Thursday, September 10, 2009

Policy and the 'Carbon' Business

Normally DC and US business live in comfortable symbiosis. At its best, policymakers defer to the business judgment of the economic actors. Which implies that business knows what it’s doing.

The problem with starting the “carbon business” is that entrepreneurs don’t yet know what they’re doing. What happens with many of the businesses that will emerge? They don’t exist yet! Potential entrepreneurs are just figuring out how they could make money in these areas but they can’t make money without stable government action. But government won’t know how to act until it can see how the business will work. It’s a chicken-and-the-egg problem.

Take carbon storage, for example. Power plant developers don’t have a motivation to start carbon storage, because it cuts into their profits, and they have a duty to maximize their shareholder wealth. It’s essentially left to idealists, and to the central government. But the mechanics of making it happen will be dependent upon people venturing into spaces that don’t exist yet.

To make financiers go in there, you have to assure investors they’ll receive their money back. Their cash flows will come from the creation of carbon offsets that will fundamentally be dependent upon government action. Now let’s not back away from this scared- paper money is also dependent upon the backing of the government, and we’ve had thousands of fights in our history about this in the past. But it is now an accepted part of our economy.

Offsets, in my opinion, could become such an accepted part of the economy, and then we’ll start to see motion in other areas. But regulators will have to make a careful dance with the entrepreneurs trying to make these businesses work, which no one really knows how to do right now.