A Level Economics 34: Understanding Market Structures

The structure of a market depends on the number of firms operating within it and their ability to enter and exit the market freely, which is known as contestability. Here's an explanation with definitions and examples:

Number of Firms: The number of firms in a market refers to the total count of independent businesses competing with each other to sell similar or substitute goods or services. The number of firms influences the level of competition and market concentration, which, in turn, affects market structure. Market structures can range from a monopoly (one firm) to perfect competition (many firms).

Example: A market with only one telecommunications company providing phone services would be a monopoly. In contrast, a market with multiple telecommunications companies competing with each other would reflect a more competitive market structure, such as oligopoly or perfect competition.

Contestability (Ability to Enter and Exit Markets Freely):Contestability refers to the ease with which new firms can enter a market and compete with existing firms, as well as the freedom for existing firms to exit the market without significant barriers or impediments. The degree of contestability affects the potential for new entry and the level of competition within a market.

Example: In a market with low barriers to entry and exit, such as the smartphone app development industry, new firms can easily enter the market and offer their apps. If these firms can compete effectively with existing app developers, it indicates high contestability and a more competitive market structure.

The Relationship:The number of firms and contestability are interrelated and jointly determine the structure of a market. When there are a large number of firms and low barriers to entry and exit, it promotes competition and leads to more competitive market structures, such as perfect competition or monopolistic competition.

In contrast, when there are a small number of firms and high barriers to entry and exit, it restricts competition and can result in more concentrated market structures, such as oligopoly or monopoly.

Example: Consider the market for coffee shops in a particular city. If there are numerous coffee shops, and new coffee shops can enter the market easily and compete with existing ones, it indicates a highly contestable market with many firms. This scenario would align with a competitive market structure, such as perfect competition or monopolistic competition.

However, if there are only a few dominant coffee shop chains and significant barriers to entry, such as high startup costs or exclusive lease agreements, the market would have low contestability. This would result in a less competitive market structure, such as an oligopoly or even a monopoly if one chain has a dominant market position.

In summary, the structure of a market depends on the number of firms operating within it and their ability to enter and exit the market freely. The presence of many firms and high contestability leads to more competitive market structures, while fewer firms and low contestability can result in concentrated market structures with less competition.

--- Structural and Behavioural Barriers to Entry

Key Terms:

1. Barriers to Entry: Barriers to entry are obstacles or restrictions that prevent new firms from entering a market and competing with existing firms. These barriers can be both structural and behavioral in nature.

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3. Structural Barriers to Entry: Structural barriers to entry refer to inherent characteristics of a market that make it difficult or costly for new firms to enter and establish themselves. These barriers are typically long-term and relate to the market's fundamental structure.

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5. Behavioral Barriers to Entry: Behavioral barriers to entry arise from the actions of existing firms in a market to discourage or limit new entrants. These barriers are often strategic and can be influenced by the actions of dominant players in the market.

Examples and Distinction:

1. Structural Barriers to Entry:

a. Economies of Scale: When existing firms in a market benefit from economies of scale, new entrants may find it challenging to match the cost efficiency of established firms. As production increases, the average cost per unit decreases, providing a competitive advantage to larger companies. This discourages new firms from entering and competing with economies of scale.

Example: In the automobile manufacturing industry, large carmakers enjoy economies of scale due to their established production facilities, distribution networks, and purchasing power. New entrants face difficulty achieving similar cost efficiencies, making it a structural barrier to entry.

b. High Capital Requirements: Some markets require substantial upfront investments in machinery, technology, or infrastructure to compete effectively. High capital requirements act as a deterrent for new entrants, limiting their ability to enter the market.

Example: The airline industry demands significant capital investment to purchase aircraft and establish routes. This high capital requirement makes it difficult for new airlines to enter the market and compete with established carriers.

c. Access to Distribution Channels: In certain markets, established firms may control critical distribution channels, making it difficult for new entrants to reach customers effectively. Without access to established distribution networks, new firms may struggle to gain market share.

Example: In the retail industry, large supermarket chains control established distribution networks, making it challenging for new grocery stores to enter the market and compete for shelf space and customer visibility.

