarmists’s own climate models.

And the temperature effect is even more de minimis California, which produces 6.2 per cent of U.S. CO2 emissions and 1.4 percent of global CO2 at present.

Here is the Lay op-ed from the pre-Kyoto days.

“Let’s Have an Ounce of Global-Warming Prevention”

- by Kenneth L. Lay, Chairman and CEO, Enron Corp.

The international climate change treaty negotiations in Kyoto offer the chance to prevent, at surprisingly low cost, a global warming scenario that might otherwise prove extremely expensive. Unfortunately, the career naysayers will attempt to confuse the debate, while companies that neither challenge nor support the scientific foundations for near-term action could waste a tremendous opportunity to stimulate realistic climate solutions.

Since, for most companies, control of greenhouse gas emissions is not an important issue, incremental and flexible regulatory programs would have negligible near-term impacts on the U.S. economy. Exports, for example, would suffer little, because of their relatively small energy component and the likelihood that energy prices will not increase significantly. Additionally, the cost of carbon reductions will decline as mass production meets the growing domestic and overseas market for “green” technologies. According to the Alliance to Save Energy, smart regulatory programs could even create as many as 800,000 new jobs.

There are three reasons why regulatory action is warranted. First, the science—although not conclusive—is substantial, and the absence of ironclad certainty does not justify apathy. Although industry has frequently opposed environmental or health regulations that were later justified by proof measured in deaths, illness and injury, industry has not always cried wolf—productivity and competitiveness can be hindered by poorly designed regulation. This is why we should rely on systems such as emission credit trading to mitigate the impact of climate change.

Second, the cost of obtaining “dead certain proof” could be high. Even if one argues that the science is not perfect, one must also acknowledge that the cost associated with certainty could be measured in more heat waves, pest infestation, storm damage and rising sea levels. A realistic regulatory program would set in motion public and private sector initiatives to capture the cheap reductions as soon as possible, while we continue to validate the science.

Third, the cost is low for insurance that takes the form of new national regulatory programs. With the right policies, such as a carbon credit trading program and incentives to start reducing carbon emissions sooner rather than later, the cost of control for the next five years would be negligible.

Stephen Decanio, an economist with President Reagan’s Council of Economic Advisers, has pointed out that to cut emissions from 1990 levels by 20 percent, eight climate economic models show gross domestic product losses of .9 percent to 1.7 percent, but that a 1.0 percent loss of GDP would amount to “less than six months of normal economic growth.” This means a half year’s delay in reaching the standard of living that would have been achieved without emissions curtailment—hardly the end of Western economies.

Why is there so much confusion about costs? When economic modelers use different assumptions, the models yield a wide array of results. But when Robert Repetto of the World Resources Institute recently analyzed many of the economic models forecasting impacts of a carbon control program, he found that when they used the same assumptions, the models gave generally similar results, namely a small and potentially favorable macroeconomic impact. This makes sense, since for 95 percent of U.S. industrial employment, energy costs are less than 5 percent of the value of total output.

The regulatory flexibility currently advocated by the more pro-active members of industry builds on 20 years of experience with air pollution credit trading in the United States. The General Accounting Office and U. S. Environmental Protection Agency have documented that between 1976 and 1995 these programs saved U.S. industry billions of dollars, as compared with alternative command and control regulatory schemes. Current economic studies show that carbon-control costs could be reduced by 70 percent if international credit trading is employed.

The keys to success are simplicity, incrementalism and an early start date. Steady reductions of 1 percent to 2 percent per year from our currently high emissions base will prompt a clear demand for solar power, wind power, fuel cells and other 21^st century technologies, thereby creating a demand for efficiency in energy and manufacturing.

To solve the climate change problem, we need to implement those systems that reward people for saving energy, reducing emissions and building a culture that identifies and corrects inefficient use of resources. Meanwhile, low-cost carbon reductions will be achieved, as well as nitrogen dioxide, particulate and sulfur emissions reductions. If the problem turns out to be a mirage, we can stop. If the problem is more severe than expected, then we can phase in larger reductions.

