Energy Companies Split Along Fuel Lines Over Cap and Trade

Posted by Steven Zweig on October 19, 2009 at 1:46 pm

Winners and losers: low-carbon-emitting energy sources (like nuclear, top) stand to do much better under proposed climate legislation than high-carbon emitting sources (like coal, bottom). (images: legalplanet.wordpress.com, tammi.tamu.edu)

“Big Energy” has long been thought of as a monolithic interest block, presenting a united face to the world and, most importantly, to Congress. It turns out that Big Energy is indeed a monolithic interest block…except when it’s not.

As reported Monday by the New York Times, the climate bill is splitting energy firms along energy source fault lines.  Natural gas has split off from its traditional ally oil to form its own interest group. Nuclear is in bed with solar, wind, and hydropower. Everyone is aligned against coal.

The reason is cap and trade, the central provision of the climate bill, which will put a “cap” or ceiling on how much carbon dioxide may be emitted. The more carbon you emit, the more you have to pay—since to emit more carbon, you will need to purchase additional carbon allowances from those who have excess. (That’s the “trade” part of cap and trade.) Since energy sources differ wildly in how much carbon they give off—
•    Nuclear, solar, wind, and hydro emit no carbon
•    Natural gas emits the least of any of the fossil fuels
•    Oil and its distillates emit more than gas
•    Coal emits the most
—the economic costs to energy companies will also differ wildly. Companies producing or using high-carbon sources will have to pay more than ones relying on low- or no-carbon sources. That will mean lower profits and/or higher prices to consumers.

At present, no one knows exactly how much cap and trade may cost. For example, estimates of the cost to the average American family vary from less than $100 per year to almost $7,000. However, with energy being a multi-billion dollar industry, the stakes are enormous—even an increase in cost of a few percentage points translates into big money. The way the final bill is structured will allocate costs among the different industry segments—depending on how it comes out, some will pay more, some will pay less:
•    If allowances have to be purchased, high-carbon fuel loses big
•    If allowances are initially distributed to the industry for free, then low-carbon energy helps subsidize high-carbon energy, since the higher-carbon sources are not fully paying for their emissions
•    Any caps on carbon work to the advantage of the low- or no-carbon energy sources, since they won’t have to absorb or pass onto their customers as many (if any) new costs
Hence the split in the ranks. As one energy expert put it, “These fissures are happening because a policy is increasingly seen as inevitable.” Once some version of cap and trade looks like a done deal, it’s no longer about opposing the bill for energy companies—it’s about gerrymandering it for the maximum benefit to their own sub-industry. That’s why natural gas companies, longtime members of the American Petroleum Institute, have formed their own lobby—since natural gas gives off less carbon than oil (though it does have its own climate change issues, as well as contributing to smog and acid rain), cap and trade is not likely to be as costly for companies that produce or utilize it. In fact, cap and trade can help them by providing an economic incentive to shift energy consumption towards natural gas.

Similarly, nuclear is sitting in the catbird seat in regards to cap and trade, since nuclear energy is carbon free. That explains why Exelon, a company that operates nuclear power plants, quit the U.S. Chamber of Commerce over the Chamber’s opposition to cap and trade.

In contrast to nuclear or even natural gas, coal, as the highest-carbon-emitting fuel, stands only to lose under carbon emissions limits. That’s why some coal executives and lobbyists continue to fight a forlorn rear-guard action against the very concept of global warming, with the head of the largest producer of Appalachian coal asking, “How can [scientists and policy makers] be so confident that man is changing the world climate?”

The split in the energy ranks is good for the bill’s proponents. As Daniel J. Weiss, climate policy director at the liberal Center for American Progress pointed out, “It’s much harder to pass clean-energy legislation when big oil and other energy interests are united in their opposition.” The climate bill is dividing-and-conquering the energy industry. At this time, there is little doubt we will see cap and trade in some form—and someone will be paying the price for it.

There is one group that is unequivocally doing well thanks to cap and trade: energy lobbyists. More than $200 million was spent in the first half of ’09 alone on lobbying the government over the climate bill.