Climate

Why Warren Buffett Is Wrong About Cap and Trade

I am reprinting a commentary for Bloomberg by Eric Pooley.  Pooley is a former senior editor of both Fortune and Time, who is writing a book about the politics of global warming.  Earlier this year, he documented the media’s mistakes and biases during the Lieberman-Warner debate in a must-read Harvard study [see How the press bungles its coverage of climate economics “” “The media’s decision to play the stenographer role helped opponents of climate action stifle progress.”]

http://www.economy.com/dismal/graphs/blog/warren_buffett.jpgWarren Buffett carries plenty of weight in any debate — even when he gets it wrong.

So as the Senate digs into the climate-change bill that passed the House of Representatives last month, it’s worth taking a hard look at how Buffett’s views on the bill went off course.

Buffett knows global warming is real and carbon emissions must be cut. But he’s worried that the bill might hurt his electric utility, Des Moines, Iowa-based MidAmerican Energy Holdings Co.

He may be right. But that doesn’t mean this is a bad bill; it may mean MidAmerican made some bad decisions.

On another count, Buffett is simply wrong when he calls the bill a “huge, regressive tax” that would ensure “very poor people are going to pay a lot more for their electricity.” Likewise David Sokol, the chairman of MidAmerican, was wrong when he testified that the cost of buying carbon allowances under the bill would drive up Iowa electricity prices by $110 per month per customer in the first year.

Opponents of the bill have latched onto Buffett and Sokol’s words, trumpeting them on the House floor and in a July 7 Senate hearing. So let’s examine their three basic claims:

Claim 1: It’s regressive. No, the bill doesn’t punish the poor. The nonpartisan Congressional Budget Office found that it would cost the average household $175 a year by 2020, while the 20 percent of Americans with the lowest incomes would come out ahead by $40 a year.

Claim 2: It’s a tax. In spite of the Republican Party’s relentless “cap-and-tax” talk, cap and trade isn’t a tax. It is a dumping fee for greenhouse gases. The dumping permits, or allowances, are distributed to utilities and other large emitters, who can then buy and sell them.

How is this different from a tax? First, the number of allowances declines over time, guaranteeing that emissions go down. A tax can’t do that. Second, since allowances can be bought and sold, capital flows to the most cost-effective technologies. A new tax means more work for accountants. Cap and trade unleashes the engineers.

Buffett and Sokol don’t want cap and trade or a tax, which means there would be no price signal driving innovation. They prefer what Sokol calls “cap and no trade,” which is another way of saying they want old-school government regulation. That approach would be more expensive than cap and trade.

Claim 3. It costs $110 a month. In early June Sokol told a House committee, “In Iowa, our cost increase just for”¨784,000 customers is $283 million in the first year” for buying the emission allowances that aren’t given away. “That’d be $110 per month, per customer.”

Texas Congressman Joe Barton repeated the scary number during the floor debate in late June. “It’s just basic math!” Barton cried.

Sokol now says he got his math wrong. The $110 figure, he told me, assumes that MidAmerican’s 217,000 Iowa residential customers would bear the entire burden of buying allowances and that commercial and industrial users wouldn’t pay a dime. “But it’s not conceivable that the regulator would put all of this on the residential customers,” he said. “So that is not a terribly useful number.”

Why didn’t Sokol correct the figure before Barton said it again? Sokol now says $110 equals the combined monthly cost of buying allowances plus paying for all the new technology MidAmerican will need to slash emissions over the next 40 years.

In reality, the technology cost is unknowable. It’s also the sort of estimate utilities routinely exaggerated in previous environmental battles. And MidAmerican’s new calculation happens to work out to the precise figure Sokol had already used — a remarkable coincidence.

Cutting carbon emissions won’t be free, but Sokol hasn’t helped his case by hyping the costs for Iowa consumers, who have gone 14 years without a rate increase. His revised estimate for the allowance costs comes to an average of $30 per month per customer — residential, commercial, and industrial.

That’s a far cry from $110, but even it is too high, according to economist Nat Keohane of the Environmental Defense Fund, because it assumes that rate payers will foot the bill for all of MidAmerican’s allowance costs — including the 30 percent of its power it sells into the deregulated wholesale market.

MidAmerican wouldn’t get free allowances for that wholesale power under the bill, and I think that’s the real reason Buffett and Sokol are against it. The system is designed so that free permits flow downstream to the people who pay for the power. That’s good for consumers, but could hurt MidAmerican shareholders, meaning Buffett’s Berkshire Hathaway Inc.

Bottom line: MidAmerican made some bad calls. It turned on a huge new coal-fired plant in 2007. It chose not to spin off its wholesale power business. And when other utilities were hammering out their allocation deals with Congress, Sokol and Buffett sat out the negotiation.

The Oracle of Omaha apparently didn’t see this one coming. But it’s not too late: the next round of negotiation is just getting under way.