2. Behavioral Barriers to Entry:

a. Predatory Pricing: Dominant firms may engage in predatory pricing, intentionally setting prices below cost to drive out new entrants. Once competitors are forced out, the dominant firm can then raise prices and regain its market power.

Example: A large software company offering its products at unprofitably low prices to deter new software startups from entering the market is an example of predatory pricing.

b. Brand Loyalty: Established firms often build strong brand loyalty and customer trust over time. This creates a barrier for new entrants as customers may be hesitant to switch to an unknown brand.

Example: Tech-savvy consumers' strong brand loyalty to smartphones may deter new smartphone manufacturers from entering the market, even if they offer innovative features.

c. Exclusive Contracts: Existing firms may enter into exclusive contracts with suppliers or distributors, preventing new entrants from accessing essential resources or distribution channels.

Example: A dominant beverage company entering into exclusive contracts with popular restaurants and convenience stores may limit the ability of new beverage companies to access these sales channels.

In summary, barriers to entry can be both structural and behavioral. Structural barriers stem from inherent market characteristics, such as economies of scale and high capital requirements. Behavioral barriers, on the other hand, result from strategic actions taken by existing firms to discourage or limit new entrants, such as predatory pricing and brand loyalty. Understanding these distinctions helps identify the challenges new firms face in entering competitive markets.

---Regulators and Contestability

Regulators play a crucial role in influencing the degree of contestability in a market by implementing policies and regulations that either promote or hinder competition. Here are several ways regulators can affect contestability in a market, along with examples:

1. Barriers to Entry and Exit:

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   • Regulators can influence the ease with which new firms can enter a market by setting entry requirements, licensing, or imposing restrictions on potential entrants.
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   • They can also impact the ability of firms to exit the market by imposing exit fees, liquidation costs, or other legal barriers.
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   Example: In the telecommunications industry, regulators can grant or deny licenses to new companies seeking to provide services. If regulators make it easy for new firms to obtain licenses and enter the market, it encourages greater contestability and competition among telecommunications providers.

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3. Anti-Competitive Practices:

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   • Regulators can enforce antitrust laws to prevent anti-competitive practices, such as price-fixing, collusion, or predatory pricing, which can restrict competition and limit contestability in a market.
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   Example: In the airline industry, regulators can investigate and take action against airlines engaging in collusion to fix ticket prices. By curbing such anti-competitive practices, regulators ensure a more competitive market that benefits consumers with lower fares and increased choices.

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5. Merger and Acquisition Approval:

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   • Regulators can assess and approve or reject mergers and acquisitions based on their potential impact on competition and contestability in the market.
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   • They may require divestitures or impose conditions to ensure that the merged entity does not gain undue market power that could harm competition.
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   Example: When two pharmaceutical companies propose a merger, regulators may scrutinize the deal to assess its potential effects on competition in the pharmaceutical industry. If the merger is deemed to reduce competition and contestability, regulators may impose conditions or reject the merger to maintain a competitive market.

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8. Price Regulation:

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   • Regulators can set price caps or price floors to prevent firms from exploiting their market power and to promote a competitive environment.
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   • Price regulation can prevent monopolistic practices and ensure that consumers have access to reasonably priced goods and services.

   Example: In the electricity market, regulators can impose price ceilings to limit the prices charged by power generation companies. This prevents firms from exploiting their dominant position and promotes contestability in the electricity market, allowing new entrants to compete.

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10. Access to Essential Facilities:

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    • Regulators can ensure that essential facilities or infrastructure, such as transportation networks or communication networks, are accessible to all firms on fair and non-discriminatory terms.
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    • This prevents the dominant control of essential facilities by a single firm, allowing competitors to enter the market and increase contestability.
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    Example: In the railroad industry, regulators can mandate that rail network operators provide access to their tracks for other freight companies at fair rates. This promotes competition in the freight transportation market and enhances contestability.

