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The black art of pricing social costs.
At the Power-Gen International trade show in December, Questar Chairman & CEO Keith Rattie delivered a firebrand speech opposing the prospect of CO 2 cap-and-trade legislation. To summarize, he said the Waxman-Markey climate bill is an “asinine” piece of legislation—which it is, as anyone who reads it quickly discovers. But more broadly, he said concerns about greenhouse gases (GHG) are based on incomplete science and politically motivated alarmism. If carbon constraints are adopted globally, they’ll force the global economy back to the 18th century, in terms of energy consumption and living standards. And it’s all unnecessary, he said, because market forces already have demonstrated the ability to reduce carbon intensity and improve efficiency.
It wasn’t the first time Rattie delivered a speech opposing GHG regulation, but it might’ve been the first time a Power-Gen keynote speaker elicited a standing ovation.
Rattie earned the ovation because his speech was refreshing and thought-provoking. Rather than taking a nuanced and politically safe approach to the topic, Rattie came with guns blazing. The Power-Gen audience appreciated this straight-shooting approach—especially given its timing on the first day of the U.N. climate conference in Copenhagen, and the accompanying green love fest taking place in the popular media and the industry.
Among Rattie’s many compelling assertions, his conclusion merits the most careful analysis:
Energy choices favored by politicians, but not confirmed by markets, are destined to fail. If history has taught us anything, it’s that we should resist the temptation to have politicians substitute their judgment for that of the market. Instead we should let markets decide how much energy gets used; what types of energy get used; where, how and by whom energy gets used.
In truth, no source of energy is perfect, and thus only markets can weigh the pros and cons of each choice. Government has a role, and that role is to set reasonable standards for environmental performance, and then to make sure that markets work.
On their face, these assertions are indisputable. Free markets produce the most efficient and cost-effective solutions to virtually any problem presented to them. Central planning and tax spending can’t touch the innovation and cut-throat cost pressure of a healthy competitive market.
But Rattie’s thesis begs a fundamental question: Can straightforward environmental standards and market competition produce an energy industry that’s both cost-effective and socially responsible? More specifically, how can lawmakers make sure the market works to price-in external costs—such as environmental damage, price volatility and dependence on imports—without imposing precisely the kinds of regulatory judgments that Rattie considers unnecessary?
As this column pointed out last month, hardly any energy investment happens anymore without some type of federal or state subsidy (see“ Subsidy Addiction ,” December 2009) . With prices so thoroughly clouded by government incentives and disincentives, we’ll never have the market competition of Adam Smith. Instead, we get competition among lobbyists, tax experts and regulatory economists, competing for the biggest possible piece of