Washington, DC – Today, the U.S. Senate Environment and Public Works Committee passed a global warming bill. Following the panel’s vote, Thomas J. Pyle, president of the non-partisan, pro-market Institute for Energy Research (IER), issued this statement:

“The winners today are rent-seeking corporations, Washington special interests and our global competitors, especially China. The timing of this vote – which will weaken America’s ability to compete in the global economy – is particularly ironic, given that just yesterday a U.S. global warming envoy official told Congress that ‘No country holds the fate of the Earth in its hands more than China.’

“Enacting burdensome policies – such as cap-and-trade – will drive energy prices up and make it more difficult to create jobs, wealth and prosperity here in the U.S. China’s hand, however, will only grow stronger, as they continue to aggressively access and develop all forms of energy in their country and across the world. This, in large part, is what has enabled their enormous economic growth and expansion.

“While the members of this committee who voted to advance this legislation may attempt to downplay their vote to increase energy costs for American families, seniors and small businesses as an inside-the-beltway procedural motion, the fact remains that job-killing, carbon regulating legislation has cleared a major hurtle and is a major step closer to becoming law.”

For additional information, please contact Patrick Creighton, 202-621-2947, or Laura Henderson, 202-621-2951.

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Unlike previous versions, this one spells out which groups are politically-favored enough to receive preferential treatment in the form of free carbon dioxide emissions allowances. This draft also includes “Increased Investments in Energy Efficiency and Renewable Energy.” In other words, increased subsidies for politically-favored forms of energy. The premise of this section of the bill seems to be that the American people need the federal government to tell them how to use energy cost-effectively.

Like Waxman-Markey, this bill is shaping up to be incredibly costly and incredibly intrusive into all aspects our energy use.

Apparently, Senators Boxer and Kerry understand the difficulties they will face in passing a cap-and-trade bill this year. It seems that, in order to create leverage to secure more votes, the drafts do not completely spell out how the carbon dioxide allowances will be allocated. Instead the draft bills contain many placeholders. The following outlines the placeholders in the first bill leaked today:

SEC. 101. DISTRIBUTION OF ALLOWANCES FOR INVESTMENT IN CLEAN VEHICLES.

[PLACEHOLDER FOR AUTHORIZING LANGUAGE]

SEC. 124. DISTRIBUTION OF ALLOWANCES FOR COMMERCIAL DEPLOYMENT OF CARBON CAPTURE AND SEQUESTRATION.

[PLACEHOLDER FOR AUTHORIZING LANGUAGE]

SEC. 131. DISTRIBUTION OF ALLOWANCES TO STATES.

[PLACEHOLDER FOR AUTHORIZING LANGUAGE]

SEC. 201. ENERGY INNOVATION HUBS.

[PLACEHOLDER FOR AUTHORIZING LANGUAGE]

SEC. 202. ADVANCED ENERGY RESEARCH.

[PLACEHOLDER FOR AUTHORIZING LANGUAGE]

SEC. 454. ENERGY EFFICIENCY IN BUILDING CODES.

[PLACEHOLDER FOR TEXT PROVIDING ALLOCATION FOR PROGRAM UNDER SECTION 174]

SEC. 455. BUILDING RETROFIT PROGRAM.

[PLACEHOLDER FOR TEXT PROVIDING ALLOCATION FOR PROGRAM UNDER SECTION 175]

SEC. 456. FLOOD PREVENTION.

[PLACEHOLDER FOR TEXT PROVIDING ALLOCATION FOR PROGRAM UNDER SECTION 181]

SEC. 457. WILDFIRE.

PLACEHOLDER FOR TEXT PROVIDING ALLOCATION FOR PROGRAM UNDER SECTION 182]

SEC. 460. GREEN JOBS AND WORKER TRANSITION.

[PLACEHOLDER FOR TEXT PROVIDING ALLOCATION FOR PROGRAM UNDER SUBTITLE B OF TITLE III or for ENERGY EFFICIENCY AND RENEWABLE ENERGY WORKER TRAINING FUND UNDER SECTION 322]

SEC. 461. NATIONAL CLIMATE CHANGE ADAPTATION PROGRAM.

[PLACEHOLDER FOR TEXT PROVIDING ALLOCATION FOR PROGRAM UNDER SECTION 351]

SEC. 462. CLIMATE CHANGE HEALTH PROTECTION AND PROMOTION FUND.

[PLACEHOLDER FOR TEXT PROVIDING ALLOCATION FOR PROGRAM UNDER SECTION 367]

SEC. 463. CLIMATE CHANGE SAFEGUARDS FOR NATURAL RESOURCES CONSERVATION.

[PLACEHOLDER FOR TEXT PROVISING ALLOCATION FOR PROGRAM UNDER SUBPART C OF PART 1 OF SUBTITLE E OF TITLE III (section  371 et seq.)]

SEC. 464. NATURAL RESOURCES CLIMATE CHANGE ADAPTATION FUND.

PLACEHOLDER FOR TEXT PROVISING ALLOCATION FOR PROGRAM UNDER SECTION 380]

SEC. 465. INVESTMENT IN ENERGY EFFICIENCY AND RENEWABLE ENERGY.

PLACEHOLDER FOR TEXT PROVISING ALLOCATION FOR PROGRAMS UNDER SUBSECTIONS (a)(8), (b)(6), and (b)(7) of SECTION 782, and SECTION 788, of the Clean Air Act (as added by SECTION 411)]

Subtitle D—International Climate Change Program

Sec. 341.

TO BE SUPPLIED.

SEC. 2. FINDINGS.

TO BE SUPPLIED

SEC. 142. NUCLEAR WASTE RESEARCH AND DEVELOPMENT.

TO BE SUPPLIED

SEC. 173. ADVANCED BIOFUELS.

TO BE SUPPLIED

SEC. 181. FLOOD PREVENTION.

TO BE SUPPLIED

SEC. 790. ENERGY REFUND PROGRAM.

TO BE SUPPLIED

Subtitle D—International Climate Change Program

SEC. 341.

TO BE SUPPLIED.

SEC. 788. CLIMATE CHANGE CONSUMER REBATES.

TO BE SUPPLIED

After the first draft bill was leaked, and appeared in a story in Greenwire, an updated draft was leaked. This second draft did not contain as many placeholders as the first, instead it gives the EPA Administrator discretion to allocate many of the allowances. This still gives Senators Boxer and Kerry bargaining power to allocate allowances to politically preferred groups.