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12 Responses to Why Warren Buffett Is Wrong About Cap and Trade

  1. pete best says:

    Is cap and trade the equivilent of exporting our carbon emissions abroad to the third world rather than to each other? If so, how can this ever be fair when they are growing economies who need to be able to offset their future growth emissions as well as offset ours!!?

    Your recent article on David McKay the Cambridge, England physicist who has done excellent work on explaining energy usage in terms of the Kwh (Kilo watt hour = the equivilent of a 40W light bulb left on permanently which in 24 hours uses 1 Kwh of energy. In the UK every inhabitant consumes on average of 125 of them each and every day.

    This is equivilent to 600,000 Wind Turbines or 300 Sizewell B nuclear power stations. Efficieny gains spring to mind.

    This video says it all:

    http://www.youtube.com/watch?v=oRQB2YXUxvY&eurl=http%3A%2F%2Fvideo%2Egoogle%2Eco%2Euk%2Fvideosearch%3Fq%3Djon%2Bstewart%26emb%3D0%26aq%3Df&feature=player_embedded

    Any form of carbon offsetting sounds immoral if a little predictable. Surely the OECD countries should embark on new renewable energy sources and guarantee significant efficiency gains as well rather then the surely cheaper route of offsetting it ?

    [JR: Currently, OECD are aggressively pursuing renewable energy and energy efficiency. I am not the biggest fan of offsets, but they can be a useful mechanism for having rich polluters pay developing countries to develop cleanly. In any case, the Europeans love them and they’re not going away anytime soon.]

  2. pete best says:

    How can they offset cleanly when we can’t hence the reason why we are offetting to them !? It sounds too odd to me and potenitally not a means of fair and equitable emissions mitigation. It sounds like develop CCS over here (if we do) and then sell it to others and hence offset your own carbon emissions as well whilst they limit their too?

    Is this what it means ?

  3. Klem says:

    What are you people talking about? A rich polluter will simply pay for the credits and continue right on polluting. Only the poor and middle class will feel the pain. So get this part straight: The rich will not notice the cost increases but everyone else will.

    And if you think that poor countries will benefit, they won’t because they will be forced into the Cap&trade system too. They will pay through the nose. Remember, it’s not the poor countries which will win, it’s the carbon neutral countries. For example, Canada is already carbon neutral when you include it’s forests (which they have not as yet). Any country will pay whether they are rich or poor, it depends on their total carbon output not their wealth.

    Al Gore recently let the cat out of the bag by saying Cap&Trade is the first step to Global Governance. So the truth is out; Cap&trade is the worlds first global tax system and it is promoted by the UN, and the revenue from Cap&Trade will be used to move toward a world governed by the UN. And let me guess, Al Gore will someday be Secretary General.

  4. pete best says:

    Klem, this will unfold as no one has preidcted, its going to have a dynamic all of its own. I doubt its a good idea but maybe its the only workable one that the capatalist econoic of the OECD countries wil accept?

  5. James Thomson the second says:

    Pete, Thanks for the utube link. I had read the book but not seen the video. The part you didn’t mention was that, although the UK’s “125 40W light bulbs per person” sounds bad, the US is exactly double – 250 40W light bulbs. View this figure from almost any other country in the world and you can see how much sympathy the US is lilely to receive for its ultra-modest attempt at a climate bill. None. In fact, for countries like China and India, it’s a carte blanche to pollute without moral hinderence.

    In my view offsets stink. Effective legislation is simple legislation and the only sane way to start is to legislate for reducing the amount of fossil fuel burned in the US, period. By all means encourage other stuff but stopping coal, oil and gas burning is the mandatory bit. Stick a bill like that in front of Congress and it will fail, but at least people will have to own up to their true position on the issue, then stand back and wait for the tidal wave of critisism.

  6. James Thomson the third says:

    Pete, Thanks for the utube link. I had read the book but not seen the video. The part you didn’t mention was that, although the UK’s “125 40W light bulbs per person” sounds bad, the US is exactly double – 250 40W light bulbs. View this figure from almost any other country in the world and you can see how much sympathy the US is lilely to receive for its ultra-modest attempt at a climate bill. None. In fact, for countries like China and India, it’s a carte blanche to pollute without moral hinderence.

    In my view offsets stink. Effective legislation is simple legislation and the only sane way to start is to legislate for reducing the amount of fossil fuel burned in the US, period. By all means encourage other stuff but stopping coal, oil and gas burning is the mandatory bit. Stick a bill like that in front of Congress and it will fail, but at least people will have to own up to their true position on the issue, then stand back and wait for the tidal wave of critisism.

  7. James Thomson the third says:

    Joe, You’re fabulous. I want to have your babies.

