The Public Policy

Corporate Sellouts

Corporate America is giving Democrats cover to impose the Obama-Waxman-Markey national energy tax.

By 5.26.09

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Communist Godfather Vladimir Lenin is alleged to have famously said, "The capitalists will sell us the rope with which we will hang them."

Nowhere is that observation more relevant than in the sorry spectacle taking place in Congress as corporations, in exchange for short-term government handouts, fall over themselves to endorse a carbon dioxide regulation bill that will impose a crushing energy tax on the American people.

Sponsored by Rep. Henry Waxman (D-CA), chairman of the House Energy and Commerce Committee, and Rep. Edward Markey (D-MA), the "cap-and-trade" legislation, called the American Clean Energy and Security Act, would put a cost on carbon dioxide by imposing a cap on greenhouse gas emissions. On May 22, the committee approved the legislation, which will be referred to the House Ways and Means Committee and other committees for consideration. The bill would establish a market in which regulated industries, such as the electric power and petrochemical sectors, would buy and sell allowances in an auction market. As the cap is reduced each year, companies that emit too much carbon dioxide would have to buy an ever-decreasing number of permits from "clean" companies with extra emissions credits.

Besides being complex, the Waxman-Markey bill would be enormously expensive for both companies and workers. A recent Heritage Foundation study estimated it would destroy over 1.1 million jobs, hike electricity rates 90 percent, and reduce the U.S. gross domestic product by nearly $10 trillion over the next 25 years.

That is why it is inexplicable that corporations, some of which used to be against such onerous environmental measures, are jumping on the "Green" bandwagon.

As is too often the case, the reason is that companies are selling out their long-term interests for short-term financial gain -- or at least what they perceive to be short-term gain. Instead of the companies having to buy all of their emissions permits, the government will give most of them away provided the recipient companies spend billions of dollars on supposedly cleaner technologies. In other words, it is a multi-billion dollar Green Bailout.

The list of corporate sellouts reads like a Who's-Who of the Fortune 500: General Motors, Ford Motor Company, General Electric, PepsiCo, Johnson & Johnson, Alcoa, and Caterpillar. Wal-Mart has not officially endorsed the Waxman-Markey bill but is on record as supporting cap-and-trade in principle.

This corporate support was pivotal in reviving a bill that appeared to be fatally stalled in the House Energy and Commerce Committee.

In trying to get his bill reported out of the committee, Waxman ran into stiff opposition from about a dozen Democrats representing districts dependent on coal or petrochemical industries. With near-unanimous Republican opposition, Waxman was forced to make major changes in the bill to lessen the impact on energy-sensitive industries and woo back wayward Democrats.

The original bill, reflecting President Obama's goals, called for the government to sell off all 100 percent of the emissions credits. The idea was to raise $646 billion over ten years to help pay for Obama's massive expansion of government-run health care. The bill set a goal to cut carbon emissions 20 percent by 2020. However, several Democrats balked at a measure they feared would cost their districts jobs. These included Rick Boucher (D-VA), Gene Green (D-TX), and Charlie Gonzalez (D-TX).

The revised plan would cut greenhouse gas emissions 17 percent by 2020. The most dramatic change, though, is in the allocation of credits. It would give away 85 percent of the emissions credits for free. That includes 35 percent for the electricity sector, 9 percent for natural gas companies, 3 percent for the auto industry, and 2 percent for oil refiners. All of the free credits will be phased out by 2025. The 15 percent of permits that will be auctioned off is expected to generate $12 billion in 2012, the first year the program could start working.

Free credits for the refiners was the price for winning the support of Texas Democrats Gonzalez and Green. John Dingell was won over because the auto industry's share of the permits is supposed to total $12 billion to $15 billion over the first six years of the trading program. The Alliance of Automobile Manufacturers praised the allocation of credits as an "encouraging" development.

However, the most dramatic reversal of position came from the utility industry. Given that half the nation's electricity is generated by coal, utility companies stand to get hit especially hard by a punitive program to reduce fossil fuel use. Thus, the industry has always been strongly opposed to any such measure. Not anymore. The utilities are estimated to get $21 billion in free credits in 2012. While not yet giving a full endorsement, the Edison Electric Institute (EEI), the utility trade association, says it is committed to seeing the bill passed. Said Jim Owen, EEI's media-relations director, "There are probably some things that different people want to see tweaked in the legislation, but…we would like to see it get into the end zone."

Individual power companies are publicly endorsing the Waxman bill. On May 19, David Crane, CEO of NRG Energy, wrote a letter to Waxman praising his "admirable" leadership on the issue and said NRG "will do what we can to support you and your colleagues in advancing your critically important bill."

This was all the cover needed for coal-state Democrats to end their opposition to the bill. Rep. Boucher, who led the push for the allocation of credits to the utility companies, said that while he still has "remaining concerns," he is now "committed in the full committee to be supportive of this bill, to encourage others to be supportive."