But it also raises an important question—if Congress needs to act to limit the damage of EPA regulating carbon dioxide under the Clean Air Act, how is the second Boxer-Kerry draft an improvement over EPA regulation? This is especially important because the Boxer-Kerry draft does not limit EPA authority to regulate greenhouse gases using the Clean Air Act.[1]

Even more surprising, the CBO report reveals (without trumpeting the result, of course) that the costs borne by the U.S. may exceed the benefits to the entire world. This should be surprising indeed to the casual observer who thought there was a “clear consensus” on the net benefits of the cap-and-trade component of Waxman-Markey.

CBO Says: Waxman-Markey’s Costs to U.S. Economy May Outweigh Benefits to U.S. Economy

For all the warnings about the dire consequences of ignoring the threat posed by climate change, the reader of the latest CBO report may be shocked to discover this admission:

Despite the wide variety of projected impacts of climate change over the course of the 21^st century, published estimates of the economic costs of direct impacts in the United States tend to be small. Most of the economy involves activities that are not likely to be directly affected by changes in climate. Moreover, researchers generally expect the growth in the U.S. economy over the coming century to be concentrated in sectors—such as information technology and medical care—that are relatively insulated from climate effects. Damages are therefore likely to be a smaller share of the future economy than they would be if they occurred today.

As a consequence, a relatively pessimistic estimate for the loss in projected real gross domestic product is about 3 percent for warming of about 7° Fahrenheit (F) by [the year] 2100. [CBO p. 3, emphasis added.]

It’s true there are much larger estimates of projected impacts from climate change if we include “non-market” activities and include scenarios of “abrupt changes”; we will explore those in more detail in a later section. But it is worth stressing that when environmental economists set out to carefully quantify the likely effects of uninterrupted climate change if governments “ignored” the problem, their best-guess estimate is a loss of 3 percent of GDP a century from now.

In contrast, what are the estimated costs of limiting greenhouse gas emissions, and trying to mitigate this potential 3 percent hit to GDP in 2100? The CBO gives this information in a convenient table, though the reader has to flip ahead to page 13 to find it. Once there, we learn that the CBO’s estimate of the hit to the U.S. economy from H.R. 2454 is in the range of 1.1 to 3.4 percent of GDP by the year 2050. Here’s CBO’s graph:

This is quite simply a bombshell revelation, and the skeptical reader only needs to look at the two pages (3 and 13) of the CBO report [.pdf] to make sure we’re not making this up. The CBO is admitting that even a pessimistic estimate of the danger posed by climate change is 3 percent of GDP, which won’t occur until 2100. On the other hand, the high-range estimate of the cost of Waxman-Markey’s cap-and-trade program is 3.4 percent of GDP, which will hit 50 years earlier.

These revelations alone are sobering enough, but it’s much worse than the difference of 0.4 percentage points. First, the time element matters. Put most simply, people prefer to have a dollar today than a dollar 50 years from now because we do not know what the future holds. Future benefits (such as averted climate damage) need to be discounted by some factor, simply because they accrue in the future. This is not a “climate change skeptic” debating point; all sides agree on the principle, they simply disagree on the appropriate number to use when discounting the future.[1] Therefore, the fact that the full economic damages of Waxman-Markey hit fifty years before the full (alleged) benefits kick in, is quite significant.

But second and more important: It is wildly inappropriate to judge the cost of Waxman-Markey (1.1 percent – 3.4 percent of GDP by 2050) against the full damage resulting from unrestricted climate change (possibly 3 percent of GDP by 2100), because Waxman-Markey will not stop global climate change in its tracks. In the extreme case, standard models show that if the U.S. complies with the Waxman-Markey emission caps, while the rest of the world continues with their baseline emissions growth, then the increase in global temperatures (in the medium emission scenario) will only be slowed by two-tenths of one degree Fahrenheit.

Of course, the proponents of Waxman-Markey say that the U.S. government needs to show its own commitment to limiting greenhouse gas emissions, and then we will see the rest of the major governments following suit (even though they have said explicitly that they won’t). That’s fine. So what these proponents need to do, is lay out an actual scenario, showing at what dates various other governments will limit their own emissions. Then U.S. policymakers will be in a position to make an informed decision as to whether the projected costs to the U.S. economy are counterbalanced by likely benefits.

But as it stands currently, all of the published work rests on a complete non sequitur. Even if Waxman-Markey cured the world of the threat from climate change, the CBO’s own figures show that its price tag might be too high, in terms of benefits and costs to the U.S. economy. But once we realize that Waxman-Markey is, by itself, a largely symbolic gesture that may not lead to similar commitments from other governments, the case for Waxman-Markey is far more dubious.

CBO Says: Price of Carbon Allowances Are Definitely Too High to Benefit Americans, and Possibly Even the World as a Whole

Rather than looking at GDP figures, there is another way to see that the CBO report shows Waxman-Markey will cost Americans far more than it will benefit them. We will show that the CBO’s projections for the market price of carbon allowances are much higher than the lower-end estimates that the government places on the “social cost of carbon.” On page 10 the CBO report says:

CBO estimates that the price of the allowances under H.R. 2454 would be $15 in 2012, the initial year that the cap took effect, and would rise at an annual real rate of 5.6 percent over the course of the policy, reaching $23 in 2020 and $118 by 2050 (all in 2007 dollars).

Now the whole theoretical justification of capping emissions is that they constitute a “negative externality,” meaning that emitting a ton of carbon dioxide imposes damages on others that the emitter is not correctly taking into account. The solution, in standard economics textbooks, is for the government to impose an artificial cost (through either a tax or mandating an allowance that carries a market price) to make the emitter “internalize the externality.”

But in order for this to be efficient, the size of the penalty—the tax on carbon or the price of an carbon allowance—has to match up with the alleged externality. In the climate change literature, this externality is called the “social cost of carbon,” or SCC.

The CBO has just shown us what it projects the price of carbon allowances will be in the U.S. market, under the cap-and-trade program outlined in Waxman-Markey. As the cap tightens over time, the price of the allowances will rise, reaching a level of (inflation-adjusted) $118 by 2050. In order to know whether this is too high, too low, or just right, we need to compare this projected path of allowance prices, with the estimated path of the social cost of carbon.

