A Free-Market Energy Blog

WSJ’s “Heard on the Street”: Political Energy Down, Market Energy Up Post-Copenhagen (Remembering the risks of Enron’s political capitalism model)

By Robert Bradley Jr. -- December 26, 2009

Matthew Curtin’s Heard on the Street in the December 22nd Wall Street Journal, Green Investments Are Being Clouded by Copenhagen, caught my eye. Copenhagen not so much failed as energy reality won. The 19th century British economist W. S. Jevons would have smiled as neo-Malthusian politics fell victim to old fashioned consumerism, economic growth, free trade, and energy economics 101.

Copenhagen also brings into review the risky political capitalism model where profit-making is tied to special political favor rather than underlying consumer demand. Enron’s core business model was tied to rent-seeking, part of the problems that brought down the company in spectacular fashion.

Here is what Mr. Curtin wrote:

The Copenhagen climate summit will do little to spur further investment in environmental technologies.

That is hardly surprising given the fundamental flaw at the heart of the process: Negotiations to reduce global carbon dioxide emissions were premised on how much of the gas nations produce, rather than what they consume.

Industrializing countries feared the emissions curbs being demanded of them were a protectionist ruse by the developed world. One country’s production cuts, if achieved by reducing local CO2 emissions by relying on imports, is another country’s production increase, with no gain for the world’s climate.

The nonbinding accord cooked up by the world’s biggest industrial nations looks like the lowest common denominator you would expect from countries skeptical of each others’ motives and increasingly mistrustful of the science that predicts global warming.

For investors and business leaders, there is no extra clarity on an international regulatory framework that might help them predict the cost of CO2. Such certainty is critical for evaluating the investment merits of environmental projects to meet the emission reductions advised by the United Nations.

McKinsey has forecast such spending might amount to as much as €530 billion ($759.76 billion) a year by 2020 and €810 billion by 2030.

The price of CO2 in the European Union, which has the world’s most advanced emissions trading system, is around €14 a metric ton, less than half the level necessary to make many low-emission projects viable. The combination of the severe European recession, coupled with too generous issuance of trading permits, has undermined the perceived advantage of a market-based approach to carbon reduction over tax-based carbon pricing: that it leads to more predictable outcomes.

What is more, EU planning for the CO2 trading regime extends only to 2020, another problem when many CO2-intensive capital projects, like power stations, have far longer lives….

 The next day, Liam Denning wrote in his Heard on the Street piece, Delays Out of Copenhagen Fire Up Coal:

In Copenhagen, world leaders debated climate change they didn’t quite believe in enough to overcome political obstacles. What does their lack of agreement portend for the U.S. electricity sector?

In short: more uncertainty. When and how America handles carbon emissions affects every power company’s investment decisions and valuation.

Selling even a multilateral settlement looked challenging. Legislation ahead of 2010 midterm elections now seems all but impossible. Having the Environmental Protection Agency regulate carbon emissions as pollutants instead would provoke legal challenges.

The big losers are nuclear generators like Exelon and Entergy. Nuclear plants emit no carbon. If carbon was embedded in electricity prices, as generators using fossil fuels factored it into costs, nuclear profits would benefit.

Conversely, unregulated power producers burning coal benefit from a delay. How much, depends on their regional market. Without a carbon cost, coal-fired generators selling into wholesale markets where natural gas-fired plants set the marginal price of electricity tend to earn good profit margins per megawatt-hour.

Carbon pricing would savage such margins—that’s the idea, after all. But in its absence, it might be time to reappraise Allegheny Energy, the worst-performing S&P Utilities constituent this year. As Morgan Stanley points out, its unregulated generation portfolio is mainly coal-fired, operating where gas-fired competitors set prices. At 11 times 2009 earnings versus a sector average of 13.4 times, Allegheny appears priced for change that Copenhagen didn’t deliver.

The Wall Street Journal’s Heard on the Street page is not about politics. It is about technical, business, and political realities to inform investors to make money. Not much spin, in other words. And the word is in: consumer-driven energies are sustainable, not political energies that rest on shaky technology and fickle public policy.

The long run still belongs to oil, gas, and coal.