It’s time to stop debating the issues surrounding climate change initiatives and focus instead on simple, realistic, cost-effective solutions. This is one area where an ounce of near-term prevention will be worth considerably more than a pound of cure later on.

* The Houston Chronicle does not have live links to much of its historic content. The Houston/Gulf Coast-based Citizens Environmental Council (CEC) referenced Lay’s piece here.

“We’re trying to minimize the package,” [Sen. John] Kerry said yesterday of the 987-page bill. “We’re trying to keep it simple. We’re trying to keep it transparent and open and understandable for why something took place.”

- Darren Samuelsohn, “Kerry-Lieberman Bill Uses ‘Fewer Buckets’ in Giving Out Highly Prized Allowances,” E&E News, May 14, 2010.

“One often speaks without seeing, without knowing, without meaning what one says.”

- Jacques Derrida, quoted in Mitchell Stephens, “Deconstructing Jacques Derrida; The Most Reviled Professor in the World Defends His Diabolically Difficult Theory,” Los Angeles Times Magazine, July 21, 1991.

The late postmodern philosopher,  Jacques Derrida (1930–2004) would find intellectual kinship in the political debates about climate and energy coming from the party in power. If alive today, Derrida would nod approvingly at Senator John Kerry’s above I-say-it, it-is-true inversion of reality. It ranks right up there with Ken Lay and Jeff Skilling telling the world after the Enron collapse that Enron was a great company.

Donway Unmasks Enron’s Inner Philosophy

Roger Donway was the first person to identify Enron as a postmodern company. In “The Collapse of a Postmodern Corporation,” he wrote:

But if Enron’s executives were neither incompetent nor crooked, what brought Enron down? I believe it was a culture of corporate values rooted in postmodernism. These were not your grandfather’s businessmen.

He explained:

The philosophical essence of the postmodern, or anti-Enlightenment, outlook is that there exists no external reality to which our beliefs should conform. On the contrary, say postmodernists, the nature of reality simply is what people believe and say it is. Of course, people cannot believe and say anything they like. Their beliefs and speech must be coherent and consistent. And if they want to work with others, they must ensure that the group is in agreement about what to believe and say. But that is the goal: constructing a shared narrative that supports the group’s desires and activities. So long as that is achieved, no “external reality” is going to come along to correct or punish them.

And Enron exhibited just this philosophy with this anecdote with involving CFO Andy Fastow:

In February 2001, Fastow went to New York to offer representatives of the bond-rating agencies some arguments that would lead them to raise their evaluation of Enron’s bonds. There is nothing unusual in that. The evaluation given to a company’s bonds determines the interest rate the company must pay when it borrows money. That, in turn, determines how much a company can borrow.

On this particular occasion, however, the agencies’ representatives said that the facts Fastow presented did not justify a change. Fastow’s response? If the agencies changed Enron’s ratings, Enron would be able to strengthen its finances, which would justify the higher rating. In short: if everyone would agree on a narrative that was supportive of Enron, reality would snap into line. The agency representatives laughed.

They laughed, but Fastow, Ken Lay, and Jeff Skilling were not smiling. This became a way of life, particularly as problems mounted and more desperate measures–but not midcourse corrections–were resorted to.

Donway concluded:

Getting everyone to agree on a supportive narrative seems to have been the principal goal of Enron’s postmodern accounting. The rating agencies would not sign on to the narrative until Enron was able to say certain things. Therefore, Enron must be able to say those certain things.

Enron’s postmodernism applied to its money-losing investments in solar power, wind power, and energy efficiency services. Gaming the regulations and fleecing the taxpayer was justified in the name of being “progressive” and “green” and practicing social corporate responsibility.

BP Postmodernism?

“Beyond Petroleum” BP, philosophically a sister company to Enron when it came to global warming and renewable energy, engaged in so-called greenwashing to sell the world on the belief that it was an environmental steward. But behind closed doors, it appears that the company’s mantra was to cut-cut-cut costs to achieve the profitability that better companies in its industry were achieving.