The CBO report doesn’t have this information, but the Federal Register (Vol. 74, No. 167) [.pdf] does. On page 44948 we read:

The interim judgments resulting from the recent interagency review process can be summarized as follows: (a) DOE and other Federal agencies should consider the global benefits associated with the reductions of CO2 emissions resulting from efficiency standards and other similar rulemakings, rather continuing the previous focus on domestic benefits; (b) these global benefits should be based on SCC estimates (in 2007$) of $55, $33, $19, $10, and $5 per ton of CO2 equivalent emitted (or avoided) in 2007; (c) the SCC value of emissions that occur (or are avoided) in future years should be escalated using an annual growth rate of 3 percent from the current values); and (d) domestic benefits are estimated to be approximately 6 percent of the global values.

When we combine the above paragraph with the CBO’s projections of allowance prices under Waxman-Markey, we reach some startling conclusions. First, if we use the two low-end estimates of the global SCC (namely $5 and $10 per ton), then from the year 2012 onward, the price of allowances under Waxman-Markey is inefficiently high. In other words, American businesses would, from day one, be paying more for a permit to emit carbon, than the global damage resulting from an additional ton of emissions.

Second, if we use the mid-range estimate of the SCC, namely $19 per ton in 2007, then by the year 2028, and continuing from that point onward, the cost of an allowance under Waxman-Markey will be too high. (The reason is that the price of allowances grows at 5.6 percent, while the SCC grows at only 3 percent.) The inefficiency gets worse and worse over time, so that by the year 2050, the CBO projects a price of a carbon allowance of $119 (with rounding), whereas the mid-range estimate has the social cost of carbon in the year 2050 at only $68 per ton. That is an enormous discrepancy.

Now it’s true, under the two highest estimates of the SCC (namely $33 and $55 per ton in 2007), the price of allowances under Waxman-Markey are lower than the SCC for all of the years up through 2049. (Even in the $33 case, in the year 2050 the price of an allowance becomes too high.) So from the standpoint of textbook economic theory—and assuming these numbers were correct!—the costs of complying with Waxman-Markey’s caps would be justified by the benefits of avoided climate damage.

However, these figures for the SCC are global estimates. As the Federal Register quotation showed in point (d): “domestic benefits are estimated to be approximately 6 percent of the global values.”

Even in the worst-case estimate from the Federal Register of a social cost of carbon of $55 in 2007, the cost to the United States of an additional ton of emissions is only $3.83 by the year 2012. Contrast that to the CBO’s projected price of an allowance of $15. By the year 2050, even using the highest government estimate of the social cost of carbon, American businesses would be paying $119 for the right to emit an additional ton, when the cost to the U.S. of that ton of emissions would be a mere $12.

Of course, the issue of global climate change involves all nations, not just the United States. It may very well be true that the correct metric to use, when evaluating legislation such as Waxman-Markey, is global benefits versus global costs. Yet we think policymakers and the American public should realize just how altruistic they are going to be.

Certain proponents of a “green economy” have stated that cap-and-trade and other measures will help the American economy. But as the government’s own analyses indicate, this is not true at all. Only by using the high-end estimates of the dangers of greenhouse gas emissions can Waxman-Markey be justified on a global scale, and even then, the United States’ economy endures all of the pain but only 6 percent of the benefits.

What About the Really Big Threats?

After admitting that the U.S. economy will suffer only a 3 percent hit to GDP by 2100, even under a pessimistic scenario, the CBO report does what it can to rebuild the reader’s support for climate legislation. It says that this figure of 3 percent does not include “non-market” damages, nor does it account for truly catastrophic scenarios of runaway climate change. Once we figure in these, CBO tells us:

The most comprehensive published study includes estimates of nonmarket damages as well as costs arising from the risk of catastrophic outcomes associated with about 11°F of warming by 2100. That study projects a loss equivalent to about 5 percent of U.S. output and, because of substantially larger losses in a number of other countries, a loss of about 10 percent of global output. [CBO, p. 4]

Scary stuff, indeed. Yet if we look to the footnote to discover what the “most comprehensive published study” is, we find it is William D. Nordhaus and Joseph Boyer’s 2000 book, Warming the World: Economic Models of Global Warming.

Ironically, a newly published, peer-reviewed paper[2] critiques the procedure by which Nordhaus and Boyer generated their alarming projection. The full explanation is too involved for a blog post; the interested reader should consult pages 14-17 here [.pdf]. The catastrophic impact estimates were not derived from a careful modeling of the global climate system, and then an economic analysis of the projected damages. On the contrary, Nordhaus simply surveyed various experts for their point estimate of the number, and then changed their answers later on, in light of new information about potential risks. (In other words, he didn’t go back to the same experts and ask them for a new guess.) Here is the summary of the changes he made, when updating the answers to his original survey of experts:

Nordhaus in 1994 asked experts to estimate (among other things) the probability of global GDP loss of 25 percent in the event of 3˚C warming. The surveyed experts gave him their answers, from which he computed the mean. By 1999, further research had made these scenarios seem more plausible and/or catastrophic. So Nordhaus (and Boyer) took the original average of probabilities reported by the experts, doubled it, and then assigned this as the probability for a 30 percent loss of GDP rather than the 25 percent the experts had been told to consider, for a less significant warming of 2.5˚C rather than the 3˚C mentioned in the original survey. (Murphy, “Rolling the DICE” [.pdf], pp. 16-17)

We do not mean to suggest that William Nordhaus has done anything intellectually dishonest. The point is, policymakers (and the CBO staff itself) might be very surprised to discover how fragile the estimate of “10 percent of GDP loss” really is. And as the CBO says, this is from the most comprehensive published study of the matter.

Conclusion

A careful reading of the latest CBO report on climate legislation shows just how dubious the case for Waxman-Markey really is. If proponents of its cap-and-trade program want to say, “We need to stop emissions immediately, regardless of the cost, because there is a chance the world will end,” then they are free to make that case. We obviously cannot prove them wrong. But by the same token, physicists could request $1 trillion to build a space-based laser system, since there is a definite chance that a killer asteroid will otherwise destroy the earth in the year 2075.

Proponents of cap-and-trade will also point out that there are plenty of reasons to support Waxman-Markey besides mere dollars and cents. Again, they are free to make that case. All we insist is that they tell us quite honestly and plainly how much Americans are going to pay for these “non-market benefits.”

