Cap and Trade Rules
Entergy's CEO J. Wayne Leonard Talks About the Carbon Cap Dilemma

By Jospeh Rago
Wall Street Journal
march 28, 2009

The Carbon Cap Dilemma Entergy's CEO on the politics and economics of tackling global warming.

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 SaundersJ. 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."


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