Krugman on Mercury Regulation

Here is how Krugman used his extraordinary megaphone at the NYT blog to deal with the EPA’s decision. Krugman first quotes two paragraphs from Grist writer David Roberts, then returns to his own (Krugman’s) commentary:

David Roberts reports on the EPA’s decision, finally, to regulate mercury from coal plants:

Anyone who pays attention to green news will have spent the last two years hearing a torrent of stories about EPA rules and the political fights over them. It can get tedious. After a certain point even my eyes glaze over, and I’m paid to follow this stuff.

But this one is a Big Deal. It’s worth lifting our heads out of the news cycle and taking a moment to appreciate that history is being made. Finally controlling mercury and toxics will be an advance on par with getting lead out of gasoline. It will save…tens of thousands of lives every year and prevent birth defects, learning disabilities, and respiratory diseases. It will make America a more decent, just, and humane place to live.

[Back to Krugman writing:] Let me repeat part of that: it will save tens of thousands of lives every year and prevent birth defects, learning disabilities, and respiratory diseases. This is actually a much bigger issue, when it comes to saving American lives, than terrorism.

As Roberts explains, we’ve known about these costs of mercury pollution for decades, yet it took until now to get something done. The reason is, of course, obvious: special interests, hiding behind claims of immense economic damage if anything was done, were able to block action. [Emphasis in original.]

This is Krugman’s preferred M.O. when it comes to environmental issues: Copy-and-paste wild numerical claims, no matter how implausible on their face, and then pretend that all of the scientists agree with Krugman, while anyone who objects is either a fool or a paid shill of big business.

In this case, the numbers were so absurd that I decided to spend a few hours digging into the matter more deeply. Even those who are familiar with the progressive Left’s willingness to bend numbers to support their ideological causes may be surprised at what I uncovered.

The Origins of a Bogus Statistic: The Liberal Blogosphere Telephone Game

Most readers are probably familiar with the “telephone game,” in which one person whispers a statement to a second person, who whispers it to a third, and so on. With a big enough group, by the time the “statement” reaches the last person, it has morphed into something only faintly resembling the original utterance.

Something analogous partially explains what happened with Krugman’s over-the-top analysis. Glancing up again at the Krugman quotation, notice that the good doctor—in a post titled, “The Meaning of Mercury”—cited the claim that the EPA’s decision will “save tens of thousands of lives every year,” and then Krugman wrote, “[W]e’ve known about these costs of mercury pollution for decades.”

Because of Krugman’s title and discussion, the innocent reader would be led to believe that “the science” had shown that mercury pollution itself was responsible for at least 20,000 deaths annually, in the same way that (say) car crashes are responsible for a large number of deaths every year.

This is why my alarm bells went off. After all, in 2007 (the latest year of finalized data) the U.S. only had 2.4 million deaths total, with much of this number due to causes clearly unrelated to mercury. (For example, more than 123,000 died from accidents, some 35,000 were suicides, and 18,000 were homicides.) Was Krugman really telling us with a straight face that he thought at least 20,000—the lowest number that would render “tens of thousands” an accurate description—deaths were due to mercury emissions from coal-fired power plants?

We can see how Krugman’s version of reality starts to unravel, just by looking more closely at the very quote Krugman himself selected from David Roberts, who had written: “Finally controlling mercury and toxics will be an advance on par with getting lead out of gasoline” (italics added). Krugman, whether intentionally or through ignorance, led his readers to believe that this was a discussion about mercury, when, as we will see, the (bogus) statistic isn’t based on mercury emissions at all.

“Saving Lives” versus “Preventing Premature Deaths”

If we follow Krugman’s link to David Roberts’ piece, we don’t see any specific explanation of the “tens of thousands of lives” claim. However, in that piece Roberts’ links to this guest post at ClimateProgress (Joe Romm’s blog), by Daniel J. Weiss and Jackie Weidman. It is here that we start learning where the “tens of thousands of lives” number comes from, because the authors write, “These rules will remove millions of pounds of mercury, lead, arsenic and other dangerous pollutants from coal plants, preventing 17,000 premature deaths annually.”