The rhetoric from Waxman-Markey supporters up until now has led Americans to believe that this bill will actually be good for the U.S. economy. As the recent CBO report itself shows, this is nonsense. American consumers will pay higher prices, particularly for electricity and gasoline, which don’t avoid a comparable amount of climate damage even under the government’s own mid-range estimates. Once we factor in everything the government reports leave out, the answer is obvious: Waxman-Markey’s costs will far outweigh its benefits.

[1] Some economists, such as Nicholas Stern, favor a very low discount rate, because they think future generations’ happiness (or “utility”) should be given as much weight in current decisions, as the happiness of the present generation. Yet even Stern agrees that some discount should be applied, since it’s possible that nuclear war (or a giant asteroid) could kill billions of people between now and the year 2100. In that (very unlikely but possible) event, our present efforts to cut greenhouse gas emissions would be a waste, since few people would be around in 2100 to enjoy the moderate climate. That’s why all economists agree that future benefits must be discounted at some rate, relative to present costs.

[2] Murphy, Robert P. “Rolling the DICE: William Nordhaus’ Dubious Case for a Carbon Tax,” The Independent Review (Vol. 14, Number 2, Fall 2009), pp. 197-218. An early version of this paper is available at: http://www.instituteforenergyresearch.org/2008/06/05/ier-economist-murphy-takes-on-nordhaus-case-for-a-carbon-tax/

FOR IMMEDIATE RELEASE
July 28, 2009
Contact:
Patrick Creighton, 202.621.2947
Laura Henderson, 202.621.2951

LOST IN TRANSLATION

Lawmakers who believe that passage of cap-and-trade legislation will encourage China, India, Russia to follow suit suffer from language barrier

• Senator John Kerry (D-MA):”Yes, we want more than promises from China – the world’s largest emitter must eventually accept binding reductions. But it would be a mistake to focus single-mindedly on what China has said it will not do.” (Financial Times, 7/26/09)

• U.S. Commerce Secretary Gary Locke says China needs to pay for emissions: “They’ve got to step up. They’ve got to pay for the cost of complying with global climate change. They’ve got to invest in energy efficiency and conservation, but also very definitive steps in reducing greenhouse gas emissions.” (Doug Palmer, “U.S. climate chaos: Confused Obama administration flip-flops on climate politics”, Reuters, 07/20/09)

• Congressman Edward Markey (D-Mass.): “[W]e leave here [China] encouraged that progress can be made heading towards Copenhagen and we hope that in the months ahead we can work cooperatively together …” (Voice of America News, May 28, 2009)

• Senator John Kerry (D-MA): “In my meetings this week, Chinese leaders assured me that China will play a positive and constructive role in the Copenhagen negotiations … China recognizes the need to address climate change as a critical component of the nation’s economic development and national security strategy.” (The Hill, May 28, 2009)

China Says No to Job-Killing Emission Caps

Chinese spokesman at June 2009 United Nations Framework Convention on Climate Change: “It is natural for China to have some increase in its emissions, so it is not possible for China in that context to accept a binding or compulsory target.” (George Will: “China, India have a big emissions veto,” Minneapolis Star Tribune, 7/23/09)

Qin Gang, a spokesman for the Chinese Foreign Ministry, said that since China is a developing country and is making strides to strengthen its economy, “it is natural for China to have some increase in emissions, so it is not possible for China to accept a binding or compulsory target.” (Carl Mortished, “Climate pact in jeopardy as China refuses to cut carbon emissions,” The Times, 6/12/09)

Jiang Kejuan, director of the energy systems center at China’s NDRC, stated that “The energy-saving policies made by the Chinese government have already been the biggest energy-saving and emission-reduction movement in the world. The Chinese government has already done well enough.” (Ariana Eunjung Cha, “At Odds on Emissions, U.S., China Open Talks,” The Washington Post, 6/9/09)

China won’t commit to emissions cuts: “‘No matter what happens on the road to Copenhagen, our stance and principles are long-held,’ Li said. ‘We are active both in global talks and taking action in curbing emission.’ The Chinese government has said that it would avoid promising a cut in greenhouse gases during the 2013-2030 period. Instead, China will consider setting a goal to improve energy efficiency by 2020.” (Fu Jing and Li Jin, “China stance on climate talks firm”, China Daily, 05/15/09)

Chinese Premier Wen Jiabao downplays agreement on mandatory caps: “‘It’s difficult for China to take quantified emission reduction quotas at the Copenhagen conference, because this country is still at the early stages of development,’ he [Jiabao] said in an interview with the Financial Times. ‘Europe started its industrialisation several hundred years ago, but for China, it has only been dozens of years.’” (Tom Young, “China lowers expectations of Copenhagen deal”, Business Green, 02/03/09)

Xie Zhenhua, vice chairman of the China Development and Reform Council, upon urgings by the West that China reduce emissions, stressed that “[b]oth developing countries and developed countries have realized the importance of technologies in building more energy-efficient and low-emission industries, however on transferring such technologies, developed nations underline the role of markets, while developing nations urge the combination of roles of markets and governments.” (”China reiterates developed nations’ obligation in anti-global warming efforts,” China View, 3/16/08)

Chinese minister Xie Zhenhua rejects responsibility for emissions: “‘The primary responsibility for tackling climate change should rest with the developed countries,’ Xie said. ‘The developed countries should take the lead,’ he said.” (”Ahead of Bali, China says the west must bear emission reduction burden”, Associated Press, 11/29/07)

Chinese President Hu Jintao says developing countries need energy, not caps: “‘Developing countries still have a long way to go before achieving industrialization, urbanization and modernization, and they face an arduos task of improving people’s life,’ Hu said. ‘To meet their development goals, developing countries need to consume more energy.’” (Andrew McCathie, “China, India insists climate change solution lies in the west”, Deutsche Press Agentur, 06/08/07)

India Says No to Job-Killing Emission Caps

Indian Environment Minister Jairam Ramesh reiterates that India will not accept emissions caps: “The world has nothing to fear from India’s development… An artificial cap is not desirable and not even necessary as we haven’t been responsible for emissions in the first place.” (James Lamont, Joshua Chaffin, and Fiona Harvey, “India widens climate rift with west”, Financial Times, 07/23/09)

