Outside View: Caught En Flagrente Kyoto

It was the Washington Post that was first to expose internal Enron Corp. documents revealing the failed energy giant's disturbing relationship with one of the more controversial Clinton-Gore Administration adventures.

These documents circulating Washington detail not merely Enron's glee upon Vice President Gore negotiating the 1997 Kyoto Protocol, or “global warming treaty”, but revealed pre-Kyoto plans to “Mak[e] sure there is a treaty.”

One memo expresses admiration for, but caution against, legislation “being blatant” about backdoor attempts to de facto implement the unratified treaty, warning against pursuing “the whole enchilada” so directly.

The smokiest gun among the popular Enron memos crows, “[i]f implemented, this agreement will do more to promote Enron's business than will almost any other regulatory initiative outside of restructuring the energy and natural gas industries in Europe and the United States…This agreement will be good for Enron stock!!”

Drafted by Enron's Kyoto emissary immediately upon his return from Japan, it praises individual Kyoto features with “we won”, “another victory for us,” and “exactly what I have been lobbying for”. An Enron political action committee update indicates carbon dioxide suppression policies lagged in priority only behind energy deregulation.

Why would an “energy” company support, let alone financially back others to advocate, such a scheme?

The answers, though simple, require an appreciation that Enron's strategic thinking was simply clouded with visions of a huge energy market in essence ceded by the government to Enron's varied industries. It was remarkably shortsighted and/or arrogant to think Kyoto's required carbon dioxide cap, while certainly killing coal immediately, would somehow spare natural gas.

Specifically, Kyoto's carbon dioxide suppression scheme would enormously benefit Enron by greatly increasing the cost of generating electricity from coal, the reserves of which are so large as to serve as an inexpensive competitor with gas for centuries.

To burn coal, you would have to purchase “credits,” for tons of carbon dioxide, principally from parties burning gas. Enron wanted to circumvent competition with coal through unnatural governmental intervention, providing them the following benefits:

Enron's core business, where they made the most of their money, was trading (energy, mostly); they hoped to replicate that feat by artificially creating a market for trading credits in carbon dioxide, so that many of their energy transactions would also lead to buyers and sellers of CO2 credits;

If a party wanted to avoid paying this premium for the privilege of burning coal, they switch to gas. Enron boasted the world's largest gas pipeline outside of Russia's Gazprom. Cost for space on their pipeline, and the cost of their principal “product” gas, would increase.

In anticipation of making this happen, Enron purchased the world's largest windmill company, and a half-share in the world's largest solar energy company, the use of both which would suddenly be far less non-competitive.

Both were ultimately spun off as losers.

In sum, Enron would affect government programs increasing the cost of electricity by billions, much of the increased U.S. cost, which would go to their pocket. Quite a racket.

Enron's aberrant policy stance was known to the bulk of those likely to be disadvantaged by Kyoto's regime. As one executive of an energy users association described it to me, “no one wanted to put their head above the radar to expose [Enron], for fear of pressure group — and administration — backlash”.

Indeed, when President Bush knowingly invited a political hammering last spring by reaffirming his campaign pledge against Kyoto, reporters scrambled to finger the “industry” culprits responsible for this decision. One noted writer/talking head from a national weekly interviewed my colleague Myron Ebell for an hour on that point.

The reporter began by asking the question, and patiently listened to Ebell walk through how Bush actually rebuffed an industry (principally, but not exclusively Enron) priority, in the name of the nation's economy. The scribe gave a thoughtful “Mmmm”, then replied, “great…now…tell me who in industry got Bush to do this?”

Enron promoting the Greens' uber-issue simply violated most reporters' mental template of how a Republican White House makes a decision on energy and/or environment. As the energy executive's comment indicates, the coal industry, which faced extinction, enjoyed few compatriots willing to testify to that which was simply not spoken for the previous eight years.

It is worth noting that Enron simply could not get to where they wanted to go — Kyoto — through Republicans.

Another flawed though common inquiry in the wake of Enron's collapse is how to explain the stunning pirouette of an erstwhile free market company advocating using the government to disable its competition, plus create artificial scarcity and thus “markets”? This misses the point of Enron.

That this appears as a philosophical turn demonstrates how the oft-cited picture of Enron as poster child for failed free-market ideas could not be more flawed.

Enron was a company whose philosophy was itself, not any among the classic economic or market disciplines. It made its initial fortune by successfully demanding then capitalizing upon removal of government barriers to competition, particularly state regulated electricity monopolies. It then sought to double that fortune by erecting governmental barriers, to artificially create markets, coincidentally quashing its principal competitors.

Though wonderfully Kafkaesque if true, its stealthy campaign for Kyoto's energy restrictions did not trigger Enron's collapse. With luck, however, Enron's downfall, and the subsequent outing of Kyoto as in large part an industry scheme to make billions, will be the deal's ultimate undoing.

Christopher C. Horner is an attorney and senior fellow at the Competitive Enterprise Institute.