In summary, regulators can significantly influence the degree of contestability in a market through various policies, regulations, and enforcement actions. By promoting fair competition, preventing anti-competitive practices, and ensuring access to essential facilities, regulators contribute to creating more competitive and contestable markets that benefit consumers and promote innovation.

Why we trust fraudsters

From Enron to Wirecard, elaborate scams can remain undetected long after the warning signs appear. What are investors missing? Tom Straw in The FT

In March 2020, the star English fund manager Alexander Darwall spoke admiringly to the chief executive at one of the largest investments in his award-winning portfolio. “The last set of numbers are fantastic,” he gushed, adding: “This is a crazy situation. People should be looking at your company and saying ‘wow’. I’m delighted, I’m delighted to be a shareholder.” 

Seated in a swivel chair at his personal conference table, Markus Braun sounded relaxed. The billionaire technologist was dressed all in black, a turtleneck under his suit like some distant Austrian cousin of the late Steve Jobs, and he had little to say about swirling allegations the company had faked its profits for years. “I am very optimistic,” he offered, when Darwall voiced his hope that the controversy would amount to nothing more than growing pains at a fast expanding company. 

“I haven’t sold a single share,” Darwall assured him, doing most of the talking, while also acknowledging how precarious the situation was. The Financial Times had reported in October 2019 that large portions of Wirecard’s sales and profits were fraudulent, and published internal company documents stuffed with the names of fake clients. A six-month “special audit” by the accounting firm KPMG was approaching completion. “If it shows anything that senior people misled, that would be a disaster,” Darwall said. 

His assessment proved correct. Three months later the company collapsed like a house of cards, punctuated by a final lie: that €1.9bn of its cash was “missing”. In fact, the money never existed and Wirecard had for years relied on a fraud that was almost farcical in its simplicity: a few friends of the company claimed to manage huge amounts of business for Wirecard, with all the vast profits from these partners said to be collected in special bank accounts overseen by a Manila-based lawyer with a YouTube following. Braun, who claims to be a victim of a protégé with security services connections who masterminded the scheme and then absconded to Belarus, faces a trial this autumn alongside two subordinates that will examine how the final years of the fraud were accomplished. 

Left behind in the ashes, however, is a much larger question, one which haunts all victims of such scams: how on earth did they get away with it for so long? Wirecard faces serious questions about the integrity of its accounts since at least 2010. Estimates for losses run to more than €20bn, never mind the reputation of Frankfurt as a financial centre. Why did so many inside and outside the company — a long list of investors, bankers, regulators, prosecutors, auditors and analysts — look at the evidence that Wirecard was too good to be true and decide to trust Braun? 

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In 2019 I worked with whistleblowers to expose Wirecard, using internal documents to show the true source of its spellbinding growth in sales and profit. As I faced Twitter vitriol and accusations I was corrupt, the retired American short-seller Marc Cohodes regularly rang me from wine country on the US west coast to deliver pep talks and describe his own attempts to persuade German journalists to see Wirecard’s true colours. “Keep going Dan. I always say, ‘there’s never just one cockroach in the kitchen’.” 

He was right on that point: find one lie and another soon follows. But short-sellers who search for overvalued companies to bet against are unusual, because they go looking for fraud and skulduggery. Most investors are not prosecutors fitting facts into a pattern of guilt: they don’t see a cockroach at all. 

Think of Elizabeth Holmes, another aficionado of the black turtleneck, who persuaded a group of experts and well-known investors to back or advise her company, Theranos, based on the claim it had technology able to deliver medical results from an improbably small pinprick of blood. The involvement of reputable people and institutions — including retired general James Mattis, former secretary of state Henry Kissinger and former Wells Fargo chief executive Richard Kovacevich as board members — seemed to confirm that all was well. 

Another problem is that complex frauds have a dark magic that is different to, say, “Count” Victor Lustig personally persuading two scrap metal dealers he could sell them a decaying Eiffel Tower in 1925. As Dan Davies wrote in his history of financial scams, Lying for Money, “the way in which most white-collar crime works is by manipulating institutional psychology. That means creating something that looks as much as possible like a normal set of transactions. The drama comes much later, when it all unwinds.”  