Dr. R.K. Pachauri, noted environmentalist and Chairman of Intergovernmental Panel on Climate Change, says India will continue to use coal: “‘Can you imagine 400 million people who do not have a light bulb in their homes,’ Dr. Pachauri told reporters here Monday. ‘You cannot, in a democracy, ignore some of these realities and as it happens with the resources of coal than India has we really don’t have any choice but to use coal in the immediate short term.’ ” (”Pachauri defends India’s climate stand, The Hindu, 07/22/09)

Rajendra Pachauri, Chair of the UN Intergovernmental Panel on Climate Change (IPCC): “You cannot, in a democracy, ignore some of these realities and as it happens with the resources of coal that India has we really don’t have any choice but to use coal in the immediate short term.” (”Pachauri defends India’s climate stand,” The Hindu, 7/21/09)

Indian Prime Minister’s special envoy on climate change, Shyam Saran, on emissions: “it is not our responsibility.” (Bryan Walsh, “Climate conundrum: How to get India to play ball”, TIME, 07/21/09)

Indian Environment Minister Jairam Ramesh: “India’s position is clear and categorical that we are simply not in a position to take any legally binding emissions reductions… Ramesh drew the red lines clearly. ‘There is simply no case for the pressure that we, who have been among the lowest emitters per capita, face to actually reduce emissions.’” (”India rebuffs Clinton, rules out emissions targets”, The Times of India, 07/20/09)

Indian Environment Minister Jairam Ramesh tells Secretary of State Clinton: “There is simply no case for the pressure that we, who have among the lowest emissions per capita, face to actually reduce emissions.” (Matthew Rosenberg, “India rejects U.S. proposal of carbon limits”, Wall Street Journal, 07/20/09)

Indian Environment Minister Jairam Ramesh: “We are simply not in a position to take on legally binding emissions reduction targets.” (Nicholas Kralev, “India tells Clinton: no carbon cuts,” The Washington Times, 7/20/09)

Indian Prime Minister’s special envoy on climate change, Shyam Saran, doubts the G20’s promise to keep global warming under two degrees Celsius: “We do not regard this as an arithmetical target; we regard this as a political decision because there is a great deal of uncertainty with respect to what would be the actual rise in temperature, what would be the consequences of that rise of temperature.” (Indrani Bacghi, “India: 2 degree Celsius is not a fixed target”, The Times of India, 07/17/09)

Indian Prime Minister Manmohan Singh: “There is a lot of pressure on India and China on the issue of climate change. We have to resist it.” (”Singh: India, China have to resist pressure on climate change”, The Economic Times, 07/11/09)

Indian Prime Minister’s special envoy on climate change, Shyam Saran, places emission burden on developed countries: “The developed countries have been the biggest polluters and have to share their historical responsibility on it. India spends 2.5 percent of its GDP on the fallout of climate change like natural disasters. Technology is the key to reducing emissions and developed countries will have to step in for this.” (Jaideep Sarin, “Climate remains an issue at G8-G5 summit”, Express Buzz, 07/10/09)

Indian Environment Minister Jairam Ramesh: “India will not accept any emission-reduction — period. This is a non-negotiable stand… We are not re-negotiating the U.N. Framework Convention on Climate Change,’ Ramesh said, referring to the treaty that entered into force in 1994 and laid the groundwork for emissions cuts by richer nations. ‘There is no way India is going to accept any emission reduction target, period, between now and the Copenhagen meeting and thereafter.’” (Bibhudatta Pradhan, “India’s red line: Rules out any emissions cuts under new climate treaty”, Bloomberg, 06/30/09)

Indian Foreign Minister Somanahalli Mallaiah Krishna: “‘India is a developing country,’ he [Krisha] said, speaking after talks with EU diplomats. ‘We have challenges and we will have to concentrate on development. And development takes precedence over everything else.’ ” (”India vows cooperation on climate change but not at economic cost”, Deutsche Press Agentur, 06/29/09)

Indian climate negotiations delegate rejects caps: “‘If the question is whether India will take on binding emission reduction commitments, the answer is no. It is morally wrong for us to agree to reduce when 40 percent of Indians do not have access to electricity,’ said a member of the Indian delegation to the recently concluded U.N. conference in Bonn, Germany, which is a prelude to a Copenhagen summit in December on climate change.” (Rama Lakshmi, “India rejects calls for emission cuts”, Washington Post, 04/13/09)

India’s top negotiator at U.N. climate conference rejects caps: “In India I need to give electricity for lightbulbs to half a billion. In the west you want to drive your Mercedees as fast as you want. We have ’survival’ emissions, you have lifestyle emissions. You cannot put them on the same basis. I am trying to give a minimal commercial energy service. Whereas you are not prepared to give up any part of your affluent lifestyle or give up consumption patterns.” (Randeep Ramesh, “India rebuffs Obama, won’t accept emissions limits”, The Guardian, 12/08/08)

Russia Says No to Job-Killing Emissions Cap

Arkady Dvorkovich, Russian President Dmitry Medvedev’s top economic advisor: “For us the 80 percent figure is unacceptable and likely unattainable. We won’t sacrifice economic growth for the sake of emission reduction.” (Anna Smolchenko, “G8 Emissions Pledge Unravels as Russia Objects”, AFP, 07/08/09)

Russian President Dmitri Medvedev”[W]e will not cut off our development potential.” Despite statements by the Russian President for CO₂ reductions, and similar calls from the international community, Russia is expected to release around 30 percent more greenhouse gases by 2020. (”Russia’s Medvedev announces greenhouse gas target,” Reuters, 6/19/09)

Russian official responsible for country’s Kyoto obligations rejects emission limits: “‘Energy must not be a barrier to our comfort. Our emerging middle class… demands lots of energy and it is our job to ensure comfortable supply,’ he said. ‘We don’t plan to limit the use of fuel for our industries. We don’t think this would be right,’ he said, referring to the current round of Kyoto. (Simon Shuster, “Russia says it has no plans to cap carbon emissions”, Reuters, 04/28/08)

The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.

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During her recent visit, India’s Environment Minister reminded Secretary of State Hillary Clinton that India would not accept caps on their carbon dioxide emissions. According to the Washington Post:

But the clash between developed and developing countries over climate change intruded on the high-profile photo opportunity midway through Clinton’s three-day tour of India. Indian Environment Minister Jairam Ramesh complained about U.S. pressure to cut a worldwide deal, and Clinton countered that the Obama administration’s push for a binding agreement would not sacrifice India’s economic growth.