Notice that the telephone game has struck again. Weiss and Weidman say the rules will prevent “17,000 premature deaths annually.” David Roberts incorrectly translated that into a claim that the rules will “save tens of thousands of lives.”[1] Besides being wrong numerically, it’s also misleading, since preventing a “premature death” doesn’t have quite the same ring as “saving lives.”

If a new air traffic control system reduces airplane crashes, so that fewer people die from “airplane crash” every year, then it is clearly saving lives, and the evidence for the efficacy of the new system is quite objectively verifiable. But if instead someone claims that a new pill will reduce “premature deaths” by a certain number each year, that is a much more abstract claim, dependent on a theoretical model. The new pill might in fact be a wonderful boon to public health, but the researchers in question have a lot more leeway to come up with a wildly wrong number when they can play with “preventing premature deaths.”

Reporting the Top of the Range Instead of the Range

Alas, even the “prevent 17,000 premature deaths” claim has fallen victim to the telephone game. If we follow the link that Weiss and Weidman provide, we are led to the EPA analysis fueling much of the progressive blogosphere’s commentary on the issue. Here we see, at long last, the origin of the factoid. On page 3 the report explains, “In 2016, these proposed rules would avoid: 6,800 – 17,000 premature deaths.” Thus, when Weiss and Weidman confidently asserted that the rules would “prevent…17,000 deaths annually,” they were reporting the very highest number in a range given by the EPA. (Note also that the low end of the range wouldn’t even constitute ten thousand, let alone “tens of thousands.”)

Bait and Switch: None of This Is About “Air Toxics” After All

We have already seen the telephone game’s ability to distort and inflate, resulting in Paul Krugman’s absurd implication that the scientific consensus has known for decades that mercury emissions from power plants currently cause at least 20,000 deaths annually, and that anyone who disagrees must be stupid or corrupt.

However, a reasonable person might respond, “Okay Murphy sure, the figures weren’t just about mercury, but ‘mercury and other air toxics.’ It’s also true Murphy that the actual number might be as low as 6,800 premature deaths avoided, rather than ‘tens of thousands of lives saved.’ But still, Krugman and his allies are only guilty of inflating the numbers and botching the summary of the facts. The basic spirit of their analysis is still sound, right?”

Unfortunately, what is happening here is far more Orwellian than a mere telephone game. The EPA’s analysis is based on a gigantic bait-and-switch, as Dr. Anne E. Smith explained in her August, 2011 technical commentary on the EPA’s proposed rule. From Smith’s summary of her findings:

EPA reports that the Proposed Rule will produce annual benefits of 6,800 to 17,000 avoided premature deaths and other types of health effects reductions, with an estimated value ranging from $53 billion to $140 billion, but these benefits have nothing to do with air toxics at all. The fact that none of these benefits are due to air toxics reductions is quite clear if one reads the Executive Summary (Chapter 1) of the RIA. [Emphasis in original.]

Indeed, if one knows what to look for, this shocking revelation is implicit in the EPA’s own fact sheet (which the ClimateProgress writers Weiss and Weidman linked to). On the very same page that provides the “6,800 – 17,000 premature deaths” bullet point, the EPA document says:

The updated standards will provide certainty and level the playing field so that all power plants will have to limit their toxic emissions – ultimately preventing 91 percent of the mercury in burned coal from being emitted into the air. The rule provides up to 4 years for facilities to meet the standards.

EPA did not estimate the benefits associated with reducing exposure to air toxics or other air pollutants, ecosystem effects, or visibility impairment. However, the proposed toxics rule would cut emissions of pollutants that are of particular concern for children. Mercury and lead can adversely affect developing brains – including effects on IQ, learning, and memory.

In addition to the benefits of reducing exposure to air toxics, these standards would reduce concentrations of fine particles (PM_2.5) in our air. This will significantly improve public health by preventing hundreds of thousands of illnesses and thousands of premature deaths each year. [Emphasis added.]

