The Obama Administration’s recently released “Economic Report of the President” devoted an entire chapter to “Transforming the Energy Sector and Addressing Climate Change” [.pdf]. Whenever the government promises to transform an entire sector of the economy, we know to watch out. Upon a simple reading it is obvious that the president’s fancy economic rhetoric doesn’t justify the $60 billion in “stimulus” funds and the proposed new mandates on the private sector. Even the report’s own analysis shows that the likely damages from climate change are comparable to the economic damages of more government regulation.

The Official Economic Argument for Intervention

Frequently when governments want to increase their power, money, and influence they justify their schemes with a scientific appeal. Standard economic theory provides just such a justification in the form of “market failure,” where the Invisible Hand breaks down because of “externalities.” Most people are familiar with the alleged negative externality of greenhouse gas emissions—which then justify either carbon taxes or cap-and-trade—but the president’s report introduces us to a new market failure, this time from a positive externality:

A market-based approach to reducing greenhouse gases [i.e. cap-and-trade] will provide incentives for research and development (R&D) into new clean energy technologies as firms search for ever cheaper ways to address the negative externality associated with their emissions. However…there is a separate externality in the area of R&D. Because it is difficult for the person or firm doing research to capture all of the returns, the private market supplies too little R&D—particularly for more basic forms of R&D…In this case, government R&D policies can complement the use of a market-based approach to reducing greenhouse gas emissions and yield large benefits to society. A policy that broadly incentivizes energy R&D is more likely to maximize social returns than a narrow one targeted at a specific technology because it allows the market, rather than the government, to pick winners. Likewise, funding efforts in support of basic R&D are less likely to crowd out private investment because differences between private and social returns to innovation are largest for basic R&D. (Economic Report, p. 243, bold added)

Rhetoric versus Reality

Given the textbook justification for government spending, we would now expect the Obama Administration to tout its expenditures on, say, math and science Ph.D. students, or a superconducting supercollider. As the report itself stresses, the economic rationale for such investments is that the social returns spill out across many sectors, so that individual companies would not be expected to spend the optimal level when we consider the costs and benefits to society as a whole. Since the report says the stimulus package provided “$60 billion in direct spending and $30 billion in tax credits” to “jump-start” the transition to a “clean energy economy,” there is a whole lot of ‘splainin’ that the administration must do.

Yet look at the programs the president’s report touts as fulfilling the requirements of “basic R&D,” without the government “picking winners”:

In its 2011 proposed budget, the Administration has stated a commitment to fund R&D as part of its comprehensive approach to transform the way we use and produce energy while addressing climate change. The Recovery Act investments begun in 2009 are a first step in this clean energy transformation. They fall into eight categories that are briefly described here.

Energy Efficiency. The Recovery Act promotes energy efficiency through investments that reduce energy consumption in many sectors of the economy. For instance, the Act appropriates $5 billion to the Weatherization Assistance Program to pay up to $6,500 per dwelling unit for energy efficiency retrofits in low-income homes…

Renewable Generation. The Recovery Act investments in renewable energy generation also are leading to the installation of wind turbines, solar panels, and other renewable energy sources…

Traditional Transit and High-Speed Rail. Grants from the Recovery Act also will help upgrade the reliability and service of public transit and conventional intercity railroad systems. For example, $8 billion is going to improve existing, or build new, high-speed rail in 100- to 600-mile intercity corridors…

Clean Energy Equipment Manufacturing. The Recovery Act investments are increasing the Nation’s capacity to manufacture wind turbines, solar panels, electric vehicles, batteries, and other clean energy components domestically. As the United States transitions away from fossil fuels, demand for advanced energy products will grow, and these investments in clean energy will help American manufacturers participate in supplying the needed goods. (pp. 243-245)

In the quotation above, we have omitted some of the items—such as research on batteries—that could plausibly be classified as “basic R&D.” But as the list above shows, much of the spending programs are the furthest things from basic R&D, and are quite obviously examples of the government shoveling money to favored constituencies. Engineers already know how to weatherize homes and build traditional transit systems; there is no “market failure” here from spillover benefits from R&D spending.

The Costs of Inaction?

After sketching some of the major components of the $90 billion in total government assistance for “clean energy” in the stimulus package, the president’s report goes on to describe the administration’s plans to push for a government cap on greenhouse gas emissions, as well as new mandates on energy efficiency and renewable electricity generation.

