WSJ: Cap and Trade Fiction

WALL STREET JOURNAL skewers Waxman-Markey and the CBO.

... Congressional Budget Office did an analysis of what has come to be known as the Waxman-Markey bill. According to the CBO, the climate legislation would cost the average household only $175 a year by 2020. Edward Markey, Mr. Waxman's co-author, instantly set to crowing that the cost of upending the entire energy economy would be no more than a postage stamp a day for the average household. Amazing. A closer look at the CBO analysis finds that it contains so many caveats as to render it useless.

For starters, the CBO estimate is a one-year snapshot of taxes that will extend to infinity. Under a cap-and-trade system, government sets a cap on the total amount of carbon that can be emitted nationally; companies then buy or sell permits to emit CO2. The cap gets cranked down over time to reduce total carbon emissions.

To get support for his bill, Mr. Waxman was forced to water down the cap in early years to please rural Democrats, and then severely ratchet it up in later years to please liberal Democrats. The CBO's analysis looks solely at the year 2020, before most of the tough restrictions kick in. As the cap is tightened and companies are stripped of initial opportunities to "offset" their emissions, the price of permits will skyrocket beyond the CBO estimate of $28 per ton of carbon. The corporate costs of buying these expensive permits will be passed to consumers.

The biggest doozy in the CBO analysis was its extraordinary decision to look only at the day-to-day costs of operating a trading program, rather than the wider consequences energy restriction would have on the economy. The CBO acknowledges this in a footnote: "The resource cost does not indicate the potential decrease in gross domestic product (GDP) that could result from the cap."

The hit to GDP is the real threat in this bill. The whole point of cap and trade is to hike the price of electricity and gas so that Americans will use less. These higher prices will show up not just in electricity bills or at the gas station but in every manufactured good, from food to cars. Consumers will cut back on spending, which in turn will cut back on production, which results in fewer jobs created or higher unemployment. Some companies will instead move their operations overseas, with the same result.

When the Heritage Foundation did its analysis of Waxman-Markey, it broadly compared the economy with and without the carbon tax. Under this more comprehensive scenario, it found Waxman-Markey would cost the economy $161 billion in 2020, which is $1,870 for a family of four. As the bill's restrictions kick in, that number rises to $6,800 for a family of four by 2035.

Note also that the CBO analysis is an average for the country as a whole. It doesn't take into account the fact that certain regions and populations will be more severely hit than others -- manufacturing states more than service states; coal producing states more than states that rely on hydro or natural gas. Low-income Americans, who devote more of their disposable income to energy, have more to lose than high-income families.

BHI's work on cap-and-trade can be found here.

Cap and trade will cost you!

RON BAILEY: Energy Price Deceit: Congress tries to hide its cap-and-trade energy price increases.

The central fact of the cap-and-trade proposal is that it will increase the price of energy. If energy prices don't go up, the goal of getting energy producers, manufacturers, and consumers to shift away from carbon generating fuels (coal, oil, and natural gas) toward low-carbon sources of energy (nuclear, solar, wind, conservation) will not be achieved.

Whatever else they are, the folks in Congress are not stupid when comes to protecting their electoral viability. They are painfully aware of the fact that, while Americans express support for regulations to reduce greenhouse gases, 77 percent in a recent ABC News/Washington Post poll declared themselves either "very concerned" or "concerned" that "federal regulation of greenhouse gases could substantially raise the price of things you have to pay for."

So in an attempt to ward off voter displeasure over higher energy prices brought about by Congressionally-mandated carbon rationing, the denizens on Capitol Hill have tacked on a number of Rube Goldbergesque policy obfuscations designed the mask the price increases. These include subsidies and tax breaks for retrofitting buildings to use less energy, setting energy conservation appliance standards, subsidies for higher mileage automobiles, and imposing a renewable fuel standard on utility companies, among many other things.

The chief technique that Congress is using to hide the mandated price increase in electricity and natural gas from voters is giving away free emissions permits to local electricity and gas distribution companies. In the ACES bill, some 30 percent of emissions permits are allocated free to local distribution companies who are supposed to sell the permits and then pass along the money to consumers as a lump sum rebate to offset their higher utility bills. Why a lump sum?

As Harvard University environmental economist Robert Stavins explains in his article on "The Wonderful Politics of Cap-and-Trade," the hope is that such rebates will compensate "consumers for increases in electricity prices, but without reducing incentives for energy conservation." Even if they are getting a rebate, higher monthly electric bills will still likely annoy voters. But let's assume that this scheme actually works as intended and blunts household displeasure about paying more for electricity and natural gas.

There's one big problem: The proposal merely shifts the price paid by consumers for energy from local utilities to other products and services. For example, Resources for the Future economists Rich Sweeney and Dallas Burtraw calculate that auctioning all of the carbon emissions permits would result in a price of $20.91 per metric ton. However, allocating 30 percent of the carbon dioxide emissions permits free to local utilities as proposed under the ACES bill would mean lower electricity prices, and lower prices would mean more consumption. The result is that there would 24 percent fewer emissions reductions in the electricity sector than would have been the case had all permits been auctioned.

More on climate change mitigation here.