Thus we see that the figures (both for premature deaths and economic benefits) cited by the progressive bloggers refer not to emissions of mercury by itself or even of mercury plus all other “air toxics” combined, but rather to a certain type of fine “particulate matter,” denoted PM_2.5. In other words, EPA proposed a rule to limit mercury and other “air toxics” emissions and then, to justify the rule, almost completely relied on a model of the costs and benefits of reducing PM_2.5 emissions, which would be an incidental byproduct of the rule. Thus, even if we accept the EPA’s analysis as gospel truth, the numbers of “lives saved” cited by Krugman have virtually nothing to do with mercury at all.

But wait, it gets worse. As Dr. Smith explains later (pp. 6-7) in her analysis, the modeling assumptions behind these PM_2.5 numbers are themselves quite dubious:

[R]eaders unfamiliar with the literature on PM_2.5 health risks should be aware that the estimates of PM_2.5-attributed deaths (such as the 6,800 to 17,000 that EPA is attributing to the Proposed Rule) are based entirely on statistical associations between total mortality rates in various locations of the US and their respective monitored, region-wide ambient PM_2.5 concentrations….EPA’s estimate of 6,800 to 17,000 PM_2.5-related premature deaths avoided in 2016 as a result of the Proposed Rule is based on an assumption that 130,000 to 320,000 deaths, respectively, of 2005’s US deaths were hastened by breathing ambient PM_2.5….And yet, EPA identifies not a single death during 2005 that was attributed, even in part, to exposure to ambient PM_2.5. If PM_2.5 is indeed having this estimated effect on the public health, there is no evidence indicating when or where these events occurred, or who was affected. Rather, these mortality estimates are merely inferences drawn after making a host of assumptions about how to convert a statistical association into a concentration-response function. No one really even knows what types of deaths might be implicated. A common belief among researchers is that the deaths are primarily cardiovascular in nature, but this is far from an established fact: everything from cardiovascular causes to diabetes to lung cancer has been mentioned as having such an association in one paper or another. There is no clinical evidence to inform these inferences either, despite at least 15 years of efforts by researchers to find a clear physiological mechanism to explain and lend credibility to these estimates based solely on statistical correlations.

Conclusion

The deeper one digs into the actual science backing up the wild claims of Krugman & Co. on mercury regulation, the weaker their rhetoric becomes. The implausible assertions in Krugman’s blog post were generated by a comedy of transgressions, ranging from (perhaps honest) poor paraphrasing, to reporting the top number of a wide range, to justifying regulations on air toxics emissions based on dubious models of the health effects of particulate matter.

In conclusion, let me be clear: No one is claiming that little kids should play with mercury. (In fact, will Krugman, David Roberts, et al. join IER in opposing the government’s phased-in ban on incandescent bulbs that will effectively force all schools and daycare centers—not to mention homes—to use mercury-filled CFLs? These guys keep telling us how dangerous mercury is, after all.) Yet the public should get mighty suspicious when the allegedly airtight evidence on the benefits of mercury regulation turns out to be so very fragile indeed.

Lisa Jackson, Administrator of the Environmental Protection Agency

The mood of the country is clearly shifting against the President’s agenda of increasing energy prices by regulating carbon dioxide and other greenhouse gases. During the campaign, the President said that “under my plan of a cap-and-trade system, electricity rates would necessarily skyrocket.” He worked to implement that plan by promoting the Waxman-Markey cap-and-trade bill in 2009. That bill passed the House by 219 to 212 on June 26, 2009. Waxman-Markey didn’t get a vote in the Senate because it became obvious that Americans understood that cap-and-trade was a massive energy tax.

After the last election, President Obama acknowledged that cap-and-trade was dead. But he didn’t stop promoting the same policies that regulate carbon dioxide. At the time, he said there was “more than one way to skin a cat” and instead of listening to the will of the American people and Congress, Obama’s EPA moved to regulate carbon dioxide. These regulations have the same effect as cap-and-trade—they will massively increase the cost of using natural gas, coal, and gasoline.

The vast majority of the Members of Congress understand the dire economic consequences of regulating carbon dioxide emissions. They also understand that even EPA’s regulations will have no meaningful impact on global temperature.[1] In other words, the regulations are all cost and no benefit. That’s why an overwhelming bipartisan majority in the House passed the Energy Tax Prevention Act to stop EPA’s harmful regulations. Nineteen democrats voted for the bill, while not a single Republican voted against the bill.