As dozens of cameras recorded the scene, Ramesh declared that India would not commit to a deal that would require it to meet targets to reduce emissions. “It is not true that India is running away from mitigation,” he said. But “India’s position, let me be clear, is that we are simply not in the position to take legally binding emissions targets.” [emphasis added]

It is refreshing to see that at least some government officials—though not from this country – understand that when you take options away from businesses, you reduce economic activity. If it were really true, as Secretary of State Clinton alleges, that reducing emissions will actually spur job creation and economic growth, then why would the government need to force its plan on the private sector? (See video.)

Furthermore, why stop with caps on carbon dioxide emissions? Why not impose a cap-and-trade plan on the use of steel? All those businesses currently using steel as an input would then have to scramble to find higher-priced substitutes, and this would create jobs in the plastics industries.

Of course the above “logic” is nonsense. Steadily shrinking the cap on permissible emissions will hamper U.S. economic growth and because businesses will be forced to switch to lower-carbon-intensive techniques than they otherwise would have chosen, their output will be lower and the productivity of labor will fall. That is, of course, the intent of the proponents of cap and trade plans including the Waxman-Markey bill that recently passed in the House of Representatives. The so-called “green jobs” created in some sectors, such as wind turbines and solar panels, will be counterbalanced by job destruction in other sectors that rely on fossil fuels and inexpensive energy.

Indian officials have it exactly right: They are being asked to sacrifice the welfare of their own citizens by Western leaders whose countries were built on a foundation of abundant energy.

India’s declaration also undermines the entire rationale for the Waxman-Markey bill. Taken in isolation, some experts contend that the Waxman-Markey caps on U.S. emissions will have virtually no impact on the trajectory of global warming, even taking the standard climate models at face value. Even the most outspoken scientists on global warming agree that unilateral American efforts are pointless, without similar targets being adopted by the developing world.

Proponents of cap and trade have justified its economically crippling, yet environmentally irrelevant, constraints on the U.S. by saying it will provide American negotiators with moral authority when seeking worldwide restrictions on industry. The idea is that we need to impose limits on the U.S. economy before other governments will agree to shackle their own economies in turn.

India, rightly so, has just declared that it will do no such thing. Let us hope that our leaders see the flaws in their logic and reverse course on this job-killing cap and trade plan before it is too late.

FOR IMMEDIATE RELEASE
June 30, 2009
CONTACT:
Laura Henderson (202) 621-2951
Patrick Creighton (202) 621-2947

Bradley: Climate Bill a Public Policy Abomination

IER’s Robert Bradley to Testify at Houston Energy Summit

HOUSTON – Institute for Energy Research (IER) CEO Robert Bradley will deliver testimony and answer questions at tomorrow’s Texas Energy Summit, a conference Congressmen Barton, Culberson, Sessions, and Olsen will hold to discuss the disturbing effects a federal cap and trade scheme will have on Texas jobs and electricity prices.

Texas Energy Summit, Featuring Robert Bradley
Wednesday, July 1, 2009
10:30 a.m.
University of Houston, Clear Lake
Bayou Building, Garden Room
General Parking in Lot D

**MEMBERS OF THE MEDIA ARE WELCOME AND ENCOURAGED TO ATTEND**

*Dr. Bradley’s remarks, as prepared, can be viewed here.

The Institute for Energy Research (IER) is a not-for-profit organization that conducts intensive research and analysis on the functions, operations, and government regulation of global energy markets. IER maintains that freely-functioning energy markets provide the most efficient and effective solutions to today’s global energy and environmental challenges and, as such, are critical to the well-being of individuals and society.

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On June 19, the CBO announced that the cap-and trade program contained in Waxman-Markey would cost households an average of $175 in the year 2020 (measured in today’s dollars). On June 23, in an effort to reassert its green bona fides, the EPA came out with an even lower estimate of $80-$111 per household. But even a cursory examination of the methodologies involved in manufacturing those numbers reveals that even the higher CBO figure is far too optimistic, since it leads citizens to believe that energy prices will only go up modestly because of the new cap and trade program.

In fact, very little related to the consequences of Waxman-Markey can be characterized as “modest.” Households will pay far more than $175 per year due to cap and trade, notwithstanding CBO’s attempts to hide it. The EPA study is misleading in the same fashion, but here we focus on the CBO report which can be read by the layperson and states quite clearly how it comes up with its low cost estimate.

Rags to Riches: How the CBO Transforms a Stealth Tax Into a Phantom Tax Cut

There are several major flaws with the CBO approach, but perhaps the most outrageous example of sleight of hand is the CBO’s focus on after-tax income. Because Waxman-Markey will raise prices more than incomes, households will necessarily become poorer. This will push households into lower tax brackets—and thus have lower tax liabilities to the tune of roughly $8.7 billion. Normal people would consider this to be a downside of Waxman-Markey. CBO is not normal. It considers this $8.7 billion as an addition to total household income—money from heaven!—and goes about celebrating the effect of this policy without saying a thing about the cause.

After explaining that some government benefits are indexed to the Consumer Price Index, which means that federal spending will have to increase owing to Waxman-Markey’s energy price hikes, the CBO study points out the silver lining:

Because the federal income tax system is largely indexed to the consumer price index, an increase in consumer prices with no increase in nominal incomes would also reduce federal income taxes. That effect would increase households’ after-tax income but would also add to the federal deficit. In combination, the effect of price changes on the government’s indexed benefit payments and income tax receipts would convey an estimated $8.7 billion to households. (p. 7)

Beyond the absurdity of translating rising prices into a benefit for households—on the basis that poorer people pay less in taxes—the CBO’s treatment of income tax revenues is inconsistent with its treatment of carbon allowance auction receipts. The CBO study acknowledges that households will pay higher energy prices partly because businesses will “pass on” the cost of buying emission allowances. But CBO didn’t include this component as a net cost to households, because the government could spend the auction receipts and thus recycle some of the money back into households.

But if that’s how the CBO wants to do its accounting, then it can’t credit households with a fictitious $8.7 billion “tax cut.” As the quotation above points out, the falling income tax revenues will simply mean a larger budget deficit if the government doesn’t cut other spending. This extra borrowing by the federal government will push up interest rates and transfer $8.7 billion out of the private capital markets. Households will ultimately lose wealth (in the form of greater public debt) that exactly offsets their alleged gain from falling into lower tax brackets.