  1. nofreewind  

    It is likely that the science has already been settled on CO2 as a greenhouse gas, but the politicians and their shill scientists could care less. Here is some real science. The decreasing logarithmic effect of CO2 as a greenhouse gas. Does Hansen know this?

    I keep coming across my skeptic pals stating that increasing CO2 will only have a mild effect on temperature, because it has a reverse logarithmic GHG effect. The first 20 ppm have a big effect, then less so to 100 ppm and then by the time we get to 380, doubling it’s concentration will have little effect.
    I found that greenhouse plastic has a similar effect.
    http://www.nofreewind.com/2009/12/dimin … c-co2.html

    some other pal told me that even the IPCC agrees that: the reverse logarithmic effect from CO2 “settled science”.

    The best answer I found was right here.
    http://wrauny.blogspot.com/2009/…-co2- alone.html
    If the scientists accept the MODTRAN program calculations, then this entire thing is “once again” nothing but a complete scam, hoax or whatever. spent trillions on nonsense, and literally kill people by freezing them to death and impoverishing them by increasing their energy prices.

    Here in the physics forum some seemingly “good guys” come up with the exact same thing as the blogger, just trying to get to the truth.
    http://www.physicsforums.com/sho…ad.php? t=174215
    Listen to RealScientists talking
    “Look in the Modtran graph right below the output data, that should answer both questions. CO2 only radiates only with a certain narrow frequency spectrum. the first ppmv’s saturate it rather quickly, then at higher CO2 concentrations the adjacent frequencies only get slowly affected.

    Compare it with painting with a little transparent paint. The first layer gives the strongest coloring. Additional layers of paint only deepen the color slightly. This a 100% identical process, only in another frequency band.

    ….That brings to question, what does cause the earth to be warmer if ghgs don’t have much of anything to do with it. It would appear that cloud cover might be the actual reason – that combined with albedo – as well as being the dominant reasons for variations.”

    http://www.junkscience.com/Green…eenhouse- X2.png
    This is what happens every time I look into any of the green claims, it always turns to nonsense.


  2. TheSkyIsFalling  

    I would like to know just how it came to pass that trading in emissions became the flavour of the month. Such an ephemeral “commodity” is so dependant upon mandate rather than reality, questions of auditing arise, accounting for so called sequestration in trees, disused mines and wells and it goes on. Half the population would be employed in monitoring. It would be obvious to anyone that it is open to massive abuse. (See recent billions lost in Europe). From an outside perspective it looks like madness and a very hard way to go about something that other mechanisms could achieve more easily (if it were indeed appropriate to do so). It is also very enlightening to see the holes in the scheme in the opening paragraphs. In addition there is interesting material on the link to political capitalism which I had not seen before. Concerns were raised here in Australia regarding the lack of certainty as the ETS bill failed to pass pre-Copenhagen although just how much certainty would be accomplished by the ETS bill I am not sure given the problems associated with it.


  3. steve C.  

    Emissions trading came to be because politicians lack the courage to tax carbon dioxide. Emissions trading schemes enable the government to create artificial scarcity, which gives them the power to endow favors on allies. It also requires the creation of trading organizations, operated by the same folks who enable the trade in financial instruments. Who are naturally inclined to favor such schemes.

    The political leaders can then say, “well we’ve created a market solution to account for the alleged external costs of CO2 emmisions”. Everyone is happy. The politicians avoid accountability for passing a tax. The financial markets get a new toy. The greens delight in outfitting us with hair shirts. The CO2 producers are not so happy, but at least they have a system that they can game. Which is why “consultants” are happy. Purveyors of magical technology (wind, solar etc) are happy because their uncompetitive contraptions become more competitive by dint of government fiat.

    The only groups left out are consumers and workers who have to suffer the consequences of a Rube Goldberg solution to a problem that might be a problem one hundred years in the future.

    Other than stealing from the 90% to enrich the 10%, what could possibly be wrong with that.


  4. TheSkyIsFalling  

    Thanks Steve C, that certainly clarifies the matter. Well said.


  5. Chris  

    Steve C,

    Exactly right. It’s another effort by the Obama and the Dems to tax the producers of this country without using an explicit tax. The new health care reform bill (with its tax increases on high earners) is similar. Why not just increase medicare payroll tax to 5% (up from 2 x 1.45% = 2.9%) to cover more people?


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