In order to stifle voter skepticism over the costs of these proposed interventions into the energy sector, proponents will usually say, “Sure the costs are high, but the costs of inaction are much higher. We can’t afford to not act when it comes to global warming.”

In this context, the reader might be surprised to examine the report’s charts which show that the actual scientific literature—even the “consensus” as codified by the Intergovernmental Panel on Climate Change’s latest report—shows that the case for alarmism is dubious:

[T]he projected losses for the most likely range of temperature changes are relatively modest. For example, at the Intergovernmental Panel on Climate Change’s most likely temperature increase of 3˚C for a doubling of CO₂ concentration (concentrations in 2100 are likely to be higher), the projected decline is 1.5 percent of GDP. (Box 9-2, page 242, emphasis added)

That is worth repeating: The Administration’s own report, in a chapter devoted to the need to “transform the energy sector,” admits that doing absolutely nothing would “most likely” lead to a “relatively modest” impact. This is consistent with the CBO’s modeling which showed that a “pessimistic” estimate of the damages from inaction are lower than the high-end estimate of the economic cost of the Waxman-Markey cap-and-trade bill by the year 2050.

Of course, it’s always possible that unchecked greenhouse gas emissions will lead to disaster. After letting the cat out of the bag regarding the “most likely” impacts from letting the market and nature run their course, the president’s report tells us:

The projected relationship between temperature changes and consumption losses is nonlinear—that is, the projected losses grow more rapidly as temperature increases. For example, while the projected loss for the first 3˚C is 1.5 percent, the loss at 6˚C is five times higher. And the estimated loss associated with an increase of 9˚C is about 20 percent [of consumption’s share of GDP]…Overall, it is evident that policy based on the most likely outcomes may not adequately protect society because such estimates fail to reflect the harms at higher temperatures. (ibid, bold added)

Those are scary numbers, it’s true. But how likely is it that human activities will cause the world to increase 9˚C, when the total warming since the start of the Industrial Revolution has been about 0.7˚C? As this graph from the IPCC’s latest report shows—across three different emission scenarios and five different modeling teams—the probability of such a rapid warming is virtually zero. Once the government gets permission to transform entire sectors of the economy because of the dangers posed by extremely unlikely outcomes, the sky’s the limit.

Conclusion

The proposals to transform the energy sector are so audacious that they can’t even be justified according to the government’s own rhetoric. A simple reading of the president’s own economic report reveals that the billions in handouts violate their own alleged rationale, and the government’s own numbers show that the likely threat of climate change is less damaging than the Waxman-Markey cap-and-trade plan.

The Administration’s Plan to Coerce Congress to Pass Cap-and-Trade—Force Congress to Rescue the Economy from the Administration’s Heavy-Handed, Command-and-Control Regulations

During the Presidential campaign Obama’s advisors promised to have the Environmental Protection Agency (EPA) regulate carbon dioxide. Today, the President made good on that promise and EPA published a rule in the Federal Register regulating carbon dioxide and greenhouse gases by declaring that these gases “endanger public health or welfare.” (This is why it is called the “endangerment finding” because EPA is finding that greenhouse gases “endanger public health and welfare.”) This announcement was timed to coincide with the opening of the United Nations Climate Change Conference in Copenhagen.

Last week, a top White House economic official explained the Administration’s cynical strategy to reporters:

“If you don’t pass this legislation, then … the EPA is going to have to regulate in this area,” the official said. ”And it is not going to be able to regulate in a market-based way, so it’s going to have to regulate in a command-and-control way, which will probably generate even more uncertainty.”

In other words, the Administration realizes that these regulations will harm the economy, but is trying to push Congress to pass a law they say will reduce the harm. Amazingly, a week and a half after holding a summit to discuss how to create jobs, the Administration is promoting a policy that it admits will harm job prospects. As one news report stated, a White House “official warned that the kind of ‘uncertainty’ generated by unilateral EPA action would be a huge ‘deterrent to investment,’ in an economy already desperate for jobs.” The Administration was acting, in the words of another newspaper writer, like Tony Soprano saying essentially, “Nice economy you got there, Congress. Now either youze guys pass da capntrade deal or my associate here, Ms. Jackson, breaks its legs.”