Impacts on the “Average” Household

The CBO study admits on page 1 that the greenhouse gas (GHG) emission schedule would raise prices for Americans:

This analysis examines the average cost per household that would result from implementing the GHG cap-and-trade program under H.R. 2454….Reducing emissions to the level required by the cap would be accomplished mainly by stemming demand for carbon-based energy by increasing its price…. Those higher prices, in turn, would reduce households’ purchasing power. (p.1)

However, the CBO’s reported annual cost estimate of $175 per household in the year 2020, does not refer to the tallying up of the price hikes acknowledged in the quotation above. The CBO reduces the “gross cost” by mixing in all of the financial benefits that will accrue to “households” from the cap and trade program:

At the same time, the distribution of emission allowances would improve households’ financial situation. The net financial impact of the program on households…would depend in large part on how many allowances were sold (versus given away), how the free allowances were allocated, and how any proceeds from selling allowances were used. That net impact would reflect both the added costs that households experienced because of higher prices and the share of the allowance value that they received in the form of benefit payments, rebates, tax decreases or credits, wages, and returns on their investments. (pp. 1-2)

The problem should be obvious: If the government spends auction revenues, or hands out “free” allowances that possess high market value, to fund alternative energy boondoggles, the CBO study will carefully chalk that money up as flowing back into the pockets of U.S. “households.”

The CBO’s logic makes sense from a certain point of view: A firm that makes solar panels is owned by shareholders who live in houses, right? So when that solar panel firm sees huge profits in the new scheme, the wealth showered on its owners will accrue to households. Even though all electricity consumers will be paying higher prices, the “average” hit will be mitigated to the extent that some of those consumers happen to be on the receiving end of the cap and trade gravy train.

The CBO’s reasoning may be appropriate in some applications, but it is grossly misleading in the current political context. Citizens may come away from the report believing that their annual expenses will rise only $175 because of Waxman-Markey.  The real figure is much higher.

The CBO’s Gross Cost

In contrast to the net cost of “$22 billion—or about $175 per household” (p.2), what does the CBO say about the gross cost, meaning the actual reduction in household purchasing power? In other words, how much of a hit will households take in the form of higher prices and lower wages, before the CBO adds back in all the pork spending and other goodies? They tell us on page 4:

According to CBO’s estimates, the gross cost of complying with the GHG cap-and-trade program delineated in H.R. 2454 would be about $110 billion in 2020…or about $890 per household…(p. 4)

We see that the number reported in the press—“$175 per household by 2020”—represents only 20 percent of the CBO’s projected increase in household costs. The other 80 percent of the gross price hikes is transferred away from unlucky consumers and into the pockets of politically-connected beneficiaries. Since this wealth is redistributed, it’s still in “households” (somewhere) and so the CBO doesn’t report the gross figure, which is five times higher than the number bouncing around the press. But that’s not the end of it. CBO didn’t score anything but the “cap and trade” part of the bill…not the renewable energy mandate, not the additional costs of complying with the bureaucratic nirvana of new standards for energy efficiency of lighting for home art and “personal spas,” etc. In some parts of the country, the “You Must Obey” renewable energy mandate could force significantly higher costs on consumers and businesses.

Winners and Losers

The CBO study acknowledges that its estimates are average figures, and that the impacts on particular sectors will be uneven:

The measure of costs described above reflects the costs that would occur once the economy had adjusted to the change in the relative prices of goods and services. It does not include the costs that some current investors and workers in sectors of the economy that produce energy and energy-intensive goods and services would incur as the economy moved away from the use of fossil fuels….Stock losses would tend to be widely dispersed among investors because shareholders typically diversify their portfolios. In contrast, the costs of unemployment would probably be concentrated among relatively few households and, by extension, their communities. (p.8)

In addition to the negative impact on workers in energy-intensive sectors, the Waxman-Markey bill would also hurt energy consumers to different degrees, depending on which region of the country they lived in. The Southern and Midwestern states are much more reliant on coal and other fossil fuels for their electricity production. Consumers in these regions will see their electricity rates jump higher than in other areas of the country.

Conclusion

Make no mistake: Waxman-Markey is a tax that, to work properly, must find a way to drive up energy prices. CBO bends over backwards to try to disguise this fact, but even they admit Waxman-Markey will increase energy prices.

The CBO’s gross cost estimate of $890 per household is also optimistic. Other studies put the figure at $1,500 per family in higher energy costs.  That makes the much lower figure of $175 per household extremely misleading.

Bent on disguising the true costs of Waxman-Markey, CBO performed a deeply flawed analysis. They treat lower household income as a good thing because households will be subject to lower tax rates, even though this will increase the budget deficit and help drive up interest rates making economic growth more difficult.

The CBO is also disingenuous in its treatment of free allowances. The financial benefit of the free allowances will go to a small subset of the population (and to overseas investors), but CBO merely averages the benefits across the U.S. population. This is deeply disingenuous and misleading. Households are in for much bigger price hikes than the CBO would lead them to believe.

Despite CBO’s heroic attempts to put a nice gloss on Waxman-Markey, cap and trade is what Rep. Dingell said it was—a tax, and a great big one.

This will not the be the last version of this bill. Agriculture Committee Chairman Collin Peterson previously opposed the bill and sought some concessions to benefit farmers. But on Tuesday evening, Rep. Peterson and Waxman reached a deal. It is not known what this deal will entail, but a new version of the bill will be announced before the scheduled vote on the House floor on Friday.

When President Obama took office, he got a new car—an 8 mile-per-gallon custom Cadillac limousine. The reason his car gets such poor fuel economy is that it is designed to protect the Commander-in-Chief from multiple threats. The limo’s body is composed of sophisticated titanium, steel, ceramic and aluminum armor to stop projectiles. The armored doors are 8-inches thick and the undercarriage is protected with a 5-inch thick reinforced steel plate. The car is equipped with night vision cameras and Obama’s seat features a foldaway desk, laptop, and satellite phone so he can conduct business on the go. Because the car’s armor and accessories weigh so much, the car is powered by a 6.5 liter diesel engine.

With these safety features and accessories, it is not surprising his limousine only gets 8 miles to the gallon. President Obama didn’t have the luxury of choosing a fuel-efficient car. His car was chosen for him based on several factors, most importantly the need to protect the President of the United States. Unfortunately, with this new national fuel efficiency standard, President Obama is not giving Americans the ability to select the car of their choosing.