What such frauds exploit is the highly valuable character of trust in modern economies. We go through life assuming the businesses we encounter are real, confident that there are institutions and processes in place to check that food standards are met or accounts are prepared correctly. Horse meat smugglers, Enron and Wirecard all abused trust in complex systems as a whole. To doubt them was to doubt the entire structure, which is what makes their impact so insidious; frauds degrade faith in the whole system. 

Trust means not wasting time on pointless checks. Most deceptions would generally have been caught early on by basic due diligence, “but nobody does confirm the facts. There are just too bloody many of them”, wrote Davies. It makes as much sense for a banker to visit every outpost of a company requiring a loan as it would for the buyer of a pint of milk to inquire after the health of the cow. For instance, by the time John Paulson, one of the world’s most famous and successful hedge fund managers, became the largest shareholder in Canadian-listed Sino Forest, its shares had traded for 15 years. Until the group’s 2011 collapse, few thought of travelling to China to see if its woodlands were there. 

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Yet what stands out in the case of Wirecard are the many attempts to check the actual facts. In 2015 a young American investigator, Susannah Kroeber, tried to knock on the doors at several remote Wirecard locations. Between 2010 and 2015 the company claimed to have grown in a series of leaps and bounds by buying businesses all over Asia for tens of millions of euros apiece. In Laos she found nothing at all, in Cambodia only traces. Wirecard’s reception area in Vietnam was like a school lunchroom; the only furniture was a picnic table for six and an open bicycle lock hung from one of the internal doors, a common security measure usually removed at a business expecting visitors. The inside was dim, with only a handful of people visible and many desks empty. She knew something wasn’t right, but she also told me that while she went half mad looking for non-existent addresses on heat-baked Southeast Asian dirt roads, she had an epiphany: “Who in their right mind would go to these lengths just to check out a stock investment?” 

Even when Kroeber’s snapshots of empty offices were gathered into a report for her employer, J Capital Research, and presented to Wirecard investors, the response reflected preconceived expectations: these are reputable people, EY is a good auditor, why would they be lying? The short seller Leo Perry described attending an investor meeting where the report was discussed. A French fund manager responded by reporting his own due diligence. He’d asked his secretary to call Wirecard’s Singapore office, the site of its Asian headquarters, and could happily report that someone there had picked up the phone. 

The shareholders reacted at an emotional level, showing how fraud exploits human behaviour. “When you’re invested in the success of something, you want to see it be the best it can be, you don’t pay attention to the finer details that are inconsistent”, says Martina Dove, author of The Psychology of Fraud, Persuasion and Scam Techniques. She adds that social proof and deference to authority, such as expert accounting firms, were powerful forces when used to spread the lies of crooks: “If a friend recommends a builder, you trust that builder because you trust your friend.” 

Wirecard’s response, in addition to taking analysts on a tour of hastily well-staffed offices in Asia, was to drape itself in complexity. Like WeWork, the office space provider that presented itself as a technology company (and which wasn’t accused of fraud), Wirecard waved a wand of innovation to make an ordinary business appear extraordinary. 

At heart, Wirecard’s legitimate operations processed credit and debit card payments for retailers all over the world. It was a competitive field with many rivals, but Wirecard claimed to have become a European PayPal and more, outpacing the competition with profit margins few could match. Wirecard was “a technology company with a bank as a daughter”, Braun said, one using artificial intelligence and cutting-edge security. As the share price rose, so did Braun’s standing as a technologist who heralded the arrival of a cashless society. Who were mere investors to suggest that the results of this whirligig, with operations in 40 countries, were too good to be true? 

It seems to me Wirecard used a similar tactic to the founder of software group Autonomy, Mike Lynch, who charged that critics simply didn’t understand the business. (Lynch has lost a civil fraud trial relating to the $11bn sale of the group, denied any wrongdoing, said he will appeal, and is fighting extradition to the US to face fraud charges. Autonomy’s former CFO was convicted of fraud in separate American proceedings.) 

When this publication presented internal documents describing a book cooking operation in Singapore, Wirecard focused on the amounts at stake, which were initially small, rather than the unpunished practices of forgery and money laundering, which were damning. 

