Baptists, Bootleggers, and Global Warming

Some of you might be interested in this 2001 essay from Bruce Yandle. The analysis applies to an international scheme under Kyoto, but the logic of a national permit system is the same.
This isn't just crude public choice theory. It accounts for actual corporate and political behavior rather well. Journalist Tim Carney has been doing an outstanding job reporting on corporate welfare — including the “green” kind — for the Washington Examiner. His column on hedge fund billionaire Julian Robertson is an excellent example:

Big businesses have long been lobbying for federal restrictions on greenhouse gases. Enron, General Electric, DuPont, Goldman Sachs and many top energy companies have lobbied hard for “cap-and-trade” laws that would impose federal restrictions on greenhouse gas emissions by manufacturers and power plants, but allow firms to buy or sell excess emissions credits. In many of these cases, it’s easy to see the financial motive of these “socially responsible” corporations.

[U]nless you spend time going through federal lobbying records, you probably haven’t heard of Robertson’s big push for cap-and-trade laws. Robertson has hired top lobbying firm Akin Gump to advance such restrictions on Capitol Hill, in the public and in policy arenas. Akin Gump even runs a global warming blog now called “Climate Intel.”
Akin Gump lobbyists doing Robertson’s bidding on Capitol Hill include former Republican National Committee Chairman Ken Mehlman and former Reps. Bill Paxon, R-N.Y., and Vic Fazio, D-Calif. What’s Robertson’s angle? Environmental publication Greenwire described Robertson as a “former hedge fund tycoon and now a philanthropist.” Robertson indeed closed down his most famous fund, Tiger Management, earlier this decade, but is still a big investor. Getting richer — not merely philanthropy — motivates these investments.
Relevant to his cap-and-trade position are his investments in China’s leading biofuels maker Gushan and in a company that deals with nuclear waste disposal. Given the right global warming legislation, both of these investments will benefit.
A bigger Robertson bet, presenting a more insidious angle, is his short position on 10-year Treasury bonds paired with a long position on two-year Treasuries. Basically, if the U.S. economy is fundamentally unsound, Robertson gets rich. “I’ve made a big bet on it,” Robertson told Fortune. “I really think I’m going to make 20 or 30 times on my money.”

The fact that many millions of people are earnestly morally motivated to push carbon regulation creates the political conditions for huge potential profits for the savvily well-positioned. Maybe Robertson is a global warming true believer and just wants to help capitalize the firms that are going to save the world and maybe he just wants to get even richer. I'm not so uncertain about GE and Goldman. Either way, the man is making an enormous bet, and aligning his pecuniary self-interest strongly with a particular political result. Suppose we get cap and trade and then the global warming scare starts to peters out. Is Julian Robertson going to happily give up on the policies upon which he has bet the farm?
[Added: Oh, and why have all these big players lined up behind cap and trade and not a tax? Wouldn't the equivalence thesis predict indifference? I suspect that the answer is that their expected competitive advantage given a tax is lower than their expected advantage given cap and trade. In which case, that's a pretty significant real-world failure of equivalence, no?]

Author: Will Wilkinson

Vice President for Research at the Niskanen Center