Firms backing carbon tax may have ulterior motives
NYU PAPER Support could be spurred by ulterior motives
When the Alberta government rolled out a carbon tax plan in 2015, the province witnessed a strange sight: Oil company executives flanking premier Rachel Notley as she announced a policy that would cost their companies a ton of money. So, why did they do it? A new paper from New York University economist Amanda Kennard shows that these firms aren’t just lobbying for environmental regulations out of the goodness of their corporate hearts: it’s a calculated bet that their competitors will be worse off, allowing them to gain an advantage. For example, if a company’s competitors are heavily reliant on coal, it will be far more likely to lobby for environmental regulations.
The paper also takes aim at the most common explanation for this kind of corporate behaviour: that companies encourage federal lawmakers to harmonize environmental policy across the country to give them certainty and predictability when it comes to costs. Kennard argues that this just isn’t borne out by the data. In fact, differences across various provinces and states could actually benefit certain companies, relative to their competition.
In the paper, Kennard examines the 2009 cap-andtrade legislation passed in the U.S. House of Representatives and finds some unlikely supporters of the bill. The aluminum company Alcoa Corporation was a vocal booster of the proposed rules, despite the fact that aluminum smelting is one of the most energy-intensive activities in the world. With about 20 per cent of the company’s costs going towards energy, any emissions legislation would be hugely expensive.
“Alcoa’s support for cap and trade was more than a simple public relations campaign,” writes Kennard. The company was involved in several other environmental initiatives and engaged in a full-throated lobbying effort to get the bill passed. Why did it do it? One clue came when Alcoa’s direct competition lobbied hard against the bill and publicly threatened to move to Mexico if it passed.
“While climate change policy increases costs across the board, it also leads to shifts in market share, which benefit those firms with relatively low adjustment costs,” writes Kennard. “If these shifts in market share are large, they may compensate for the policy’s direct costs.”
In other words, companies will be happy to pay extra costs provided their competition is hit harder.
Alcoa had a big advantage because it had signed long-term contracts for hydro-electric power for its operations, while the competition was using coal-fired power plants. Although the legislation would still be a cost burden on Alcoa, the cost of adjusting to the new regime was much higher for its domestic competitors.
Kennard’s paper also argues that a company’s international competitors — which may be able to avoid burdensome environmental regulations — may not be as big a factor as previously believed. Economists and corporate executives have expressed concerns about this global “carbon leakage,” when onerous environmental rules are imposed. Although most large firms are facing global competitors in a world increasingly free of trade barriers, most of the lobbying decisions on environmental regulations are driven by domestic market share. Those domestic benefits seem to outweigh the global competition.
Kennard outlines three ways that domestic competitors could see massively different costs from the same legislation. Cost advantages could come from a company that has invested a lot of money in new, more efficient equipment. Some firms will have access to clean energy and energy-efficient technology. The third factor comes from regional differences in electricity generation. If an area happens to be coal-intensive, it will end up being more expensive than other regions that rely on cleaner fuel sources.
In a competitive environment, most of these conditions naturally arise.
“Competition between domestic firms is a sufficient condition for supportive lobbying in nearly any regulatory context,” Kennard writes.