But limiting EPA overreach isn’t as easy in the Senate. Last week the Senate voted on a number of proposals to limiting EPA’s authority, but none passed.  The closest any measure came to passing was Sen. Inhofe and Sen. McConnell’s amendment to nullify EPA’s carbon dioxide regulations altogether. That amendment failed on a 50 to 50 vote. But there were a number of other amendments considered which limited EPA’s regulatory authority in some way. All told, 64 senators voted against the administration’s policies including 17 Democrats who broke with their party for one vote or another.

The stated goal of the Obama administration and various cabinet members is to increase the price of energy. EPA’s regulations are a tool the administration is using. But gasoline prices are already too high for many Americans and some people are already being forced to cut back on their transportation use.

Americans should not be forced to pay more for energy. But until enough citizens can convince more Senators to vote to repeal the Obama administration’s regulations, we can only expect energy prices to continue to rise.

Alan Blinder, Professor of Economics at Princeton University

In a recent article (“The Carbon Tax Miracle Cure,” Jan. 31) Alan Blinder listed numerous alleged benefits of a phased-in carbon tax. His main argument is that it would stimulate job creation in new technologies and techniques. Out of his entire column, he devoted a single sentence to the possible downside of his plan when he wrote, “No one likes to pay higher taxes.” A more balanced assessment shows that a carbon tax presents very real dangers, even if we rely on the same economic analysis that so enthralled Blinder.

To see the fallacy in Blinder’s argument for job creation, consider his list of the “few nice side effects” that would result from a carbon tax: “reducing our trade deficit, making our economy more efficient, ameliorating global warming…” Since he puts global warming at third in the list, we see that the so-called negative externalities of carbon emissions aren’t playing a role in his main argument.

No, Blinder is making the simple observation that if the government imposes artificial costs on the current way businesses operate, then the market will respond to the new handicap and end up generating new products and techniques along the way.

This analysis is true, as far it goes. But the same could be said for any new government policy that made it illegal for businesses to continue operating in the ways that they currently find the most efficient. For example, if the government promised to impose stiff taxes on nails and screws over the next few decades, that would certainly cause entrepreneurs to see “lucrative opportunities” in developing do-it-yourself furniture that used only wooden pegs and glue. But obviously consumers would be worse off because of the less convenient and/or more expensive products.

This is basic economics: you don’t make the country richer by taxing it, or by taking options away from industry. If investors pour money into carbon-reducing technologies under the threat of a future carbon tax, there is correspondingly less investment available for other technologies.

Advocates of a carbon tax claim that there is a special reason to penalize carbon emissions, as opposed to nails and screws. They argue that because emissions of carbon dioxide (and other greenhouse gases) may eventually lead to significant damages from climate change, entrepreneurs currently are not taking all of the costs of their actions into account.

Even if we concede this framing of the issue, it still does not follow that economists should favor a new carbon tax. Ironically, we can use the same researcher—William Nordhaus—upon whom Blinder based his own case.

It is true that Nordhaus himself favors a carbon tax. In the 2007 calibration of his “DICE” model of the global economy and climate system, Nordhaus estimated that the theoretically optimal carbon tax regime would reduce (the present value of) climate damages by about $5 trillion, at the cost of about $2 trillion in lost economic output. This is why Nordhaus favors such a policy—its theoretical benefits exceed the costs by up to $3 trillion.

However, this figure assumes all governments around the world implement the tax. If some governments cheat, then the alleged benefits shrink, as some of the emissions simply migrate from the high-tax to the low-tax areas.

Nordhaus’ calculation also assumes that governments implement the economically optimal carbon tax. If the tax is set too high, however, Nordhaus’ results demonstrate that the cure can be much worse than the disease. For example, when Nordhaus simulated the impact of limiting atmospheric concentrations of CO₂ to 1.5 times their preindustrial level, he found that it would make the world more than $14 trillion poorer than if governments did absolutely nothing to regulate emissions. This is because the simulated $13 trillion in benefits from avoided climate damage were swamped by $27 trillion in reduced economic output.[i]

The proponents of a carbon tax (or cap-and-trade) continuously point out that there is a “consensus” on the natural science linking human activity to rising global temperatures. But the economic arguments, needed to show that the benefits of a carbon tax outweigh its costs, are far less conclusive.