Then there was the thrall of German officials. Three times, in 2008, 2017, and 2019, the financial market regulator BaFin publicly investigated critics of Wirecard, taken by observers as a signal of support. Indeed, BaFin fell for the big lie when faced with an unenviable choice of circumstances: either foreign journalists and speculators were conspiring to attack Germany’s new technology champion using the pages of a prominent newspaper; or senior executives at a DAX 30 company were lying to prosecutors, as well as some of Germany’s most prestigious banks and investment houses. Acting on a claim by Wirecard that traders knew about an FT story before publication, regulators suspended short selling of the stock to protect the integrity of financial markets. 

Proximity to the subject won out, but the German authorities were hardly the first to fail in this way. Their US counterparts ignored the urging of Harry Markopolos to investigate the Ponzi schemer Bernard Madoff, a former chairman of the Nasdaq whose imaginary $65bn fund sent out account statements run off a dot matrix printer. 

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For some long-term investors, to doubt Wirecard was surely to doubt themselves. Darwall first invested in 2007, when the share price was around €9. As it rose more than tenfold, his investment prowess was recognised accordingly, attracting money to the funds he ran for Jupiter Asset Management, and fame. He knew the Wirecard staff, they had provided advice on taking payments for his wife’s holiday rental. Naturally he trusted Braun. 

Darwall did not respond to requests for comment made to his firm, Devon Equity Management. 

In the buildings beyond the shades of Braun’s office, staff rationalised what didn’t fit. Wirecard was a tech company, yet in early 2016 it suffered a tech disaster. On a quiet Saturday afternoon, running down a list of routine maintenance, a tech guy made a typo. He entered the wrong command when decommissioning a Linux server. Instead of taking out the one machine, he watched with rising panic as it killed all of them, pulling the plug on almost the entire company’s operations without warning. 

Customers were in the dark, as email was offline and Wirecard had no weekend helpline, and it took days for services to recover. Following the incident, a small but notable proportion of clients left and new business was put on hold as teams placated those they already had, staff recalled. Yet the pace of growth in the published numbers remained strong. 

Martin Osterloh, a salesman at Wirecard for 15 years, put the mismatch between claims and capabilities down to spin. Only after the fall was the extent of Wirecard’s hackers, private detectives, intimidation and legal threats exposed to the light. Haphazard lines of communication, disorganisation and poor record keeping created excuses for middle-ranking Wirecard staff and its supervisory board, stories to tell themselves about a failure to integrate and start-up’s culture of experimentation. 

It was perhaps not as hard to believe as we might think. Facebook, which has probed the legal boundaries of surveillance capitalism, famously encouraged staff to “move fast and break things”. Business questions often shade grey before they turn black. As Andrew Fastow said of his own career as a fraudster, “I wasn’t the chief finance officer at Enron, I was the chief loophole officer.” 

Braun’s protégé was chief operating officer Jan Marsalek, a mercurial Austrian who constantly travelled and struck deals, with no real team to speak of. Boasting that he only slept “in the air”, he would appear at headquarters from one flight with a copy of Sun-Tzu’s The Art of War tucked under an arm, then leave a few hours later for the next. Questions were met with a shrug, that strange arrangements reflected Marsalek’s “chaotic genius”. As scrutiny intensified in the final 18 months, the fraudulent imitation shifted to problem solving, allowing board members and staff to think they were engaged in procedures to improve governance. 

After the collapse I shared pretzels with Osterloh on a snowy day in Munich and he seemed embarrassed by events. He and thousands of others had worked on a real business, until they were summarily fired and learned it lost money hand over fist. Osterloh spoke for many when he said: “I’m like the idiot guy in a movie, I got to meet all these guys. The question arises, why were we so naive? And I can’t really answer that question.”  