When the average American chooses a new car, she considers her needs, her financial situation, the size of her family and her personal preferences. Some people want cars that are very fuel efficient. Others want lots of cup holders. Safety is an important consideration for many. Many small businesses need trucks to do their jobs. Still others participate in community car polls that require the ability to carry kids to and from soccer practice.

President Obama, however, is proposing to limit American’s automobile choices and force Americans to buy more fuel economy than they would choose on their own. He is proposing a fuel-economy mandate that cars in 2016 model cars will have to get at least 39 miles per gallon.

Currently there are only three cars that get 35 miles per gallon or better, the Toyota Prius, the Honda Civic hybrid, and the Ford Fusion hybrid. In just over 5 years, automakers need to improve the fuel economy of the entire fleet by 40 percent. Possible? Yes. Costly? Most definitely.

More Fuel Efficient Cars Will be Expensive to Manufacture

It is possible to build more fuel efficient cars. For example, automakers can build smaller cars, but the American people, prefer certain amenities like safety, comfort, and ability to carry passengers over fuel economy. Cars can also be built out of exotic materials to make them lighter and more fuel efficient, but this increases the price. A study by Global Insight found that this kind of regulation would increase power-train costs by $1,000 for small cars and $5,000 for larger vehicles.

Additional Manufacturing Costs Will Destroy 150,000 Jobs in the Automotive Industry

According to a study by the National Highway Transportation Safety Administration, implementing a fuel economy mandate as stringent as the President has called for will likely destroy over 148,000 jobs in the automotive industry.[1]

The reason this mandate will reduce jobs in the automotive industry is simple economics. As NHTSA explains in its report, fuel economy mandates increase the price of cars and trucks. These higher vehicle prices lead to reduced demand for new vehicles, which in turn reduces the amount of jobs in the automotive industry (fewer workers and needed to build fewer cars). [2]

Safety First

Besides costing American jobs, this mandate will also come at a cost of American lives. A 2002 study from the National Research Council found that the federal government’s Corporate Average Fuel Economy mandate contributed to 2,000 deaths per year.

The reason for this death toll is that frequently there is a tradeoff between fuel economy and safety. Smaller, lighter cars are generally more fuel efficient than larger, heavier cars. Cars have become safer, but today’s small, fuel efficient cars are still more dangerous than other cars in two-car frontal offset collisions, even again medium sized cars.

To meet President Obama’s fuel economy regulations, automakers will likely make their cars smaller. This will reduce the safety of the cars. As Adrian Lund, president of the Insurance Institute for Highway Safety told the USA Today, “leave the automakers the option of downsizing, clearly we’re going to have some safety consequences," Lund says. “Smaller vehicles do not protect their occupants as well as large ones.”

President Obama didn’t have to choose between safety and fuel economy when it came to his limo. He shouldn’t force the American people to be forced to choose smaller, more fuel efficient and less-safe cars.

Environment Last

In the past, fuel economy mandates were implemented to save oil. President Obama is not only promoting the oil savings of more fuel efficient cars, but also touting this regulation as protecting us from global warming. Some environmentalists called the President’s plan the “biggest single step to curb global warming”. But even setting aside the fact that the Earth has not warmed since 2001 despite rising greenhouse gas emissions, this mandate will have no affect on global warming.

The NHTSA study used the MAGICC climate model to model the climate impact increases in fuel economy requirements. They found that the scenario similar to President Obama’s reduced global temperature by 0.001 C in 2030, 0.003 C in 2060, and 0.007 C in 2100.[3]

The reason is for this infinitesimally small reduction in global temperature is because future carbon dioxide emissions from the developing world will swamp our modest automobile-related reductions. If every car and truck complied with President Obama’s new fuel economy mandate (in reality, the mandate will only apply to new cars and trucks), U.S. emissions of greenhouse gases would decrease by 5 percent overnight.[4] But emissions from the rest of the world are increasing so dramatically that by the end of September, [5] emissions increases from the rest of the world make our decrease moot. In short, this costly policy would have no noticeable impact on global concentrations of carbon dioxide emissions.

American jobs, American workers, and American family budgets will suffer. All in the name of a reduction of global temperature by 1/1000^th of a degree Celsius by 2030.

[1] See National Highway Traffic Safety Administration, Average Fuel Economy Standards, Passenger Cars and Light Trucks. Model Years 2011-2015, available at http://www.instituteforenergyresearch.org/wp-content/uploads/2009/05/nhtsa_analysis.pdf. The NHTSA looked at six options in their report. The TC = TB option (Total Cost = Total Benefit) is a very close analogue to President Obama’s proposed plan. (See VII-2 Average Required CAFE levels, p. 608). The TC = TB option raised CAFE to 34.6 in 2015, while the Obama plan increased the average fleet fuel economy standard to 35.5 in 2016.

[2] See National Highway Traffic Safety Administration, Average Fuel Economy Standards, Passenger Cars and Light Trucks. Model Years 2011-2015, at 585–586.

[3] See National Highway Traffic Safety Administration, Average Fuel Economy Standards, Passenger Cars and Light Trucks. Model Years 2011-2015, at 624.

[4] According to the Energy Information Administration report Emissions of Greenhouse Gases in the United States 2007, http://www.eia.doe.gov/oiaf/1605/ggrpt/pdf/0573(2007).pdf p. 5, U.S. transportation emissions account for 28% of total U.S. carbon dioxide emissions. According to p. 19 of the same report, motor gasoline accounts for 59% of the total U.S. transportation emissions. The California regulations will reduction greenhouse gas emissions by 30% http://www.arb.ca.gov/newsrel/nr092404.htm.

[5] Calculated using the emissions data from the Global Carbon Project. According to EIA (see footnote 1), the GHG emissions from the transportation sector total 28% of total U.S. emissions in 2007. Twenty-eight percent of the U.S.’s 2007 carbon dioxide emissions are 444,139 GgC. The burning of motor gasoline accounts for 59% of the total transportation emissions. Fifty-nine percent of 444,139 GgC is 262,042 GgC. California’s regulations would reduce this amount by 30% or 78,612 GgC. From 2006 to 2007, the world’s carbon dioxide emissions (excluding the United States) increased by 213,436 GgC. At this rate of change, the reductions brought about by applying California’s regulation to the entire transportation system today would be replaced in 134 days.