For example, in the spring of 2009, Richard Tol published a survey of comprehensive studies of the global “welfare impacts” of climate change.[ii] These impacts included not just direct economic harms, but also tried to value (in dollar terms) intangibles such as human health and mortality. Of the thirteen studies Tol surveyed, the best-guess estimate of global GDP impacts ranged from a loss of 4.8 percent to a gain of 2.5 percent. Most of these impacts were calibrated for temperature increases of 2.5 to 3.0 degrees Celsius, which are not expected to occur until the second half of the 21^st century. (Currently the globe is about 0.8 degrees Celsius warmer than the preindustrial benchmark.)

Tol found that of the eleven studies that had been published since the year 1995, the worst estimate was a global GDP loss of 1.9 percent. To put that number in context, in a 2009 report the Congressional Budget Office estimated that an 83 percent cut in emissions—the long-run cap proposed under the Kerry-Boxer bill—would reduce U.S. GDP in 2050 from 1.1 to 3.4 percent.[iii]

To repeat, the damages in Tol’s survey were calibrated for a particular range of temperature increases, and in reality it’s always possible that global warming could be worse by, say, 2085. Yet using reasonable projections of what is likely to occur, the economic case for a carbon tax is not nearly the slam dunk that Blinder implied in his article.

Blinder is right that this country could use a burst of entrepreneurship and investment. But there are much more productive policies to stimulate investment, than to threaten tax hikes on affordable energy.

[i] See Table 5-1 on page 82 here: http://nordhaus.econ.yale.edu/Balance_2nd_proofs.pdf .

[ii] Tol’s paper is not available for free, but it is summarized by Jerry Taylor here: http://www.masterresource.org/2009/11/the-economics-of-climate-change-essential-knowledge/

[iii] See Table 1 on page 13: http://www.cbo.gov/ftpdocs/105xx/doc10573/09-17-Greenhouse-Gas.pdf

Although he is no doubt a technically savvy economist, Keohane is an unabashed advocate for government intervention in energy markets. His video “The Facts of Cap and Trade”—which urged Americans to support Senate passage of the American Clean Energy and Security Act after the House had passed H.R. 2454—shows a remarkably one-sided presentation of the “facts.” Someone viewing this video would think there wasn’t any conceivable downside to unilateral U.S. implementation of federal limits on carbon emissions:

In the interest of balance, here are responses to a few of the statements from the video (with the time-stamp in parentheses after each quotation):

“We’ve been dumping carbon pollution into our atmosphere for decades, warming our planet, and wreaking havoc on the climate.” (0:09)

This is simple hyperbole. Even if the most alarming climate models are correct, and mankind must drastically curb emissions in order to avoid catastrophe, such havoc is in the future—so long as the word “havoc” implies “events that seriously impact human welfare.” The IPCC reports do indeed argue for a strong link between carbon emissions and rising global temperatures, but they do not say that this has caused appreciable damage to humans yet. Keohane talks as if the evidence of harmful, human-caused climate havoc is all before our eyes, when in fact they are projections in models.[i]

“As cap-and-trade kicks in, the demand for clean energy increases. That means lots of opportunities for entrepreneurs to supply wind, solar, tidal, and other clean-energy technologies, like making jet fuel from algae, and roof shingles that double as solar panels.” (1:48)

This is true as far as it goes, but Keohane never mentions the downside: higher energy prices (and prices of other goods that rely on energy). After all, the reason we don’t make jet fuel from algae right now, is that it would be absurdly inefficient compared to making it from crude oil. Air travel would be prohibitively expensive if jet fuel had to be made from algae anytime soon.

It’s no surprise that by artificially suppressing competing technologies through an arbitrary “cap,” the government can spur all sorts of new “innovation.” For example, if the government placed an annual (and shrinking) cap on how many pounds of meat U.S. restaurants could serve each year, the demand for meat-free meals would increase. That would mean lots of opportunities for entrepreneurs to supply fish tacos, tofu burgers, and asparagus skewers, because the permit for a T-bone steak would eventually cost $500. This would clearly make consumers worse off.