It's David Cameron that's anti-business

Campaigners against business abuse believe in wealth creation, not corporate abuse of so-called free markets

• 
• • Richard Murphy for Tax Research UK, part of the Guardian Comment Network
  • guardian.co.uk, Thursday 23 February 2012 13.06 GMT

David Cameron has condemned 'anti-business snobbery'. Photograph: Pool/Reuters

David Cameron will use today's speech to the Business in the Community charity to warn that "we've heard some dangerous rhetoric creep into our national debate that wealth creation is somehow antisocial, that people in business are out for themselves".

Cameron's on dodgy ground here. First, he's flip-flopping, which is amusing to see when Labour has opened a clear lead on this issue. But more important, he's completely missing the point.
The problems that those of us who campaign against business abuse have are that there aren't free markets, and as such wealth creation is not taking place but has been replaced by corporate abuse and that is not socially progressive and has instead proved to be massively socially destructive.

Let me explain. When Cameron refers to business leaders he's invariably talking about the leaders of big business. All, just about without exception, are monopolists or oligopolists. They exploit markets to make excessive profits at cost to consumers. They use those excessive profits to pay themselves vastly inflated sums. That's not wealth creation – that's rent-seeking behaviour that is straightforwardly abusive.

In fact, it's just an act of redistribution, but from the 99% to the 1%. We object to that. We demand information so we can appraise what's going on so it can be stopped. That's one of the reasons for demanding country-by-country reporting – which Cameron and the Tories have been cool about. Cameron has shown himself to be on the side of abuse as a result.

And those big business leaders exploit their position to avoid tax using tax havens. Cameron and the Tories are encouraging that. First they're doing it by passing new legislation that is going to positively encourage large companies (and only large companies, mind: smaller ones are excluded) to set up their treasury functions outside the UK in future and pay just 5.75% tax on them as a result.

Second, while Labour strongly supported country-by-country reporting that would require companies to disclose just what profits they made in tax havens and other countries, and where they do or don't pay their tax, the Tories have gone out of their way to support proposals from big accountants like PWC that do just the opposite because their proposals would ignore all places where no tax was paid – like tax havens. To break monopoly power and rent-seeking behaviour that exploits tax loopholes by exposing it would support wealth creation rather than wealth abuse, but Cameron isn't taking the steps to support that wealth creation. He seems to prefer the continuing secrecy that has supported the abuse.

And there are also aren't free markets because government won't provide the regulation to make sure all businesses comply with regulation or pay their taxes, as I've shown. So there's an unlevel playing field. That's a profoundly anti-business policy on the part of the Tories.

The result is that Cameron's policies encourage shifting of profits to the greedy, the monopolist, the abuser of the consumer, those who ignore regulation and those who are fraudulent. That's not socially progressive. That's socially harmful.

That's why we object to his policies. And whatever the story, while he does not walk the walk, those campaigners like the Tax Justice Network – who believe that being pro-business means being pro-transparency and accountability, being pro-everyone paying their tax and being anti-market abuse measures like tax havens and opacity – will continue to pursue their arguments. Because they're the real pro-wealth creators and real pro-free marketeers, when free means people have the information they need to make proper decisions freely available to them – which is the pre-condition of free markets as anyone who has done some training in economics knows.

Public relations companies and law firms work without declaring who their clients are!

Smoke and mirrors: how the tobacco industry hides behind lobbyists

PR firms and lawyers campaign without revealing clients' identity

By Steve Connor, Science Editor
 

Saturday, 3 September 2011 in The Independent

The tobacco industry is covertly using third-party companies to lobby against smoking restrictions and to gain access to health documents held by public organisations.

Public relations companies and law firms are working on behalf of anonymous multinational tobacco companies without declaring who their clients are, according to an investigation by The Independent.

The third parties have refused to confirm they are working on behalf of tobacco firms when they make freedom of information requests from universities and other public bodies, even though the third parties are demanding more openness from their targets.

The public relations company Bell Pottinger and the London law firm Clifford Chance have both requested information from public organisations without making it clear they are working on behalf of tobacco firms.
The Irish PR company Hume Brophy has also carried out a lobbying campaign against the Government's ban on cigarette displays in shops on behalf of the National Federation of Retail Newsagents without stating
that the campaign was being funded by the tobacco industry.

