Electricity, resin prices could be impacted by Paris pullout

Some of the dust has settled after President Trump's recent decision to pull the United States out of the Paris climate accord, so it is an auspicious time to discuss how this decision could affect the plastics industry.

Before the decision to dump the deal was announced, many large corporations lobbied the president in an effort to get him to keep the U.S. in the Paris agreement. Among these companies were some large resins and feedstock suppliers.

Clearly these suppliers believe that the Paris agreement was in the best interests of their shareholders or employees or both. But an important question for me was, "What impact will this decision have on processors?"

In the spirit of full disclosure, I must state at the outset that I believe that climate change is real and that the activities of humans can and do have significant negative effects on the environment. I also believe that most of the effects of climate change are long-term in nature. This means that the real costs caused by climate change are difficult to measure at the present time and even harder to predict in the future. But if we only choose to deal with the easy problems, then why do we need economists?

A pressing problem for those of us fortunate enough to live and work in the developed world is how to generate enough energy to keep our economy growing without spoiling the environment we all need to live. The Paris climate accord was a political attempt to address this issue, but in my opinion, it was long on rhetoric and short on substance.

Thanks to my economics education, I am well-versed in the problem of externalized costs. Sending pollutants up a tall smokestack is the classic example of an externalized cost. The people responsible for producing the pollution, which should include the customers as well as the actual producers, pay only a fraction of the actual accrued cost to society of this pollution. The rest of the cost is passed on to somebody else at some other time and location. Left unabated, this practice will often result in a negative outcome that economists call a "tragedy of the commons."

If such a tragedy does come to pass, it will most certainly have a negative effect on processors. But I do not expect that to happen in the next year or two. In the meantime, there are a few economic effects that Trump's decision might have on processors in the near-term. I believe that for most processors, these impacts will be minor, but some of them could turn into more significant issues in the future.

The first effect has to do with the near-term price of electricity. On the surface, the decision to pull out of the Paris accord seems tantamount to the elimination of an environmental regulation. This decision appears to favor the fossil fuels industries and to go against the renewable energy industry. At the present time, it is significantly cheaper to produce electricity with coal than with any other fuel, renewable or otherwise. The cost differential is getting narrower, and it would probably disappear altogether if all of the externalized costs associated with mining and burning coal were reflected in the market price for coal. But for the next year or two, the price of electricity will probably rise at a slower pace than it would have if the switch to a different fuel was mandated.

But coal is rapidly losing favor among the world's large economies, so this reprieve to the coal industry will likely be short-lived. And this creates future regulatory risk for the big energy and utility companies. From a regulatory perspective, the Paris agreement was very favorable to the big energy companies. They knew what was in the agreement, and they knew how they were going to handle it. The fact that there is no longer an agreement in place increases the future risk that they may have to expend the resources required to avoid a newly negotiated set of future regulations that are even more restrictive.

Another effect of Trump's decision on processors may be lower resins prices. Compliance with the Paris accord would have been a boon to the natural gas industry. There is already a shift in the energy sector away from electricity generated by coal-powered plants and into natural gas-powered generating plants. This trend will not be stopped by Trump's decision, but the Paris accord would have likely accelerated it.

This means that future demand for natural gas would have risen at an even faster pace than at the present time. Any increase in demand would have put upward pressure on natural gas prices and ultimately on the price for many types of plastic resins made from natural gas.

A third (and perhaps the most important) effect that Trump's decision will have on processors is that it will raise the consciousness of the marketplace. Many consumers are increasingly demanding that the products they purchase are made using renewable energy sources. I also know of processors that are investing in innovative ways to eliminate their carbon footprint and create cheap, reliable sources of renewable energy to power their factories and offices for years to come.

This type of market-based solution to one's unique energy needs is how the conversion away from burning fossil fuels should happen. The one-size-fits-all approach that is inherent in any policy adopted by the federal government will almost certainly be cumbersome and inefficient. But when these decisions are made in the free marketplace, they are much more likely to be effective and long-lasting.

In the time it has taken for the Paris accord to be implemented (or rejected by Trump), the market has already moved to a position that is more energy-efficient. Consumers and manufacturers who do not want to be held responsible for externalized costs in the future are freely making the choice to demand cleaner energy in the present.

Free market capitalism is not the answer to every problem we face as a nation, but it should definitely be the basis for our energy policy. Too much government control and regulation has created a system that is inefficient and difficult to improve due to its high barriers to entry, high costs and high levels of waste. The plastics industry will have a huge role to play in supplying the products necessary to make our energy future cleaner, cheaper and more secure. Decisions to participate in international agreements are symbolic at best. Market-based decisions are the source of the real power.

At the present time, it is significantly cheaper to produce electricity with coal than with any other fuel, renewable or otherwise.