The environmental record of BP versus its peers speaks for itself. But BP has ended up not putting profits before people and the environment; it has put losses ahead of people and the environment.

The lessons of Waxman–Markey, Kerry–Lieberman, Enron, and BP point toward the badness of postmodernism–and the need to return to reason and reality going forward.

[Also see: "On the Fall of Enron and Ken Lay: Philosophical Fraud at an Errant Energy Company"]

———————————————————————————–

Appendix: Subjectivism Defined and Applied to Enron

This excerpt is from Capitalism at Work: Business, Government, and Energy (Scrivener: 2009, pp. 64–65):

The philosophical morass that Objectivism sought to escape was Subjectivism, defined by one philosopher as

the belief that reality is not a firm absolute but a fluid, plastic, indeterminate realm which can be altered, in whole or in part, by the consciousness of the perceiver—i.e., by his feelings, wishes or whims. It is the doctrine which holds that man—an entity of a specific nature, dealing with a universe of a specific nature—can, somehow, live, act, and achieve his goals apart from and/or in contradiction to the facts of reality, i.e., apart from and/or in contradiction to his own nature and the nature of the universe.

The escape from reality sanctified by Subjectivism—a philosophy whose modern incarnation can be traced back to Immanuel Kant (1724–1804) and whose contemporary manifestation is broadly known as postmodernism—can be played out on a grand scale by government tyrants, on a large scale by business tycoons, or in the microcosm of personal relationships. Postmodernism is a multi-disciplinary movement whose “primary goal has been to challenge convictions about the objectivity of knowledge and the stability of language.” Facts, truth, reality, communication, and open inquiry are more than questioned, as they are in the time-honored practice of “prove it”; they are trivialized as subjective and unknowable.

Postmodernism is a reaction to the outlook of modernism, “the notion of the freely acting, freely knowing individual whose experiments can penetrate the secrets of nature and whose work with other individuals can make a new and better world.” To modernists, reality and truth are knowable and discoverable, language is understandable, and improvement is achievable by comprehending, communicating, and implementing the wisdom of social and natural science. Human progress is the goal and vindication of modernism.

What is the argument of postmodernism, variously described as complete skepticism, contemporary relativism, cynicism, deconstructionism, nihilism, obscurantism, perspectivism, romanticism, and mysticism?

Postmodernists maintain that the biases of society, and particularly the predilections of those who wield power, make the disinterested search for truth a charade. “Objectivity,” it is held, is “a disguise for power or authority in the academy.” Perception is reality since reality is nothing more than “suspect dichotomies on the flux of events.” Reality is dismissed as a fleeting, impermanent subjective state. Natural science is viewed with suspicion; social science wholly rejected. Predictably, postmodernists are especially opposed to “the modern, industrial, and urban way of life,” because they sense what underlies it—reason, science, and freedom. Capitalism is despised as an arbitrary political economy with a class-based politics of truth.

Tensions and contradictions abound within postmodernism. It is a profoundly anti-intellectual intellectual movement. Postmodernists discredit themselves as seekers, communicators, and knowers of truth by questioning reality, language, and veracity. Somehow, they know that knowledge is unknowable. Postmodernists are “deeply disillusioned intellectuals” who want to change the world but cannot accept any end-states from capitalism to communism to anarchy. What began in literature and the arts as “a playful acceptance of surfaces and superficial style, self-conscious quotation and parody … and a celebration of the ironic, the transient, and the glitzy” turned into a nonsensical creed against human thought and progress.

Postmodernism creates a large void in place of what might otherwise be described as workable reality—a realm that is generally, albeit imperfectly, recognizable by seekers of truth. Not surprisingly, postmodernism is irrelevant outside of the ivory tower. There are no postmodern how-to business books, for example, because any such effort would comically demonstrate the difference between consumer-grounded realism and whim. Any “postmodern” business would crash and burn.