EPA Was Not Forced to Regulate Greenhouse Gases

The endangerment finding is a response to the Supreme Court’s decision in Massachusetts v. EPA. That decision required EPA to make a finding, but it did not require EPA to find that greenhouse gases endanger human health and welfare. As the Supreme Court explained, “We need not and do not reach the question whether on remand EPA must make an endangerment finding, or whether policy concerns can inform EPA’s actions in the event that it makes such a finding. We hold only that EPA must ground its reasons for action or inaction in the statute.”[1]

What’s really disingenuous about the Administration’s ploy is that even if the Senate had already passed the Kerry-Boxer cap and tax bill, the Supreme Court decision would still stand, meaning the EPA would still have to determine whether CO2 endangers public health and welfare

Thus the entire premise of the Administration’s claim that Congress must pass a bill because if they don’t “EPA is going to have to regulate in this area” is bogus. Whether or not Congress passed a cap-and-trade bill, the Supreme Court ruling required EPA to either reject or issue an endangerment finding.

Command-and-Control versus “Market-Based” Approach

EPA’s threat is misleading in yet another way. By contrasting a top-down regulatory approach with the ostensibly market-based approach of cap-and-trade, one is led to the assumption that the Waxman-Markey and Kerry-Boxer bills simply augment the market price of carbon to reflect the alleged “social cost of carbon” and then let the magic of the market take control.

This is nonsense. In the first place, IER has already demonstrated the tremendous thicket of command-and-control regulations in Waxman-Markey besides its cap-and-trade program. To contrast EPA’s admittedly top-down, command-and-control-style approach with the climate bills in Congress is a false dichotomy. They are both command-and-control.

Second, even the cap-and-trade programs in Waxman-Markey and Kerry-Boxer are not what environmental economists would have recommended to correct the “externality” of possible future climate damages. Many (perhaps most) economists who actually publish academic articles on the issue think that if the government is going to take “market-based” action, it should set a straightforward carbon tax and use the proceeds to reduce other taxes. Failing that, they would argue that the government should implement a cap-and-trade program with full auctioning of permits, and then use the receipts to reduce other taxes. No academic economist endorses the hodge-podge of allowance handouts, “offsets,” and subsidies to various “green” recipients contained in the two pending bills. The only way to justify them is to say “that’s how politics works.”

Follow the Money

So, if the Obama Administration wasn’t legally required to issue regulations but did so—knowing full well they would be harmful to jobs and the economy—why did they do it? The answer is simple—to force Congress to enact the policies the White House really wants: cap-and-trade—and the money that goes along with it. Regulation by EPA only gives the Administration regulatory authority over 85 percent of our energy use (energy from coal, oil, and natural gas) but there is no real revenue increase for the federal government. Cap-and-trade provides huge revenue increases to the federal government. The Administration’s proposed budget called for raising $646 billion in new fees from cap-and-trade between 2012 and 2019. A senior aide later admitted the number could be 2 to 3 times that much, or $1.3 to $1.9 trillion. That makes it the largest tax increase in world history. And this tax will only go up over time as emissions prices go up.

Legislative proposals such as the Waxman-Markey bill and the Kerry-Boxer bill do not raise as much revenue for the federal government as Obama’s budget proposal, but instead the bills redistribute trillions of dollars to preferred interest groups. Under EPA regulation, the government cannot collect taxes or sell credits for carbon dioxide. Under the cap-and-trade plan, it makes out like a bandit and gets to choose economic winners and losers. Government power and money would increase, paid for with the people’s economic liberties.

Conclusion

The Supreme Court did not require EPA to find that greenhouse gases endanger public health and welfare. The Obama Administration chose to make that finding, even though it understands that EPA regulations would be very harmful to a struggling economy. Now the Administration is trying to leverage the harm they have created to force Congress to pass the largest tax increase in the history. We should reject this cynical strategy. Instead of passing legislation to regulate greenhouse gases, Congress could restore the original intent of the Clean Air Act by removing EPA’s ability to regulate greenhouse gases under the Clean Air Act. Those actions would protect the American people from the Administration’s economically harmful regulations.

[1] 549 U.S. 497, 533–34 (2007).

This is completely misleading. It is true that the vast majority of the surveyed economists believe that climate change poses a threat to the economy. However, this alone doesn’t mean that their work endorses the pending legislation. In fact, we will show that many of the responses in the survey underscore that Congress’ proposed “solutions” to climate change violate the recommendations of even those economists who are very concerned about climate change.

