Common Tragedies

Thoughts on Environmental Economics

Probably not the best way to regulate the environment

Posted by Rich Sweeney on September 24, 2007

The NYTimes reports that new New York AG Andrew Coumo is using securities laws to subpoena documents from 5 energy companies. Corporate subpoenas are nothing new, especially in New York. What is new is the rationale. Whereas Spitzer used to at least harass companies in the general vain of SOX, Coumo is now using his powers to protect shareholders as justification for investigating energy companies’ purported plans to build coal-fired generators in the future. His letter to the companies questions whether or not their investors are adequately informed about the “financial liabilities of carbon dioxide emissions”.

Now I don’t know all the details of the case but that sounds pretty dubious to me. In a post-Inconvenient Truth world, investors in energy are probably better informed about the regulatory risk their investments face than any other industry I can think of. At this point, any potential liabilities from emitting carbon should already be incorporated into both the price of the stock and the decision to build more coal plants. For all we know, investors could be betting on the success of carbon capture and sequestration (CCS), and it is precisely in situations like this, when there is great complexity and uncertainty, that we need to let the market do its job. If politicians want to reduce carbon emissions they should do so explicitly and transparently by directly linking the decision to emit with the cost of emission. Harassing companies through back-door subpoenas, especially when the root of the problem lies with Washington’s unwillingness to enact a meaningful carbon policy, is both inefficient and disingenuous.

2 Responses to “Probably not the best way to regulate the environment”

  1. Daniel Hall said

    In terms of markets incorporating potential liabilities, I think a prime example is the private equity buyout of TXU. This deal was likely made possible by the fact that TXU shares were slipping because of regulatory risk from their plans to build 11 coal-fired power plants. The private equity guys saw a chance to make money if they could negotiate away most of the power plants in conjunction with buying the company.

  2. Dallas Burtraw said

    The TXU deal is a good example of the market disciplining the company. However, the change in stock price in the fall of 2006 was the result in part from a major public relations campaign. Remember also the letter from Senators Boxer and Bingaman that assured investors that TXU would not be grandfathered free permits if a cap and trade program came into being. Politics interacted with other types of information to have an affect on the TXU stock price.

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