Postmodernism, denying “the individual as knower and doer,” becomes an ethos of “anything goes” and “never having to say you’re sorry.” Postmodernism allows Enron apologists to say that the company was “in great shape,” and outsiders “killed a great company.” Far from being a hypothetical possibility, such statements were made by disgraced former Enron CEO Jeff Skilling during a nationally televised congressional hearing in February 2002. Enron founder and chairman Ken Lay, on the eve of his trial, called on his former employees to step forward to “prove that Enron was a great company,” presumably by joining Skilling and himself in declaring it to be a fact. For both Enron leaders, these declarations were not—at least, not only—an attempt to “tell the same story” and protect each other at trial; they reflected a postmodern belief that a thoroughly shared narrative is reality. Enron was—and should always be remembered as—a postmodern company.

Postmodernists meet themselves coming and going in the Enron debacle. Enron created, in postmodern jargon, its own “language” and “truth” under the “hubris of power.” Postmodernists must shine a critical light on themselves to ask, is the reality of Enron unreal? And was the Enron debacle—marked by executives fighting reality with perception— postmodernism in action?

Also see Internet appendix 3.3, “The Roots of Philosophical Subjectivism,” at http://www.PoliticalCapitalism.org/BookI/Chapter3/Appendix3.html

“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 [Kerry-Graham-Lieberman'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 energy regulatory rules.

And 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 add 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 complained about 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.

[13 comments followed this post from May 14, 2009]

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Other MasterResource posts on Enron and cap-and-trade:

Power Politics: Enron Lives (From Ken Lay’s Natural Gas Standard to Today’s Cap-and-Trade) (December 5, 2009)

Who Was Ken Lay? (The Senate Should Know the Father of U.S.-Side Cap-and-Trade) (July 7, 2009)

Enron and Waxman-Markey: Response of Joe Romm (July 2, 2009)

Appendix A: CEI Press Release, Kerry-(Graham)-Lieberman Bill a Huge Payoff to Big Business (Will BP and Goldman Sachs Be at Kerry’s Press Conference?)

Washington, D.C., May 11, 2010—As Senators John Kerry (D-MA) and Joseph Lieberman (I-CT) prepare to introduce their long-delayed energy-rationing legislation, the Competitive Enterprise Institute calls on Americans to remember what is really at stake: government control over energy use and massive kickbacks to favored corporations.

“The bill crafted by Kerry and Lieberman – and sometimes Lindsey Graham (R-SC) – manages to have something to harm everyone except big business special interests,” said Competitive Enterprise Institute Director of Energy Policy Myron Ebell. “Environmentalists know it will have no discernible impact on the climate, but it will reward favored companies with massive windfall profits.”

Senator Kerry has admitted that the bill was written in close consultation with the companies and industries to be regulated, including the Edison Electric Institute and major oil companies. Kerry recently remarked “Ironically, we’ve been working very closely with some of these oil companies in the last months,” referring to BP, Conoco Phillips, and Shell. This process could only be considered “ironic” by someone unacquainted with the history of special interest lobbying in Washington, D.C.

“Cap and trade regulation, far from disciplining the energy sector, is poised to become one of the greatest wealth transfers from consumers to private corporations in the nation’s history,” said Ebell. “General Electric, Exelon, BP, Goldman Sachs, and Duke Energy will make out like bandits because of provisions they have written. That’s not democracy or capitalism. It’s political corruption and crony capitalism.” 

As public awareness of what cap and trade would cost American consumers has grown, the bill’s sponsors have responded not by amending their proposals, but by trying to fool the public with shifting terminology. Senator Kerry at one point renamed gasoline taxes “linked fees.” Sen. Lieberman remarked in April that he was dropping the phrase “cap and trade” in favor of “emissions reduction targets,” going so far as to joke about the in-name-only difference by asking a reporter “Remember the Artist Previously Known as Prince?”

“Lieberman is not the only one playing word games,” said CEI Senior Fellow Marlo Lewis. On-again, off-again co-sponsor Lindsey Graham recently said in an interview that he no longer considers the Kerry-Lieberman legislation either a cap-and-trade bill or a global warming bill because “There is no bipartisan support for a cap-and-trade bill based on global warming.”