The Existence of a Threat Alone Doesn’t Justify Any Government “Solution”

The most-hyped result from the survey was the fact that 84 percent of the surveyed economists agreed with this statement: “The environmental effects of greenhouse-gas emissions, as described by leading scientific experts, create significant risks to important sectors of the United States and global economy.”

Already we see that the question is loaded; a more neutral question would have been, “Do you think greenhouse-gas emissions create significant risks to the economy?” There are many economists who have expressed skepticism about the computer models and techniques used to generate some of the scarier projections. But with the phrasing of the question, they were technically being asked to take the climate models at face value, and assess what the impact of their projections would be on the economy.

But that’s a minor quibble. The real problem with the hype placed on this particular result, is that it does not follow that the Waxman-Markey or Kerry-Boxer bills are appropriate to dealing with this potential risk. For an analogy, if we surveyed doctors and asked, “Is there a significant risk to the public from H1N1?” presumably a large percentage would say, “Yes.” If the Obama Administration then proposed vaccinating every American three times a month for the next 20 years, that would clearly be a waste of resources and detrimental to public health.

The same is true with the threat of climate change. As we will show, the pending Congressional legislation actually violates many of the recommendations of the economists in the survey. Yet one would never get that impression from reading the NYT coverage, or story in USA Today.

Surveyed Economists Favor “Market-Based” Approach and Auctioned Allowances

Another completely misleading result from the survey shows that an overwhelming 91.6 percent of the respondents favored a “market-based” approach to curbing greenhouse gas emissions. In the news stories linked above, as well as the Executive Summary of the survey itself, this statistic is offered as apparent endorsement of the cap-and-trade legislation currently being debated in Congress.

On the contrary, the economists endorsement of “market-based” approaches really shows how inefficient the pending legislation is. By “market-based” approach, the economists mean that the government should place a price penalty on carbon dioxide emissions, either through a cap-and-trade system or a straightforward carbon tax. And then…the government should mind its own business. In particular, policymakers should not try to micromanage the particular ways that business and consumers scale back their emissions, but rather the (augmented) profit and loss system will lead to the most efficient response to the new incentives. As the study itself explains:

Nearly all respondents—92%—also agreed or strongly agreed that market-based mechanisms, as opposed to command-and-control approaches, are the preferred way to cut greenhouse gas emissions and place a price on carbon. As such, most economists would support the cap-and-trade structure proposed by the main legislative options now pending before Congress. [Emphasis added]

Yet contrary to the non sequitur in the quote above, if a straightforward “market-based” approach is what the expert economists favor—by an overwhelming majority—then the economists would likely reject the monstrous hunks of legislation that passed the House and are being debated in the Senate. We at IER have already shown the tremendous thicket of new regulations contained in the House-passed Waxman-Markey bill, besides its cap-and-trade system. At best, only one half of Waxman-Markey could even be called cap-and-trade, leaving an additional 700 pages of inefficient regulations. The 91.6 percent of economists who favored a “market-based” approach were rejecting the top-down central planning contained in Waxman-Markey and Kerry-Boxer.

Speaking of cap-and-trade, the IPI survey also found that 80.6 percent of respondents favored auctioning emission allowances rather than handing them to favored groups for free. Presumably then these economists would join with IER in condemning this thinly veiled transfer of an enormous amount of wealth from low- and middle-class energy consumers into the pockets of politically-connected shareholders.

What the Media Hype Didn’t Report

We have seen that the two most-hyped results of the survey actually do not support the pending legislation, and if anything actually undercut it. What’s interesting is that if one looks at pages 18-19 of the actual survey [.pdf], one learns:

The survey asked what percentage of benefits from emissions reduction would accrue to the United States. The average response was 7.7%, and the median was 4%….Given the global extent of the problem, each individual country has an incentive to “free ride” on the efforts of others—it is important for all countries to act to overcome this incentive or else appropriate controls will not be put in place.

The lay person who simply reads the news coverage or Executive Summary would be stunned by the above concession. Many economists support a reduction in greenhouse gas emissions because they calculate that the global benefits will outweigh the global costs. But as the above quotation makes crystal clear, if the U.S. restrains its own emissions while other major governments do not, then the impact on the U.S. economy—which the CBO estimates could be as high as 3.4 percent of GDP by 2050—will result in benefits that will accrue largely to foreigners.

