Clean Energy Initiative

The Waxman-Markey Bill: Politics-as-Usual Meets Climate Change

The House Energy and Commerce Committee’s recent approval of the cap-and-trade bill penned by its chairman, Henry Waxman, presents a crucial test for serious advocates of measures to control climate change.  The Waxman-Markey plan won committee approval with backing from some environmental groups that have promoted cap-and-trade for 15 years, as well as industry groups representing companies that produce most of our greenhouse gases.  The disappointing truth is, the bill combines the inherent problems of cap-and-trade long noted by economists with a large catalog of giveaways and exceptions for industries now supporting it.

By any measure, the bill would do little to address the climate challenge.  For example, the International Panel on Climate Change figures that the United States will have to reduce its greenhouse gas emissions by 2025 to 25 percent less than in 1990.  The official line is that the bill would cut emissions in 2020 to 17 percent less than 2005 levels – but that comes to just 3 percent less than the 1990 levels.  Moreover, the actual reductions would be even less: Greenpeace has calculated that because the bill provides “offsets” to power companies and energy-intensive industries – letting them emit more greenhouse gases so long as they take “offsetting” steps such as planting trees – its actual caps “could be met without any reduction in fossil fuel emissions for more than 20 years.”

Or consider the bill’s implicit price for the permits to emit carbon.  Climate scientists figure that a price of $50 per-ton of carbon dioxide should be sufficient to discourage people from using carbon-intensive fuels and encourage businesses to develop and adopt more climate-friendly energy and technologies.  The bill, however, would end up pricing carbon dioxide at less than $20 per-ton, or less than half the level needed to spur the green changes necessary to protect the climate.  To make matters worse, it gives away 90 percent of the permits to the utilities and other industries that produce most of the emissions.  The result, in the judgment of Carl Pope, who heads the Sierra Club, is a “congressional bailout” for carbon-intensive industries, as well as a bonanza for Wall Street institutions that would happily reap windfall profits from trading and speculation in some $1 trillion in new permits.

The bill also does nothing about the deep economic drawbacks of all cap-and-trade schemes.  It has no provisions to prevent insider trading by utilities and energy companies or a financial meltdown from speculators trading frantically in the permits and their derivatives.  It also ignores the basic conundrum of capping emissions when we don’t know what the demand for energy will be in any year – because we can’t predict how cold the winter will be or how fast the economy will grow.   The result in every cap-and-trade system ever tried has been enormous volatility in permit prices.  For example, the price of permits in the European cap-and-trade scheme moves up and down by an average of more than 20 percent per-month.  Imagine that on top of normal fluctuations in energy prices, gasoline moved up or down by another 70 to 80-cents per-month.  And without a predictable price for carbon, businesses and households won’t be able to calculate whether developing and using less carbon-intensive energy and technologies make economic sense.

There’s a much better, more fair and progressive way to deal with climate change:   Apply a steady tax of $50 per-ton of CO2 and use the revenues to cut payroll taxes and so help average Americans deal with the higher energy prices, and to support climate-friendly R&D and technology deployment.   It’s the approach long favored by Al Gore, by Jim Hansen, the NASA scientist who first drew public attention to climate change, by a growing number of environmental groups, and most recently, even by some large energy companies.  Its’ only drawback is political: It can’t be easily gamed by powerful industry groups, and it’s not the approach a few environmental groups have used for a generation to recruit new members.  With the planet’s climate hanging in the balance, shouldn’t politics-as-usual give way to sound environmental and economic policy?


Preventing a GM Trainwreck

New York City - Just when fear seemed to be receding in the economy, and the appearance of green shoots seemed to presage recovery by the end of the year, yesterday, senior GM officials indicated they expect GM to enter bankruptcy come June. June 1 is the deadline set by the government's Auto Task Torce for GM's various creditors, principally the government itself, unions and bondholders to strike a deal that will keep GM in business. However, it now appears a deal will not be forthcoming and GM may shortly follow Chrysler into federal bankruptcy court in New York only without a pre-existing deal structure to expedite the bankruptcy proceeding.

There is still a way to prevent a trainwreck, but only if the parties act quickly.

First consider what bankruptcy would mean.

As I have written before, in contrast to Chrysler whose bankruptcy has proceeded fairly smoothly so far, a GM bankruptcy would be more disruptive to the general economy as well as the people directly involved. Why? GM has 55,000 workers and hundreds of thousands of retirees who still depend on the company for benefits. It also has a far larger network of suppliers than Chrysler. In sales alone, it has historically been more than twice as large as Chrysler.

The greater problem, however, is that GM has a different capital structure than Chrysler's. Whereas a handful of banks and hedge funds owned all of Chrysler's debt and a private company its equity making a deal comparatively easy to structure, GM because of its size and iconic status is owned by a wide universe of people. Its publicly traded stock is, of course, widely held. And it's unsecured bonds--once thought to be rock solid--are held by everyone from pension funds to community banks to individuals.

For this reason working out a settlement with GM bondholders was always likely to be more difficult than with Chrysler, and the consequences of failure greater. Sure enough, the government was able to get most of Chrysler's small group of bondholders to agree to the deal at the center of the pre-packaged bankruptcy now underway. However, so far the government and GM's diverse group of bondholders are barely even talking.

Were GM to enter bankruptcy without a prepackaged deal, the proceedings would be extraordinarily complex. America's bankruptcy procedures--designed to protect investors in private enterprise--are a key asset of our capitalist system that substantially reduce the cost of credit and draw the world's capital to our shores. They pre-date the current financial turmoil and do, in fact, reduce uncertainty by creating an orderly route to unwind business. There is no certainty that a bankruptcy judge, bound to protect the many stakeholders of GM would do what the government requests. While it is tempting to imagine wiping out speculators, in reality, established precedent and law are the best way to insure equity of competing claims.

In turn, every week that a bankruptcy proceeding continues would lessen sales and erode the value of GM's assets, making it more likely that the company would have to liquidate, destroying an important engine of the economy and harming America's prospects for participating in the clean tech revolution just when electric cars are taking off.

Fortunately there may still be a way to cut a deal but time is running out. The latest government proposal calls for unions to trade in health care claims for for 39% of the equity of a reorganized company. And it calls for bondholders to swap $27 billion for about 10% of equity with a requirement that at least 90% of bondholders make the swap to insure remaining debt does not exceed about $2.7 billion.

The unions support the deal: though painful, they judge it better than the
alternative of bankruptcy. But the bondholders--who view their claims as equal to the unions--don't find it better than what they might receive from a judge. Without their buy-in, the outcome may leave workers, bondholders and the country poorer.

Game theorists may recognize the classic collective action problem of the Prisoner's Dilemna where, absent cooperation, everyone ends up worse off.

Recently, however, a proposal has been floated of taking a page from the 1979 Chrysler rescue and offering bond holders who make the swap, not only 10% of equity, but also the $2.7 billion in debt the government has suggested the company could carry--if it has Treasury backed insurance. In lieu of an actual cash redemption by the company, the Treasury guaranty would be far smaller than others recently extended. This proposal could be the basis for a pre-packaged bankruptcy come June.

As the clock ticks down on what may be the largest and most disruptive bankruptcy in global history, this simple idea deserves serious consideration by the parties concerned.


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