The Carbon Cap Dilemma

Entergy's CEO on the politics and economics of tackling global warming.

By JOSEPH RAGO
Washington

On the one hand, environmentalists claim that climate change is a "planetary emergency," perhaps the greatest threat ever to face humanity. On the other, nuclear energy is still verboten in the green catechism -- despite the fact that it provides roughly one-fifth of U.S. electricity, all of it free of carbon emissions. And without more nuclear power, it is nearly impossible to see even the glimmers of any low-emission future.
Zina Saunders
J. Wayne Leonard, chairman and CEO of Entergy Corp., one of the largest U.S. energy companies and the No. 2 generator of nuclear power, is no stranger to the many contradictions of American energy policy. "Everybody's gums are still bleeding from the '70s," he says of nuclear power, noting that today's technology is far superior to its Three Mile Island vintage.
The avuncular Mr. Leonard, who lives in Louisiana, made his name in nuclear, and over the last nine years as Entergy CEO he has achieved the highest total shareholder return in the nuclear power industry. But now his thoughts are concentrated on more lasting matters -- namely, his deep-seated concern about climate change.
Does he think nuclear energy has a larger role to play in that effort?
"Is it nuclear?" Mr. Leonard asks in Entergy's D.C. office. "Are you really going to mandate nuclear? I don't think so. I mean, mandate private businesses at the kind of prices we're taking about, and the kind of risks? That's pretty tough to do. You'd have to turn all of us into France" -- 79% of its electricity is nuclear -- "and have a government-sponsored program. I don't see that as consistent with what made this country into what it is today."
Mr. Leonard thinks like an economist. He talks about "efficiency" and "maximizing consumer surplus" the same way other utility executives talk about rate schedules and voltage. The most important thing the government can do on climate change, in Mr. Leonard's estimation, is to change the incentives for producing -- or, not producing -- carbon. His answer on the role of nuclear was revealing about his mentality: Set the price, and market forces, not government, will make the decisions.
"We see ourselves as a market economy, and that's created great wealth for society over time," he says, "but we're a market economy that doesn't have price signals for CO2."
Entergy belongs to the swarm of major energy companies that are -- contrary to type -- practically begging Washington to create a cap-and-trade program. Mr. Leonard supports President Barack Obama's plan to slash emissions 80% by 2050. It sounds strange: Lobbying the government to tax your products is generally not taught in business school.
But then, a lot of companies stand to make a bundle off cap and trade. Once Congress puts a ceiling on emissions, and then allows businesses to sell any of its extra allowances that stand for the right to emit, it is essentially creating the world's largest commodity market -- in carbon-backed securities. These will be extremely valuable, and everything comes down to how the government chooses to distribute them.
Mr. Leonard thinks the allowances should be auctioned off, rather than given away. So does the White House. Then the billions in new revenues that cap and trade would raise every year should be returned to the public. "Ideally you want to recycle it all, give all the money back," he says.
That's the purist's view on cap and trade -- and it puts him at odds with many of his peers at big coal-fired utilities like Duke Energy and American Electric Power that emit the most carbon. These companies signed on in the expectation that the allowances would be handed out at no charge. But economically, that is the same as selling them and giving the money to businesses -- i.e., as subsidies and corporate welfare. Mr. Leonard uses more diplomatic language: "Everybody's got their kind of own self-interest out there that they're tending to promote, once you get behind it."
It would be fair here to note Entergy's own self-interest: Only about 7% of its portfolio is coal, and the nuclear industry stands to benefit as much as any "green" business from a carbon crackdown. Then again, if Congress does create cap and trade, expect the next populist outcry to be for a windfall profits tax on nuclear.
Mr. Leonard acknowledges, though, that coal and other energy companies -- and their customers -- have legitimate reasons to worry about cap and trade: "No utility CEO likes to raise rates, and that's what would happen. Your rates go up no matter what," he says. And even if the government returns every dime of climate revenues to ratepayers, "That's a painful thing for utilities to have to endure, because angriness comes toward you, and somebody else gets the goodwill." Giving out the allowances, he does concede, could help the cushion the blow.