Of course, there is nothing wrong with foreign aid per se; Americans are quite generous with their wealth. Furthermore, many people believe that the Western countries ought to bear the lion’s share of the pain from emissions cuts, because they historically benefited from plentiful energy supplies in the form of fossil fuels. Even so, average Americans are being misled when they believe the pending legislation will benefit the U.S. economy on net. Even according to the “consensus” models, it will not benefit if the U.S. acts unilaterally.

Conclusion

The media blitz surrounding the new IPI survey tells Americans that economists as well as climate scientists support government intervention into the energy sector. Yet a little digging shows that if anything, the economic consensus rejects the particular legislation pending in Congress. Just because many experts agree there is a problem doesn’t automatically mean Congress has the solution.

Not true, as you can see here.

This week Senator John Kerry, the lead author of the legislation, told the Senate Finance Committee that “the reason” we need to pass his cap-and-trade energy tax is that “over the last eight years, emissions in the United States of America in greenhouse gases went up four times faster than in the 1990s.”  Also not true.  In fact, he’s off by a factor of 32.

As the video shows, greenhouse gas emissions increased far slower in the 2000s than the 1990s. According to data from the Energy Information Administration,[1] U.S. carbon dioxide emissions increased by 15.14% between 1990 and 1999, but from 2001 to 2008 carbon dioxide emissions only increased by 1.88%. If Senator Kerry were correct, U.S. carbon dioxide emissions would have increased by 60.5% over the last 8 years, but they only increased by 1.88%.  Senator Kerry overestimated U.S. emissions by a factor of 32.

These are the authors of the Kerry-Boxer cap-and-trade energy tax legislation.  If our leaders can’t stick to the basic facts to support their argument for a national energy tax, and the lead author of the bill is this far off the mark on “the reason” Congress needs to pass it, Americans might reasonably question the validity of their estimates on how much the bill will cost them and our nation’s already-struggling economy.

Even more troubling, Senator Lindsey Graham is now working with Senator Kerry on a “compromise” in which Senators’ would accept the cap-and-trade plan in exchange for “opening new areas for offshore drilling.”  This would have been a bad compromise last year, but given the fact that the Outer Continental Shelf (OCS) is now open—and has been since Congress allowed its ban on offshore drilling to expire on October 1, 2008—it appears to be an even worse compromise this year.

If the compromise is anything like the “Gang of 10” plan offered last year in the months before the Congressional ban on drilling in 85 percent of the OCS was set to expire, the only thing we’d be compromising is the progress we’ve already made. That’s because the Gang of 10 plan would have created a permanent ban on drilling in 78 percent of our offshore areas—areas that are now open.

But at the end of the day, it doesn’t matter what the compromise may be.  The long-term costs cap-and-trade legislation would inflict on our economy and our way of life would be so devastating, that no compromise – offshore drilling or anything else – would justify its passage.

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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Elmendorf’s testimony was in response to a revision of CBO’s original report on the cost of the Waxman-Markey bill. When the original report came out, IER showed that CBO’s own numbers demonstrated that the economic costs of Waxman-Markey’s cap-and-trade scheme far outweighed its benefits to American citizens, and arguably even to the world as a whole. In the present post, we explain why Elmendorf’s three key points are misleading. Elmendorf calls hundreds of billions of dollars in lost future economic growth a “modest” reduction, he obfuscates by focusing on purchasing power instead of on the reduction in total income, and contrary to economic theory, assumes that low- and middle-income families will benefit from free allowances handed out to utilities. By simply stressing different aspects of the same underlying CBO analysis, one could have painted a much bleaker picture of the costs of cap-and-trade than Elmendorf chose to convey.

Writing off Billions of Dollars in Lost Future Economic Growth as “Modest”

The first trick Elmendorf deploys is to dismiss reductions in GDP as “modest” because they won’t occur until Americans are wealthier than they are today:

Reducing the risk of climate change would come at some cost to the economy. For example, the Congressional Budget Office…concludes that the cap-and-trade provisions of H.R. 2454…would reduce gross domestic product (GDP) below what it would otherwise have been—by roughly ¼ percent to ¾ percent in 2020 and by between 1 percent and 3½ percent in 2050. By way of comparison, CBO projects that real (inflation-adjusted) GDP will be roughly two and a half times as large in 2050 as it is today, so those changes would be comparatively modest.