“So, because climate alarm and cap-and-tax are no longer polling well, Graham now pretends he can change the bill’s nature simply by rebranding it. I’ve got news for these guys,” said Lewis. “Everybody knew it was Prince even before the Artist Formerly Known As changed his name back to plain old Prince. An energy tax by any other name is just as foul.”

Appendix B: IER Press Release, “Wall Street Wins with Cap-and-Trade, Consumers Lose”

 Washington, DC – As Senators John Kerry (D-Mass.), Lindsey Graham (R-S.C.) and Joe Lieberman (I-Conn.) prepare to unveil their much-awaited global warming legislation, many Americans find themselves wondering who will benefit from the proposal. Well, after a quick search of newspapers from the past few years, it’s obvious who wins and who loses: Wall Street wins, consumers lose. Following are a few selected articles that paint an abundantly clear picture of what’s at stake and why specific rent-seeking corporations are aggressively lobbying for implementation of energy rationing legislation.

It’s also important to note that while this trio of senators has been working for months—over six to be exact—behind closed doors with many of the companies and trade associations mentioned below, the American consumer, who will inevitably foot the bill through higher energy and electricity prices, was absent from the negotiating table.

While Sens. Kerry, Graham and Lieberman have publicly distanced themselves and their legislation from the House-passed Waxman-Markey legislation, their proposal, at its core, will achieve the same goal: it will artificially increase the price of coal, oil and natural gas through added legislation and regulation.

