The social cost of political lobbying around climate policy

About

Climate policy, as with any policy, emerges from a political process. In democratic systems, this may be influenced by lobbying, the interaction between elected officials and organized interests. When such interests can lobby differentially in favor or in opposition to a proposed policy, lobbying could alter the likelihood that the policy becomes enacted. For the landmark Waxman-Markey bill, a piece of federal legislation pertaining to the implementation of a cap-and-trade system in the US that ultimately failed passage in 2010, it was widely postulated at the time that oppositional political interests played a key role in the bill’s demise.

We examined how lobbying spending on the Waxman-Markey bill altered its likelihood of being implemented to determine if lobbying could be an explanation for why so few climate change regulations are enacted and if lobbying has welfare consequences by reducing the likelihood of enacting a socially beneficial policy.

Approach

We used comprehensive United States Congressional lobbying records documenting lobbying activity related to Waxman-Markey between mid-2009 and the end of 2010, allowing us to identify which firms lobbied on Waxman-Markey, and how much they spent lobbying. 
We used the data as inputs to a prediction market event study, an empirical method for forecasting the policy’s effect on the value of publicly listed firms. Despite the fact that Waxman-Markey was not implemented, this approach uses market prices to infer among publicly listed firms that lobbied on Waxman–Markey which ones were expected to gain or lose value from the policy, and by how much.

We found a statistically significant relationship between the amount a firm spent lobbying on Waxman-Markey and how much the policy would be expected to alter its stock value, and that this relationship differs between firms expected to gain value from the policy and those expected to lose value. 

Key Findings

First, we found that firms that are expected to lose are more effective at lobbying to lower the policy’s chances than firms that are expected to gain are at lobbying to raise the policy’s chances. Second, regardless of whether a firm gains or loses, there are diminishing returns to lobbying. The greater effectiveness of oppositional lobbying implies that the sum of all lobbying activity lowered the probability of enacting the Waxman–Markey bill by 13 percentage points, representing an expected social cost of US$60 billion (in 2018 US dollars).

For future climate policies to be more robust to political opposition, we also demonstrated and suggest that sophisticated targeting of which firms get free permits under a cap-and-trade program can increase the probability of policy enactment.

Partners

This study was completed in partnership with Dr. Ashwin Rode of the University of Chicago’s Department of Economics and Energy Policy Institute.