Although the CBO director brushes it off, a potential cost of 3.5 percent of total economic output is enormous. In 2008, US GDP was $14.4 trillion. The high-end cost estimate of 3.5 percent works out to $504 billion. Yes, it’s certainly true that if you asked people back in 1970 if 3.5 percent of GDP forty years in their future was a big deal, they probably would have said “Not really.” Yet the people in 2008 would certainly have been upset if $504 billion were sucked out of the economy because of a program implemented forty years earlier.

While CBO calls a 1 percent to 3.5 percent reduction in GDP by 2050 a “modest” cost, what about the benefits? The true irony here is that Elmendorf’s testimony provides an estimate of the cost of global warming. CBO argues that “a relatively pessimistic estimate for the loss in projected real gross domestic product [GDP] is about 3 percent…by [the year] 2100”. So if Elmendorf is allowed to blow off 1 percent to 3.5 percent in GDP because people will be so much richer by 2050, why are we rushing through legislation to avert potential climate change that the same CBO predicts might cost 3 percent of GDP at the end of the century? Won’t Americans be really wealthy by 2100?

Focusing on Consumption Purchasing Power Rather Than Total Income

After assuring the senators that reductions in GDP were modest, Elmendorf then changed the measuring rod:

In the models that CBO reviewed, the long-run cost to households would be smaller than the changes in GDP. Projected GDP impacts include declines in investment, which only gradually translate into reduced household consumption.

This statement is technically true but it is very misleading. Suppose a household currently enjoys a take-home income of $100,000, out of which they put $10,000 into funding retirement and the kids’ college tuition, while the other $90,000 they spend on the mortgage, dining out, clothes, gasoline, and other household necessities. The politicians come along and propose a new tax that will grab an extra $5,000 a year, leaving the family with a new after-tax income of $95,000.

Now most people would think, “Wow, I’m $5,000 a year poorer.” But the apologists for the tax hike could argue, “Actually you’re not really $5,000 poorer, in terms of your lifestyle. You won’t cut out your spending on groceries and food by the full $5,000. Because of your lower income, you will reduce your savings to $9,000 a year, and your other spending down to $86,000 a year. So really the hit to your household’s consumption is only $4,000 per year.”

Would anybody buy that argument? Of course not. Income is income. The “long-run cost to households” will certainly be affected by declines in investment spending, which is counted in GDP. By focusing on a decline in “purchasing power” of 1.2 percent for households by 2050—rather than their estimate of 1.1 percent to 3.5 percent of lost GDP—the CBO is effectively sweeping half the impact under the rug.

Reporting Allowance “Rebates,” Not Gross Compliance Cost

The last trick we’ll note is that the CBO analysis simply takes the government at its word that low-and middle-income families will benefit from the free allowances that will be handed to utilities under the provisions of Waxman-Markey, even though this flies in the face of standard economic theory. As a recent IER study showed, Congress plans on using allowance handouts in order to transfer money from consumers (through higher prices) into the pockets of special interests.

The reader may be interested to see the CBO’s estimates of the actual hike in household costs from Waxman-Markey’s cap-and-trade scheme, before adding in the free allowance handouts:

As the first column makes clear, middle class families are expected to suffer a hit of more than $1,000 per year in higher prices. (And remember, this figure is the one that has already been cut in half using the total output vs. consumption trick explained above.) Whatever happened to “a postage stamp a day”? Does the CBO know something about the Postal Service’s intentions that we don’t?

Conclusion

During a recent hearing, Elmendorf made clear there were substantial costs to cap-and-trade. According to the Washington Post he said:

“The shifts will be significant,” the CBO director said. “We want to leave no misunderstanding that aggregate performance—the fact that jobs turn up somewhere else for some people—does not mean that there are not substantial costs borne by people, communities, firms in affected industries and affected areas. You saw that in manufacturing, and we would see that in response to changes that this legislation would produce.”

Even Elmendorf agrees there are substantial costs to cap-and-trade. And as we have shown, he and the CBO are still underestimating the costs.

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.

WASHINGTON – In advance of Wednesday’s Senate Energy and Natural Resources Committee hearing on the economic consequences of climate change legislation, the Institute for Energy Research (IER) today released an analysis entitled ‘The Other Half of Waxman-Markey: An Examination of the Non-Cap-and-Trade Provisions.’ As the title suggests, the report identifies and analyzes several of the provisions included in the House climate bill unrelated to cap-and-trade, but taken on the whole, potentially just as harmful to the U.S. economy as the components of the bill attracting all the headlines.

