Price caps are for sissies

By Steve Bailey, Globe Columnist  |  December 7, 2005

Governor Mitt Romney and his chief economic adviser, Ranch Kimball, are former
venture capitalists, champions of the free market and innovation. Yet the two
are now in full retreat from an innovative, market-rate approach to reducing
global warming, an elegant approach their own administration played a leading
role in crafting over the last 2 1/2 years.

The governor had it right the first time when last month he signaled his support
for a historic regional agreement among Northeastern states to cut greenhouse
gas emissions. ''I'm convinced it is good for business," Romney said at the
time.

Now, in a major flip-flop, Massachusetts is about to get left out of this
first-in-the-nation agreement. Lobbied heavily by business, Romney worries that
the plan could raise utility prices, and wants to place a cap on how much power
plants would pay for each ton of carbon dioxide they emit. Real venture
capitalists, governor, don't do price caps.

If Romney and Kimball are getting cold feet, they need look no further than
their current Business Week to see where the world is headed. In a special
report, the magazine reports how top companies are moving swiftly to prepare for
''a profoundly altered world" of lower greenhouse emissions. And they are doing
it -- as Romney first suggested -- because it is good business. ''If we
stonewall this thing to five years out, all of a sudden the cost to us and
ultimately our consumers can be gigantic," Cinergy Corp. chief executive James
E. Rogers told Business Week.

The magazine even ranks the ''Top Carbon Cutters," the companies that have
excelled in cutting greenhouse gases, and the ''Green Leaders," the people who
have made a difference. California's Arnold Schwarzenegger, a fellow Republican
governor, makes the cut. Romney does not.

The regional greenhouse gas initiative is based on a so-called cap-and-trade
system, the same free-market device used under the first President Bush to
reduce acid rain. The plan would establish an overall limit of emissions for the
Northeast, and reduce it by 10 percent by 2020. Companies would get some right
to pollute, but they would have to buy or trade credits for every ton of carbon
dioxide they emit over that limit. The market, not regulators, would set the
price for those credits.

Romney wants a price cap on how much power plants would have to pay for each ton
of carbon dioxide they emit. Wall Street, however, likes the market-based
approach. A group of heavy hitters, including hedge fund giant Julian Robertson,
chairman of Tiger Management, and Lewis Ranieri, inventor of the mortgage-backed
security while at Salomon Bros., told New York Governor George Pataki just that
in a recent letter.

Price caps, they said, favor ''the lowest common denominator approach and
rewards the most inefficient and those who are the slowest to innovate. By the
same token, it penalizes those who innovate and those who invest in the future
of their physical plants by upgrading and modernizing their equipment." Price
caps, they say, would convert a market system into a tax.

A similar market system has cut pollutants that cause acid rain far more
efficiently than expected. A new government study on the 15-year-old acid rain
initiative estimated the annual cost of the sulfur dioxide program is now
expected to be $1 billion to $2 billion in 2010, far lower than the $6 billion
estimated in 1990. If the estimates prove to be wrong on carbon, the governor of
Massachusetts holds the ultimate cap: He or she can pull the state out of the
compact on 30 days notice.

We know Romney's ambitions extend beyond Massachusetts. But the environment,
unlike such wedge issues as abortion and gay marriage, does not divide neatly by
Red and Blue states. Another Massachusetts Republican governor, William Weld, is
perhaps best known for his famous head-first dive into the cleaned-up Charles
River. How Romney's record on the environment is viewed is up to him.

Steve Bailey is a Globe columnist. He can be reached at bailey@globe.com or at
617-929-2902.