The Independent has established that Alex Deane, a former chief-of-staff to David Cameron, played a key role in attempts to use the freedom of information law against one public organisation involved in promoting awareness against the health dangers of roll-up tobacco. Mr Deane is a director of Bell Pottinger which earlier this year requested documents from a health-awareness organisation funded by the NHS, the Bristol-based Smoke Free South West, following a campaign it ran against roll-up tobacco, which is popular in that part of the country.

Soon after this informal request, Smoke Free South West received a formal freedom of information request for the same documentation from Big Brother Watch, a right-of-centre libertarian group founded by Mr Deane.

Neither Bell Pottinger nor Big Brother Watch declared to Smoke Free South West that they had held discussions with one another or with Bristol-based Imperial Tobacco, which is listed as one of Bell Pottinger's clients in the PR firm's website, and makes Golden Virginia rolling tobacco and Rizla cigarette papers.

Mr Deane was not available for comment yesterday; Bell Pottinger said he was on holiday. David Petrie, the Bell Pottinger executive who sent the email requests to Smoke Free South West, did not return calls. Daniel Hamilton, a director of Big Brother Watch, refused to confirm or deny that his organisation had been in contact with Bell Pottinger or Imperial Tobacco over the FOI request to Smoke Free South West. "We don't work on behalf of other groups. We only work on behalf of ourselves... We've got no formal links with anyone in the tobacco industry," Mr Hamilton said.

This week, The Independent revealed that tobacco companies had demanded access to confidential university research papers on teenagers' attitudes to smoking, as well as meetings within the Department of Health between government officials and experts on smoking and health.

Stirling University, which carries out research on behalf of the Health Department and Cancer Research UK, said Philip Morris, the makers of Marlboro cigarettes, was attempting to access thousands of confidential interviews with British teenagers.

The FOI request was initially made in 2009 through the London law firm Clifford Chance, which tried to keep the identify of its client confidential. However, under the Scottish Freedom of Information Act, which is slightly different to the English Act, a third party must name the client it is working for – in this case Philip Morris.

A spokeswoman for Clifford Chance said she could not comment on whether the law firm was carrying out any further freedom of information requests on behalf of tobacco companies. Under the English FOI Act, third parties can work on behalf of anonymous clients.

Hume Brophy, the Irish public relations company, admitted it was a mistake to conduct a parliamentary lobbying campaign against cigarette displays in shops without making it clear it was paid for by the tobacco industry. In a letter to Stephen Williams MP, John Hume, a partner in the company, said that it will not happen again.

Martin Dockrell of the campaign group Action on Smoking and Health said that the tobacco industry's use of "front" organisations was nothing new.

"Big Tobacco's dirty little secret is how they get others to do their dirty work," Mr Dockrell said. "Some front groups are pretty much wholly owned subsidiaries; some appear to be independent but tobacco companies pay the bills and pull the strings."

Former Cameron crony leading the fight for the smoking lobby
Profile
Alex Deane served as David Cameron's chief of staff when Cameron was shadow education secretary from 2004-2005. A Tory activist since 1995, Mr Deane is now a director of Bell Pottinger, the public relations firm set up by Lord Bell, the Tory peer. He was a founding director of Big Brother Watch, a right-of-centre libertarian pressure group that opposes state-controlled surveillance and what it sees as intrusions into civil liberties. He has opposed CCTV cameras, DNA databases, council surveillance and data chips in dustbins. Big Brother Watch also stoutly defends the rights of smokers to smoke in public places. 

Europe's top industrial firms have a cache of 240m pollution permits

European Commission estimates energy-intensive sector will have accumulated allowances worth €7-12bn by the end of 2012

Damian Carrington
guardian.co.uk, Sunday 19 June 2011 15.38 BST
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ArcelorMittal steel worker
Steel producer ArcelorMittal tops the list of firms with surplus of emissions trading permits, according to thinktank Sandbag. Photograph AP

Some of Europe's largest industrial companies gained billions of euros from the carbon emission rules they lobbied fiercely against, new analysis reveals today.

Ten steel and cement companies have amassed 240m carbon pollution permits from generous allocations, according to a report by Sandbag, the carbon trading thinktank, seen by the Guardian.