IER President Thomas J. Pyle released the following statement about the new study:

“Though nearly all of the debate surrounding Waxman-Markey and its new Senate counterpart, Kerry-Boxer, has centered on cap-and-trade, there is much more to this legislation than just that one policy. This bill is chock-full of provisions that mandate everything from the kind of light bulbs we can use in our swimming pools to the amount of electricity that utilities will be forced to provide from politically correct, unreliable, and unaffordable sources.

“While the bill boldly announces itself ready and willing to regulate fundamental aspects of Americans’ daily lives, harder to find is any explanation of how it will actually improve our environment, or enhance the quality of life of those who live within it. One would’ve thought those considerations could have found their way into a nearly 700-page bill. But they did not, and it’s hard to imagine they will moving forward.”

More information on the study:

• Fact Sheet: Highlights of the Rest of Waxman-Markey
• Summary: A Brief Overview of Waxman-Markey’s Non-Cap-and-Trade Provisions
• Study: The Other Half of Waxman-Markey: An Examination of the Non-Cap-and-Trade Provisions

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

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• Dr. Michael’s full study is available here.
• The following is a fact sheet to accompany Dr. Michaels’ study (PDF version here).

Notable Provisions in Waxman-Markey:

• Mandate that utilities provide 20 percent of electricity from qualified renewables by 2020, up from about 2.8 percent today[1] (Sec. 101): The bill requires utilities to obtain at least 6 percent of their electricity from sources defined as renewable by 2012, 9.5 percent by 2014 and 20 percent by 2020 (some portion may come from efficiency-related savings).And if those mandates aren’t strict enough, Waxman-Markey also:
  • Defines wood and plant waste from federal lands as non renewable, while the same material, if found on certain non-federal lands, is renewable. (Sec.126)
  • States that new hydroelectric power from the U.S. is renewable; hydroelectric power from Canada is not.[2]
• Establish a new $1 billion annual tax on electricity from coal and natural gas-fired power plants (Sec. 114): These tax proceeds are given to a nonprofit corporation to “accelerate the commercial availability of carbon dioxide capture and storage.” The Pew Center on Global Climate Change estimates this technology will increase coal-fired electricity costs by 40 to 70 percent.[3]
• Provide assistance to the many workers who will lose their jobs as a result of the bill’s economically destructive provisions (Sec. 421–424).
• Micromanage energy efficiency standards for lighting and appliances (Sec. 211–212), including swimming pool lights, portable lights, decorative gas lighting systems, theme park lights, stage lights, lights for artwork, water dispensers, hot food holding cabinets, hot tubs and more.
• Establish a new $30 billion revolving loan fund to subsidize wind turbines, solar energy, fuel cells, batteries, biomass equipment and other energy sources (Sec. 246).
• Create a Clean Energy Deployment Administration (CEDA) with $7.5 billion in Treasury “Green Bonds” (Sec. 182): CEDA will use taxpayer dollars to invest in energy technologies that private investors consider too risky. Waxman-Markey does not explain why the federal government, which has no history of investing wisely, will make better investments than private investors.
• Require utilities to develop large scale plans for electric vehicles (Sec. 121) and increase the ceiling on loans to auto manufactures to build electric cars (Sec. 125). The bill also allows the Secretary of Transportation to require automobile manufactures to produce flex-fuel vehicles (Sec. 127), and even authorizes $350 million for a “Cash for Clunkers” program for electric motors (Sec. 245).
• Continue to allow EPA to regulate greenhouse gases using criteria other than global climate change (Sec. 831–835). Waxman-Markey prohibits EPA from regulating greenhouse gases based on their effect on global climate change, but does not prohibit EPA from regulating greenhouse gases on any other basis, such as ocean acidification.
• Stall EPA’s efforts to determine the complete lifecycle greenhouse gas emissions of ethanol (Sec. 551). Though EPA has been working to determine the lifecycle greenhouse gas emissions from the production of ethanol, the bill stalls that effort. Recent science shows the lifecycle greenhouse gas emissions of ethanol may be greater than gasoline.[4]
• Replace local and state building codes with a federal building code (Sec. 201). Apparently, state and local governments cannot be trusted to make their own decisions about what buildings to allow in their jurisdiction, so the federal government will require more expensive buildings across America. This is needless additional regulation, as weather and storm effects vary throughout the US.
• Create a federal grant program to help electric utilities plant trees (Sec. 205).
• Create an independent consumer advocacy office within FERC that is run by a political appointee and will not answer to the Commissioners (Sec. 198). This section also removes the independence of the office of Administrative Litigation and places it under a political appointee.
• Establish a “National Climate Adaptation Program,” which empowers federal zoning of land and the oceans under the guise of climate change (Sec. 471–482).
• Require the President to impose tariffs on imports from counties that do not reduce their emissions by 2020 (767–768).