• Exelon, the nation’s largest nuclear power company, stands to rake in roughly an extra $1 billion to $1.5 billion a year if the House climate change bill passes, according to the company’s own estimates. The House is expected to vote on the bill on Friday… Exelon CEO John Rowe recently told a gathering of investors and senior executives that the energy bill “will add $700 to $750 million to Exelon’s annual revenues for every $10 per metric ton (MT) increase in the price of CO2 allowances.” Prices will range between $15 and $18 per metric ton, the report estimates, “implying a positive earnings impact of $1 to $1.30 per share.” (Huffington Post, 7.24.09)   
• Banks: Gearing Up for Carbon Trading…while U.S. policymakers continue to squabble over the details of the “cap-and-trade” proposal, big banks are gearing up for what they see as a new profit center. “U.S. carbon trading is coming,” says Louis Redshaw, head of environmental markets at Barclays’ (BCS) investment bank. “You have to be in it to win it.” Analysts figure rules will be in place by 2013, and carbon trading could top $1 trillion a year by 2020, according to research firm New Carbon Finance. At that size, carbon would rival oil as one of the largest commodity markets… The biggest banks in the U.S. and Europe are quietly preparing for the potential payoff in trading. France’s Société Générale (SCGLY) has set up a U.S. group devoted to carbon. Morgan Stanley, which already is active on the U.S. regional exchanges, says it will expand its unit once policymakers finalize the rules. (Business Week, 5.28.09)  
• Behind the Green Doerr… In essence, Doerr is helping to create the biggest new market the world has seen since the dawn of the oil industry—and asking for taxpayer dollars to do it. Doerr regularly trots out chum Al Gore to run through his Inconvenient Truth slide show in front of influential audiences of businesspeople and politicians. Doerr has an unlikely solution to the tech-bubble problem: He denies there ever was one. “People think of it as a bubble,” he says, gesticulating enthusiastically. “I prefer to think of it as a boom. The payoff on some of these innovations was longer term.” Asked if greentech could repeat the dotcom crash, Doerr admits, “It’s possible.” He pauses and rubs his forehead before repeating, “It’s possible.” Kleiner Perkins partner Ray Lane… goes further. “A bubble? You can almost count on it…” “Bubbles are common. They end badly for those who come in late. For those who come in early, it’s not that bad.” But he predicts that alternative energy will get overheated and others will undoubtedly go up in flames. “If the bubble develops out of a whim,’’ he says, “then shame on investors. They need to get burned.”  (Forbes, 4.16.07 )   
• Chemical Makers Poised to Gain In New Cap-and-Trade System…     DuPont Co. expects that by 2015 its sales from renewable materials that displace fossil fuels will nearly double to $8 billion. That could include sales of ethanol made from corn cobs and switchgrass that the company is developing in a joint venture with food-ingredient company Danisco AS. German chemical maker BASF SE sees big business opportunities in the weatherproofing of residential homes, which typically contain an average $17,000 worth of chemical products, according to the chemistry council. There’s room to raise that to up to $30,000 per house, says BASF. Among its weatherizing products: tiny wax-filled capsules that can be embedded in plaster, wall board and insulation. The wax absorbs heat when it melts and releases it when it solidifies.  (Wall Street Journal, 6.5.09)       
• Industries Hope for a Feather in Their ‘Cap and Trade’ Emissions Plan…      Robert Stavins, a professor of business and government at Harvard University, said a cap and trade program would be fantastic for GE and other companies that sell products that consume power. He said that if energy costs go up as a result of the regulation — something he believes is likely — a wide array of products from appliances to power plants would become prematurely obsolete and need to be replaced with greener models.  (Politico, 2.28.07)   
• One major group of recipients of the free money being given to industry in the form of carbon permits are the electric utilities     , represented in Washington by the Edison Electric Institute. Along with the coal and steel businesses, the utilities are positioned to receive a huge portion of the carbon permits — some of which will be disguised as measures for consumers — and have become one of the nation’s highest-spending lobbies, working to ensure that their interests are served by cap-and-trade.  (National Review, 7.2.09)  
• Rio Tinto to Congress: Get going on carbon pricing  … Not only is Rio Tinto concerned about higher costs for energy required to run its business, but it also sees opportunities to sell more commodities, such as copper and aluminum, that could be used in climate-control technologies.  (Salt Lake Tribune, 4.12.10)   
• Imagine a Google executive demanding a tax on software, or General Mills asking for a tax on wheat.     That’s where we now are in the U.S. auto industry, with Ford CEO Alan Mulally believing he has little choice but to seek a tax on the very fuel that powers his products… Michael Jackson, CEO of AutoNation, the largest auto dealer in the country, was more explicit: “Mr. Mulally said it very elegantly last night and I will say it more straightforward. We need more expensive gasoline.” He figures a tax that guarantees a gas-price floor of $4 a gallon is a “good start.” Mr. Mulally, for his part, talked about how good Ford’s sales of small cars were in Europe, and that “one of the reasons is that gasoline and diesel is somewhere between seven and nine dollars a gallon.” So: The U.S. government mandates fuel-economy standards that force Detroit to make cars Americans don’t want to drive. When Detroit loses money on those cars, Washington throws taxpayer dollars at its mistake, and the car makers demand a tax increase that would prod Americans to buy the unpopular cars that Washington mandates. As for what the American consumer or taxpayer wants — or can afford in today’s economy — who cares? Welcome to government-run energy policy.  (Wall Street Journal, 3.17.09)     
• Randy Zwirn heads Siemens Energy Americas, part of a 19 billion euro revenue business that accounted for 25% of the German conglomerate’s revenue in 2008. Siemens Energy’s fortunes are intertwined with the development of the global green energy industry, and often hinge on government policy that would support the development of renewable energy. Siemens produces wind turbines, photovoltaics and has developed a new generation of efficient large natural gas-fired turbines, in addition to its coal-fired generation and nuclear businesses. (Forbes, 6.11.09)

Editor Note: This commentary is reproduced, with slight revision, from the December 2009 issue of POWER magazine.

As director of public policy analysis in my last seven years at Enron, I participated in many legislative and regulatory debates involving electricity, although the public policy thrust of the company was the opposite of what I personally believed was good social policy.

