Oracle of Omaha must face hard facts on climate bill

Warren Buffett carries plenty of weight in any debate - even when he gets it wrong.

So as the Senate digs into the climate-change bill that passed the House of Representatives last month, it's worth a look at how Buffett's views on the bill went off course.

Buffett knows global warming is real and carbon emissions must be cut. But he's worried that the bill might hurt his electric utility MidAmerican Energy Holdings.

But that doesn't mean this is a bad bill; it may mean MidAmerican made some bad decisions.

Buffett is simply wrong when he calls the bill a "huge, regressive tax" that would ensure "very poor people are going to pay a lot more for their electricity".

Likewise David Sokol, the chairman of MidAmerican, was wrong when he testified that the cost of buying carbon allowances under the bill would drive up Iowa electricity prices by $110 per month per customer in the first year.

Let's examine their three basic claims:

Claim 1: It's regressive. No, the bill doesn't punish the poor. The nonpartisan Congressional Budget Office found that it would cost the average household US$175 a year by 2020, while the 20 per cent of Americans with the lowest incomes would come out ahead by US$40 a year.

Claim 2: It's a tax. In spite of the Republican Party's relentless "cap-and-tax" talk, cap and trade isn't a tax. It is a dumping fee for greenhouse gases. The dumping permits, or allowances, are distributed to utilities and other large emitters, who can then buy and sell them.

The number of allowances declines over time, guaranteeing that emissions go down. A tax can't do that. Since allowances can be bought and sold, capital flows to the most cost-effective technologies. A new tax means more work for accountants. Cap and trade unleashes the engineers.

Buffett and Sokol don't want cap and trade or a tax, they prefer what Sokol calls "cap and no trade", which is another way of saying they want old-school Government regulation. That would be more expensive than cap and trade.

Claim 3: It costs US$110 a month. In early June Sokol told a House committee, "In Iowa, our cost increase just for 784,000 customers is US$283 million in the first year for buying the emission allowances that aren't given away. That'd be US$110 per month, per customer."

Sokol now says he got his maths wrong. The US$110 figure, he told me, assumes that MidAmerican's 217,000 Iowa residential customers would bear the entire burden of buying allowances. "But it's not conceivable that the regulator would put all of this on the residential customers," he said. "So that is not a terribly useful number."

Sokol now says US$110 equals the combined monthly cost of buying allowances plus paying for all the new technology MidAmerican will need to slash emissions over the next 40years.

It's the sort of estimate utilities routinely exaggerated in previous environmental battles. And MidAmerican's new calculation happens to work out to the precise figure Sokol had already used - a remarkable coincidence.

Sokol's revised estimate for the allowance costs comes to an average of US$30 per month per customer - residential, commercial, and industrial.

That's a far cry from US$110, but even it is too high, according to economist Nat Keohane of the Environmental Defence Fund, because it assumes that ratepayers will foot the bill for all of MidAmerican's allowance costs - including the 30 per cent of its power it sells into the deregulated wholesale market.

MidAmerican wouldn't get free allowances for that wholesale power under the bill, and I think that's the real reason Buffett and Sokol are against it.

The system is designed so that free permits flow downstream to the people who pay for the power. That's good for consumers, but it could hurt MidAmerican shareholders, meaning Buffett's Berkshire Hathaway. The Oracle of Omaha apparently didn't see this one coming. But it's not too late: the next round of negotiation is just getting under way.

- BLOOMBERG

* Eric Pooley is a former managing editor of Fortune magazine who is writing a book about the politics of global warming