In one of the more surreal developments, some corporations have been pressuring the U.S. Chamber of Commerce, the lobby charged with defending their interests in Washington, to reverse its opposition to a cap-and-trade plan. In a letter to the chamber, Nike Inc. and Johnson & Johnson called for the group to support emissions cuts consistent with Waxman-Markey.

So far, the Chamber of Commerce is maintaining its opposition to a bill which it estimates will raise energy prices, shrink the economy, and reduce household spending.

Rep. Markey is citing the corporate defections to the cap-and-trade side as evidence to rebut accusations by congressional Republicans and free-market advocates that the legislation will harm the economy. "When Edison Electric Institute's CEO endorsed the bill, when three of the largest oil companies support the bill, when the second-largest coal company supports the bill, when [General Electric] and dozens of Fortune 100 companies endorse the bill, that will be the answer to the critics who say it will hurt the economy," said Markey.

Markey says that "CEOs are not about to preside over the destruction of their business" because they believe they can still make money in the "new clean-energy future."

On the contrary, CEOs jumping on the cap-and-trade bandwagon are risking the existence of not only their companies, but the livelihoods of ordinary Americans and indeed the very future of the U.S. economy. That is the conclusion, not of some supposedly biased industry lobby, but of the Congressional Budget Office (CBO).

On May 7, the CBO released its analysis of the impact of a cap-and-trade plan on the U.S. economy. Its conclusions are stark. Since cap-and-trade would raise prices of fossil fuels for the express purpose of discouraging their use, the resulting lower energy consumption "would render capital and labor less productive, which would lower output directly and would also tend to discourage investment and work." The higher prices created by cap-and-trade "would create losses for some current investors and workers in the sectors of the economy that produce energy and energy-intensive goods and services. Investors would see the value of their stocks decline, and workers would face higher risk of unemployment as jobs in those sectors were cut." That is a prediction that should make any CEO and shareholder shudder with trepidation.

But it is the average consumer that should be most fearful of cap-and-trade. The study points out that energy-intensive industries naturally would face the most serious increases in business costs such as electricity producers, the steel industry, petroleum refiners, coal miners, and the air, truck and passenger transportation industries.

Under cap-and-trade, CBO says that "obtaining allowances -- or taking steps to cut emissions to avoid the need for such allowances -- would become a cost of doing business for firms that were subject to the [carbon] cap."

Or more precisely, it is the consumers who will have to get used to paying for the products and services of the affected industries. "Those firms would not ultimately bear most of the costs of the allowances. Instead, they would pass those costs along to their customers (and their customers' customers) in the form of higher prices."

CBO estimates that a 15 percent cut in carbon dioxide emissions would cost the average household roughly $1,600 per year. The lowest one-fifth (quintile) of household earners would pay an additional $700 while the top one-fifth would pay $2,200. However, the price increases "would impose a larger burden, relative to income, on low-income households than on high-income households." That is because the lowest-income households spend 21 percent of their income on utility and gasoline expenditures whereas the highest income households spend only 4 percent.

In addition, some regions of the country will pay a higher price under cap-and-trade because they may rely more on coal-fired plants for their electricity. As a result, CBO found that low-income households in the Ohio Valley and the Mid-Atlantic states will pay significantly more for energy than those in California and New York.

For example, power costs in Kentucky would sharply increase. According to the National Rural Electric Cooperative Association, the average monthly bill could go up $27 to $68. Likewise in Indiana, estimates indicate that electricity bills would more than double.

President Obama cannot be accused of lying when he said that electricity bills "would skyrocket" under cap-and-trade.

The end result of the litany of corporate sellouts on the Waxman-Markey bill could be the imposition of an unprecedented and massive energy tax on the American people. Despite the short-term gains these companies believe they may reap, the long-term result will most certainly be dire for their own futures. Success, whether measured in corporate or individual terms, will be hard to come by in an economy hobbled by energy inflation, mandated use of untested and inefficient "clean" technologies, and a suffocating bureaucracy.

Fortunately, it is not at all clear that the Waxman-Markey bill will be enacted even if it manages to clear the House Energy and Commerce Committee. Major environmental groups such as Greenpeace and Friends of the Earth are opposing the bill for making too many compromises with industry. There could quite likely be many other changes both in the House and Senate that could make the legislation, intrinsically unacceptable to free market advocates, unpalatable for the environmental purists.

Whatever the outcome, it is profoundly disappointing to see a steady parade of corporations lend their support to a bill that is inimical to their existence. A lot has changed since Lenin made his dark prediction that capitalists will sell themselves out. One thing that hasn't changed is the myopic stupidity of some members of that class.

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About the Author

John Carlisle is director of policy at the National Legal and Policy Center, a nonprofit foundation based in Falls Church, Virginia.