While I favored free markets, the business model of Ken Lay (a PhD economist with years of Washington regulatory experience) centered on special government favor. Enron, for example, had seven profit centers geared to government pricing/rationing of carbon dioxide (CO ₂) emissions. And in the 1990s, the company was squarely behind a Btu tax. Today, Enron would be pushing cap and trade and a federal renewables mandate–and a lot of mandated energy efficiency with its profit centers in mind.

Backing Gas

Ken Lay’s political niche began innocently enough with a unique, highly focused natural gas strategy, one that would culminate in Enron’s 1995 self-description as “the world’s first natural gas major.” In pursuit of that goal, Lay promoted gas-fired power generation relative to coal. He countered the coal lobby’s contention that the 1970s shortages were the inevitable result of a tiring North American gas resource base. “We had a surplus of regulation, not a shortage of gas,” Lay would say, and Enron backed up its claim by offering utilities long-term fixed-priced gas contracts.

Enron also challenged the tendency of electric utilities to opt for coal plants over gas plants because, under public-utility regulation, the former’s higher capital cost created more rate base and thus more profits. Citing new combined-cycle technology, Enron made the case that gas was economically and environmentally superior to coal for new capacity. For example, in March 1992, Enron unveiled “the natural gas standard” in letters, press releases, and speeches. The standard, set forth under Lay’s signature, declared:

The advantages of generating power from a gas fired combined cycle plant are overwhelming: It is cleaner, cheaper, and more reliable than the coal and nuclear options. I propose that electric utilities and state [public utility commissions] adopt the “Natural Gas Standard” for power generation capacity additions. The standard should be applied in the following way — no new coal or nuclear power generating stations should be built unless they:

• produce electricity cleaner than gas combined cycle plants;
• produce electricity cheaper, per [kWh], than gas combined cycle plants;
• produce electricity more reliably than gas combined cycle plants.

I am obviously confident natural gas combined cycle generation will win when all three of these standards are considered.

This challenge was intended for public utility commissioners as much as for electric utilities and was less an attack on fuel-neutral free markets than on perverse regulatory incentives. Lay wanted “a fair field and no favor” for natural gas when competing with coal plants and nuclear power.

But Lay was no free marketeer. He was a pragmatist, searching for first-mover profits from regulatory change. And sure enough, Enron entered into the (government-dependent) solar market in 1994 and the wind market in 1997. Solarex and Enron Wind Corp. would not be profitable, despite a raft of government subsidies. But Enron wanted to be the world’s progressive, “green” company, a hubris that was part of a wider problem that brought down the company. (Ironically, renewables would later tend to replace natural gas as the swing fuel in electric generation.)

Cap and Trade = More Corporate Welfare

Fast forward to today. Aubrey McClendon and the U.S. Natural Gas Alliance have grabbed the mantle of Ken Lay and Enron by embracing climate legislation with a pro-gas flavor. Like T. Boone Pickens, McClendon wants special government favor — differentiated tax incentives and/or mandates for natural gas as a transportation fuel (at the expense of oil) and as an electricity generator (at the expense of coal). Increasingly, it is becoming clear that climate legislation is more about corporate welfare and political capitalism than about meaningfully reversing the human influence on climate.

President Obama’s energy/climate policy is all about the two things that Enron wanted most in its lifetime — cap and trade and a federal renewable standard. (Enron did secure a renewables mandate for Texas back in 1999 — the single most important reason for the U.S. wind power boom.) This is why I have referred to the Waxman-Markey climate bill as the Enron Revitalization Act of 2009.

Historians will document the role of Ken Lay as the grandfather of Waxman-Markey. But who is the father of cap and trade, you might ask? That title goes to a former Enron executive and Ken Lay protégé who took his get-out-in-front political model to the electric utility industry and was instrumental in the U.S. Climate Action Partnership’s drafting of what became HR 2454. But the story of James E. “Jim” Rogers must wait for another time.

Enron Lives!

—Robert L. Bradley is CEO of the Institute for Energy Research and a blogger at Master-Resource.org. His new book, Capitalism at Work: Business, Government, and Energy, is inspired by the rise and fall of Enron.

[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.

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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.

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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.

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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.