The free permits, granted to companies with a market value of €4bn (£3.5bn), can be sold or kept for future use. The European commission estimates that the entire energy-intensive sector will have accumulated allowances worth €7bn-€12bn by the end of 2012.

"More and more businesses see that Europe's future lies in a highly efficient economy with low pollution," Baroness Worthington, Sandbag's founding director, said. "But a small group of carbon fat-cat companies are trying to stop this, in spite of making billions from a windfall of free pollution permits."

The steelmaker ArcelorMittal leads the list of companies in the report, with a current surplus valued at €1.7bn, followed by Lafarge, the cement group.

Tata Steel, in third place with a surplus valued at €393m, last month announced 1,500 job losses at its plants in Lincolnshire and Teesside, blaming emissions regulations as well as the economic downturn. Karl-Ulrich Köhler, chief executive of Tata Steel Europe, said at the time: "EU carbon legislation threatens to impose huge additional costs on the steel industry." Tata Steel declined to comment on the report.

The European Union emissions trading scheme (ETS) puts a cap on the carbon pollution emitted by energy and industrial companies. Those reducing their emissions can sell their spare permits to those who do not. But a combination of initial over-allocation by national governments and the economic decline has left the steel, cement, chemical, ceramic and paper sectors with many more permits than they need. The industries have lobbied hard against calls from governments including the UK for the tightening of the ETS and other emissions targets.

Eurofer, the lobby group representing all of Europe's steelmakers, said last month: "To remain competitive in the free, global steel markets, European steel needs … legislation that does not harm its competitiveness. But we are gravely concerned that EU climate change policy will do precisely that."

Cembureau, which lobbies for the cement industry, takes a similar line, stating: "It would be irresponsible to shift the [emissions] goalposts."

In the UK, the government has proposed incentivising low-carbon innovation by setting a British floor price for carbon from 2013. But this is opposed by the CBI. John Cridland, the director general of the employers' group, said: "It risks tipping energy-intensive industries over the edge."

The government has made some concessions, promising to produce plans later in 2011 to compensate businesses for any competitive disadvantage.

However, independent analysis by Bloomberg New Energy Finance found that the carbon permits held by the steel industry would cover its emissions for the next 12 years. "If the steel sector [on aggregate] did not sell any of its surplus, it would not have a need to purchase emissions until 2023," said Guy Turner at Bloomberg NEF.

The Sandbag report, based on public data, also found that nine of the 10 "carbon fat cats" bought between them 24.4m permits from the cheaper international market, mainly from companies in China and India. These can be used within the EU's trading scheme, enabling companies to retain the more valuable European ETS permits. Furthermore, despite the European companies claiming that tougher emissions rules would drive business overseas, some were paying overseas steel and cement companies for their international carbon permits.

"Purchasing carbon offsets from foreign competitors would not seem to be the actions of businesses genuinely concerned that the ETS will drive business abroad," said Worthington.

Not all companies are resisting the tightening of the European ETS. Five major energy groups, including Britain's Scottish and Southern Energy, last week called for spare permits to be withdrawn, a proposal supported by Sandbag.

"Failure to do so could severely hamper business incentives to invest in low-carbon technologies, as the price signal will be skewed in favour of fossil-based solutions," their statement said.

The Guardian contacted all the companies named by Sandbag. Those who responded argued that the surplus permits arose from decreased production and might be needed when the economy recovered. They said that without protection, steel and cement making would be driven to countries with less CO2-efficient manufacturing practices. Many called for global regulation of emissions

A spokesperson for ArcelorMittal said: "As part of our corporate responsibility strategy, we have decided that any sale of such surplus allowances will be reinvested into projects aimed at the improvement of our energy efficiency footprint, as this will help to reduce our overall CO2 emissions."

Erwin Schneider, at the steelmaker ThyssenKrupp, said: "Companies make decisions based on expected future developments. Any earnings from the past will either have been reinvested already or paid out to shareholders. Therefore it seems to be very misleading to use historic numbers to address our future position."