Waxman-Markey does not include:

• Any provisions that will increase the supply of energy without increasing prices, subsidies and costs to taxpayers.
• Any provisions to accelerate access to billions of barrels of oil and natural gas on the outer continental shelf or the over 2 trillion barrels of oil in oil shale.

[1] See Institute for Energy Research, How Much of Your State’s Electricity Meets Congress’s Definition of Carbon-free “Renewable” Energy?, http://www.instituteforenergyresearch.org/2009/05/02/does-your-electricity-come-from-congress-approved-sources/. This requirement only applies to investor-owned utilities, not municipal utilities which sell 25 percent of the nation’s electricity. Waxman-Markey defines renewable hydro as hydro built on or after January 1, 1988. The vast majority of hydro in the United States was in place before 1988. It is not clear how much hydropower was brought online after 1988, so the 2.8 percent figure might slightly underestimate the amount of electricity which qualifies as renewable under Waxman-Markey.

[2] See Sec. 101. "Qualified hydropower" under the standard must be from a facility approved by FERC, which eliminates relatively plentiful Canadian imports from qualifying under the RPS.

[3] Vello A. Kuuskraa, A Program to Accelerate the Deployment of CO2 Capture and Storage (CCS): Rationale, Objectives, and Costs, report by Advanced Resources International, Inc. for the Pew Center on Global Climate Change, October 2007 at 14 and 18-25. http://www.pewclimate.org/docUploads/CCS-Deployment.pdf.

[4] Jason Hill et al, Climate Change and Health Costs of Air Emissions from Biofuels and Gasoline," Proceedings of the National Academy of Sciences 106 (Feb. 10, 2009), 2077-2082.

1. It appears the Senators do not trust cap-and-trade to produce the result they want. If they did, the bill would not need to increase hundreds of pages of additional (and costly) energy regulations.
2. In spite of their claim that this bill will create jobs, portions of the bill suggest the Senators understand that their legislation will be costly for Americans. This is why the bill contains subsidies for people who lose their jobs as a result of the bill’s provisions.
3. It appears that the Senators want the Environmental Protection Agency (EPA) to regulate greenhouse gases using the Clean Air Act. Unlike the Waxman-Markey bill, the Boxer-Kerry permits EPA to move forward with regulations.[1] Even the Washington Post believes that it is not efficient for EPA to regulate greenhouse gases using the Clean Air Act.
4. A recent study shows that the Waxman-Markey bill will redistribute $14 billion per year from the nation’s poorest citizens to the nation’s richest citizen. Because the Boxer-Kerry bill is functionally similar to Waxman-Markey, the Boxer-Kerry bill will benefit the rich at the expense of the poor.

A couple other interesting features:

• The bill’s summary does not describe the bill as “cap-and-trade” bill. Instead, the cap-and-trade provisions are called “pollution reduction and investment.” Apparently, Americans are seeing cap-and-trade for what it is—a tax.
• The bill’s summary only mentions “greenhouse gases” once and does not mention carbon dioxide. Instead, the summary describes these emissions as “carbon pollution.” This is a misnomer, as New York Times reporter Andrew Revkin has pointed out. Not all greenhouse gases contain carbon (nitrous oxide and sulfur hexafluoride for example) and not all emissions which contain carbon are greenhouse gases (carbon monoxide is an example). It would seem that Senators Boxer and Kerry prefer a sound bite to accurately portraying the emissions they seek to regulate.

[1] As we have noted before, Waxman-Markey’s attempt to limit EPA’s ability to regulate greenhouse gases is ineffectual. The limitation only prohibits EPA from regulating greenhouse gases based on the impact on “global climate change.” (Sec. 831-835) That language does not prohibit EPA from regulating carbon dioxide based on non-global climate change concerns such as ocean acidification. This is especially telling because there are a number of sections in Waxman-Markey where climate change and ocean acidification are coupled (see e.g. Sec. 471).