You’ve probably heard the bad news about Enron going down in flames. But maybe Enron’s spectacular fall from grace will cause the carbon-dioxide emissions reduction program, mandated by the Kyoto Protocol, to also take a kamikaze dive, and that’s good news.
About 20 years ago, Enron basically was an owner and operator of an interstate network of natural gas pipelines. But, as a result of recent congressional deregulation acts, interstate transporters of both gas and electricity have become “common carriers.” They transport a commodity – which they frequently do not own – from supplier to consumer for a fee, fixed by the Federal Energy Regulatory Commission.
Well, being a fixed-fee common carrier is not sexy. Who would buy that company’s stock?
Yet, just before it went down in flames last year, Enron had become a sexy Wall Street high-flyer. Enron had transformed itself into a billion dollar a day commodity trader, buying and selling contracts – and their derivatives – to deliver natural gas, electricity, Internet bandwidth, whatever. In the early 1990s, Enron had even helped establish the market for – and became the major trader in – EPA’s $20 billion-per-year sulfur dioxide “cap and trade” program.
The 1990 Clean Air Act amendments authorized the Environmental Protection Agency to put a “cap” on how much pollutant the operator of a fossil-fueled plant was allowed to emit. Suppose that after being assigned a cap by the EPA, the operator then installed equipment – or switched to fuel – that reduced his emissions below that cap. The EPA then allowed him to sell that excess “allowance” to the highest bidder.
Who would want to buy that EPA allowance? Well, the operator of another fossil-fueled plant, who, for whatever reason, was unable to operate his plant within his own EPA cap.
What if the allowance the seller has to sell is not exactly the amount the buyer needs to buy? Aha. Establish a “commodity” exchange, wherein emission allowances – denominated in so many tons of pollutant reduction – can be bought and sold by speculators, just as if they were warehouse receipts for bales of cotton or barrels of oil.
Well, Enron became the major trader in the sulfur dioxide “cap and trade” programs and Enron’s stock began to rise. What next? How about a carbon dioxide cap and trade program? Well, there was a problem. CO2 is not a pollutant, and therefore, EPA has no authority to cap its emission. Without a cap there is no basis for determining either ownership of the commodity or its value.
How about getting EPA to just “certify” CO2-emission reductions for projects and see if the markets think that unofficial certification is worth anything?
In 1993, almost immediately upon taking office, the Clinton-Gore administration set up the U.S. Initiative on Joint Implementation program, run by an interagency group co-chaired by the EPA and the Energy Department. All during the Clinton-Gore administration the USIJI solicited applications for projects sited all around the world that could reduce CO2 emissions. The USIJI would review each project proposal and then “credit” the project with so many tons of annual CO2 emission reduction.
What the USIJI tried to do – without authorization – all during the Clinton-Gore administration was essentially what the Kyoto Protocol would have required, in law. Kyoto would have placed CO2 emission caps on nation-states, and established an international entity like the USIJI to review individual project proposals for reducing emissions and then award Certified Emission Reduction credits. Since – by treaty – there would have been an enforceable cap, the CERs awarded to the project would have had value, and could then be traded.
Of course, that’s what Enron wanted, something it could trade. So Enron vigorously lobbied Clinton and Congress, seeking either EPA regulatory authority over CO2 or U.S. compliance with the Kyoto Protocol. Whatever.
Enron even lobbied candidate George Bush and thought it had got him to commit to EPA regulation of CO2 emissions. Wrong. No regulation of CO2 emissions by Dubya’s EPA. And no compliance with the Kyoto Protocol.
So, Enron intensified its lobbying efforts last year with Bush-Cheney to get support for some kind of voluntary CO2 emission-reduction program. And last year, trading over the Internet by Enron and other traders did begin of these voluntary CERs.
Now, there is no evidence that any of Enron’s commodity trading was the reason it went down in flames, but seeing that it has, it would be a good thing if this whole CO2 emission reduction cap and trade business now did an empathetic kamikaze dive, too.