    (stands back to see if that gets put in moderation…)

    [JR: Flattery will get you everywhere — though I thought your posts were more science based :) ]

  8. Dorothy says:

    George Monbiot this morning describes “why large scale carbon offsets can’t work.”
    http://www.monbiot.com/archives/2009/07/14/pulling-yourself-off-the-ground-by-your-whiskers/

    He writes that “new policies (adopted by the UK) will include buying up to 50% of the reduction from abroad. If this is true, it means that the UK will not cut its greenhouse gases by 80% by 2050, as the government promised. It means it will cut them by 40%. Offsetting half our emissions (which means paying other countries to cut them on our behalf) makes a mockery of the government’s climate change programme.”

    He goes on to describe in detail just how “unjust, contradictory and ultimately impossible” large scale offsets will be. A must read article.

    The way things are going, the world has a faint to non-existent chance of preventing two degrees Celsius of warming. And the real tragedy is the 2C has been chosen as a “safe” level only because it just might be politically possible. In reality, this level is much too high. Look out your window; we’re losing the Arctic sea ice right now. Is allowing our planet to keep heating up to 2C going to help that? What’s it going to take for the many well-intentioned environmentalists who support cap and trade to recognize that this is not only morally wrong; it’s doomed to fail.

    [JR: The article would make a little more sense if it had also explained why “large-scale carbon offsets don’t exist” at a low cost.]

  9. pete best says:

    Yes, I did forget to mention the average US citizen 250 Kwh per day consumption which ewuates to 600 sizewell B nuclear reactors or 1.2 million of those 2 MW wind turbines. Make wind turbines 5 or 10 MW (Horizontal designs which I have of late heard little more of – 9MW capable) and it reduces what we need for half to 75%. Its still a lot of wind turbines though but CSP in the USA is a credible candidate for some energy and the USA has four large wind corridors and they have the ability to develop deep off shore wind as have Europe.

    Why are carbon offsets required again? To save rain forest but the west paying for it to offset emissions or to allow us to deploy less renewable energy due to the cost increases to each energy payer?

  10. pete best says:

    Oh sorry, that needs to be multiplied by another 5 due to the population diffeences making 6 million wind turbins or 3000 nuclear reactores Sizewell B size. So strike me down, no wonder a country of the USA size and energy hunger wants to export their emissions issues abroad. CCS is probably their only realisitic hope although 6 million wind turbines is only equivilent of 3 great britains. Quite possible I guess.

  11. Guy Dauncey says:

    Pete,
    I’m wondering about your numbers….

    The UK uses 110 TWh a year in electricity; shared by 61 million people, so that’s 50 kWh a day.

    A 2 MW wind turbine produces some 5 GWh a year of electricity (assuming a 30% capacity rating), so on this basis, the UK’s entire electricity needs could be met by 22,000 wind turbines – not 1.2 million.

    You may have been using a kWh per person number that translated ALL energy use into kWh, which is what I think David McKay did, but the fascinating thing is that when you translate regular vehicles to electric vehicles, the energy use falls three-fold, due to the vastly increased efficiency of electric drive. Likewise, when you switch from oil and gas heating to heat pumps. So overall electricity use only needs to increase by some 15% to meet most energy needs, plus some kinds of bio-fuel and bio-heat from wastes, algae, etc.

    So the full demand for wind turbines for the UK might be 22,000 + 15% = 25,300 turbines, or 50 times less than you assumed.

    The US uses around 4,000 TWh of electricity a year, or 36 times more than the UK, so the total wind turbines needed would be around 1 million, not six million. If everything was twice as efficient, that falls to 500,000, and no-one is assuming that 100% of the power would come from wind, anyway, but from a mix of wind, geothermal, solar thermal, solar PV, etc, moderated through a smart supergrid.

  12. pete best says:

    Guy, It is total energy usage and not just electrcity, after all cars wil be electric too but can flight and freight be?

    Electric engines are 90% efficient but the fuel that feeds then is not, its the same as it is today so that 90% makes them less efficient than 40% of a coal fired power station or the 30% of a wind turbine relative to a ICE.

    I doubt it is as simple as your numbers or as complex as mine for if all things electric are so efficient, ground source heat pumps and electric motors then cost/performance ratios would have made these technologies much more economic decades ago or are we just being lazy.

    In addition to all that 5 GWh a wind turbine produces it does not come along nice and smooth but in bursts of 90% and then 10% and then 0%. Hence it requires alternatve and innovative methods of getting it to keep the grid nice and balanced as we need it.

    Good figures though. The UK uses 380 TWh of electricity per annum. For 5 GWh to scale to 1 TWh would required 200 of them and hence 200×380=76000 of them and that is just for electricity. Couple onto that heating your house, cooking, and vehicles and it could end us being double that amount. SO lets call it 150,000 2 MW turbines and maybe a lot less if we can insualte houses. David McKay must be using a conversion process that does not take into account efficieny gains but does take into account all of the energy we use abroad to make our stuff and transport our food etc. Primary energy usage is a lot less than the secondary stuff.