On pure economic grounds, Mr. Leonard seems to prefer a straight carbon tax, which would be simpler and more efficient than cap and trade. But he also notes that "the political will to go the tax route . . . is just not there. Nonexistent" -- namely because the use of the word "tax." The key, he says, is to design a cap-and-trade program that will "simulate the same thing a tax would do." That is, to achieve the increased energy prices essential to the success of cap and trade.
Mr. Leonard does evince a certain . . . uneasiness with the direction of climate politics. "The old adage of 'think globally, act locally' -- it still works," he says. "But with climate change, for it to really be effective, we have to take that thought much more completely and much more deeply than probably we've ever really thought about an issue."
He notes China's breakneck construction of conventional coal plants. China has already surpassed U.S. coal capacity and is on pace to double it sometime in the middle of the next decade. The U.S., he says, could close down every single coal plant immediately and that would be "working to a global solution, acting locally. But that wouldn't do much good in the scheme of things," because atmospheric CO2 concentrations would continue to rise as China continues to expand.
"We go to zero emissions in this country, and if China doesn't follow us, we're nowhere. . . . We've just ruined our economy, and we're nowhere," Mr. Leonard says. "We make mistakes here," meaning a poorly designed carbon system, "and we have a real problem." He goes on, "We talk about that we should lead, then people will follow, but that's kind of" -- he pauses -- "silly. China's not going to follow us because we're the United States. . . . You say, 'Shut down your plants' -- well, that's going to be a short conversation. They've got $2 trillion invested in their plants and they still aren't feeding all their people." He adds that "If we were China, we wouldn't shut our plants down either."
Mr. Leonard argues that the best way to square these circles is to channel U.S. basic research dollars into the technology that can retrofit existing coal plants with carbon capture technology. Most current funding is devoted to second-generation systems that are still 10 or 20 years away from commercial deployment, at best. "We should spend 99% of our time on the problem that we have today, and it ain't going away," he says, referring to coal emissions. He also sees retrofit technology as a realistic way to curb Chinese emissions: "They're going to follow because we can offer them something."
Mr. Leonard worries, too, that Congress may make matters worse as it takes up climate change legislation this spring or summer. One proposal that enjoys wide Democratic support is a "renewable portfolio standard," which would mandate that utilities generate a certain percentage of their electricity -- as high as 20% -- from renewable sources like wind or solar. Nuclear, naturally, does not qualify.
Mr. Leonard points to yet another energy policy contradiction, which is that a portfolio standard -- which Congress would impose on top of cap and trade -- would actually increase carbon emissions. Power companies would be more likely to use renewables to replace sources like natural gas, which is relatively lower in carbon but also expensive, rather than to displace coal, which is cheaper and more abundant but also produces more emissions.
While Mr. Leonard says -- repeatedly -- that Entergy has nothing against solar or wind, "Our view is that government shouldn't be in the business of picking technologies. . . . And we're moving down a path where we're mandating renewables instead of a price signal to do it. We're . . . moving toward a planned economy by mandating a technology. Well, if we're a planned economy, if we're mandating technologies, then we don't have a whole plan."
"The focus," Mr. Leonard reiterates, "should be on developing the cap-and-trade program: Setting the amount of reductions, where we want to be, setting the price signal that works so that it's not so high that it shuts down coal plants prematurely, and that's not so low that it becomes a loophole and people don't end up doing anything -- and all we end up doing is taxing people, and God knows what the government will do with that money."
"This needs to be done with a fine pen to get it right," he adds.
Still, the government is not exactly run by omniscient technocrats. Does he believe that Congress -- with its entrenched constituencies, its own self-interest, its many antibusiness biases -- can actually create a climate system that is as sensitive and efficient as he envisions? That is, can the political class actually write the same bill that economists would write?
"That is really the tough part," Mr. Leonard says. "The trade-offs are not simple. . . . With a well-crafted bill, the market will make those choices. Or you can do it with a planned economy, and hope you get it right."
We may find out.
Mr. Rago is a Journal editorial page writer.