Two Climate Takes On Warren Buffet & Burlington
It can happen from time to time that there are different viewpoints in a practice group. Here are two perspectives from attorneys on MLA’s climate team regarding Warren Buffet’s planned purchase of Burlington Northern Santa Fe Corp. The bloggers suggest what the financial guru’s $34 billion investment implies for coal and cap-and-trade legislation.
Peter Gray:
According to Wall Street Journal reporter Josh Mitchell, Berkshire Hathaway Inc.'s planned $34 billion purchase of Burlington Northern Santa Fe Corp. suggests that Berkshire CEO, Warren Buffett, believes President Obama's climate change policies will boost the freight rail industry. According to Mitchell, White House support of a cap-and-trade program to reduce global warming emissions "could also boost the popularity of freight travel, which is 5.5 times more fuel-efficient than trucks in carrying goods, according to a recent government study."
I disagree. If the President's climate change policy is adopted, it is likely to decrease the profitability of the rail system as a way to move freight. My reasoning is as follows.
According to the National Mining Association, coal accounts for 75% of railroad shipments. Thus, whatever hurts coal also hurts the railroad business.
Coal transport currently is down: less coal is being used because the economic downturn has led to lower energy demand. Cap-and-trade would accelerate that trend: the cost of power produced from coal would increase, relative to other less carbon-intensive fuels, under cap-and-trade because coal users would have to purchase allowances to cover the CO2 emissions associated with coal use. As a result, LESS coal would be used, which means less coal would be transported by rail.
So, I reach a very different conclusion than Mr. Mitchell: Mr. Buffet must believe that efforts to adopt cap-and-trade legislation will FAIL.
Jon Sohn:
I agree Warren Buffet is against Cap-and-Trade. He has stated this several times publicly. What is less clear to me, and where Peter and I may diverge, is the real world impact cap-and-trade, as currently conceived in Congress, will have on coal at least in the next 15-20 years. The likely legislative scenario, for better or worse, is significant free allowances (not purchased) provided to the coal industry in the medium-term that softens the blow of any regulation.
Further, there are enormous incentives for Carbon Capture & Storage that directly benefit the coal industry. Duke Energy, amongst others, is in favor of cap-and-trade legislation and sees a role for coal in their portfolio going forward. Clearly there are many powerful coal interests against cap-and-trade due to their fears of less coal demand, and a general industry preference for no cap as a matter of principle. Nonetheless, EPA projections on Waxman-Markey actually see overall higher coal electricity demand out through 2025. This is largely due to anticipation of artificially suppressed carbon prices and free allowances. Currently, it is virtually impossible to permit a conventional new coal plant in the United States and it may be easier to move forward on new investments under a cap-and-trade regime because of resulting policy certainty and the provisions noted above.
My take is that Buffet's bet is that coal, particularly coal that is cleaner in terms of traditional pollutants, will be in significant demand for the medium-term whether or not cap-and-trade legislation passes Congress. I don’t see the dire consequences for the coal industry that my colleague suggests above.