Of course, there is an argument to be made that carbon emissions involve “negative externalities” and that a cap-and-trade program corrects the market signals. Yet Keohane doesn’t discuss any of this. It is amazing that an economist could make a case to the public and list the (alleged) benefits of a program without even alluding to the fact that there are huge costs. Indeed, someone watching Keohane’s video—of cute little smokestacks turning into wind turbines—would have no idea that the CBO’s own analysis (back in 2009) showed that the Waxman-Markey bill would likely have no net economic benefits to the U.S. In other words, the CBO’s own numbers show that uninterrupted climate change poses a smaller threat to the U.S. (measured in terms of GDP loss) than the cap-and-trade program proposed under Waxman-Markey.

“The bill also allows smart companies to profit, by cutting their pollution even more than is required.” (2:04)

This segment of the video features a “clean” company selling its permits to the “dirty” company. It’s true, this is the aspect of cap-and-trade that leads its supporters to call it a “market-based solution.” Rather than the government passing precise, top-down commands on how emissions should be cut, a cap-and-trade program leaves it up to the market place (through the secondhand-market for emission permits) to make the cuts in the cheapest possible way.

However, this analysis overlooks the fact that it is government officials who pick the size of the “cap,” and who determine all of the other minutiae involved with the program, such as “safety valve” thresholds, how many permits are “bankable,” and how much of the cap can be satisfied through the purchase of “offsets” (e.g. planting trees in Brazil instead of reducing emissions in the U.S.). It’s hardly a “market-based solution” that relies on a massive bill that takes lawyers to interpret.

Furthermore, Keohane doesn’t tell his viewers that the determination of which groups get the coveted emission permits in the first place is a process fraught with corruption. Using standard economic analysis, this study found that in practice the Waxman-Markey climate bill would redistribute income from the poor to the rich, because the higher energy prices (due to the shrinking cap on emissions) would be partially offset by free allowances given to large corporations (owned by rich shareholders).

“Europe is already using cap-and-trade to cut carbon emissions. An MIT study shows it’s already working there.” (2:54)

If we look at the bibliography at the end of the video, we see that Keohane is referring to a 2008 paper by Denny Ellerman et al. on the European Union’s Emissions Trading Scheme.[ii] Although that particular paper does not appear to be online, Ellerman is the co-author of a similarly titled 2008 piece for the Pew Center on Global Climate Change, which presumably offers the same evidence of the “success” of the EU’s cap-and-trade program. Here is an excerpt from the Executive Summary of that paper:

The performance of the European Union’s Emissions Trading System (EU ETS) to date cannot be evaluated without recognizing that the first three years from 2005 through 2007 constituted a “trial” period and understanding what this trial period was supposed to accomplish….The trial period was a rehearsal for the later more serious engagement and it was never intended to achieve significant reductions in CO2 emissions in only three years. In light of the speed with which the program was developed, the many sovereign countries involved, the need to develop the necessary data, information dissemination, compliance and market institutions, and the lack of extensive experience with emissions trading in Europe, we think that the system has performed surprisingly well.

Although there have been plenty of rough edges, a transparent and widely accepted price for tradable CO2 emission allowances emerged by January 1, 2005, a functioning market for allowances has developed quickly and effortlessly without any prodding by the Commission or member state governments, the cap-and-trade infrastructure of market institutions, registries, monitoring, reporting and verification is in place, and a significant segment of European industry is incorporating the price of CO2 emissions into their daily production decisions.

…
The deeper significance of the trial period of the EU ETS may be its explicit status as a work in progress. As such, it is emblematic of all climate change programs, which will surely be changed over the long horizon during which they will remain effective. The trial period demonstrates that everything does not need to be perfect at the beginning. In fact, it provides a reminder that the best can be the enemy of the good. [Emphasis added.]

That doesn’t sound too promising, does it? If you had left town for a week, while carpenters were working on your house, would you be reassured on the phone if the guy in charge used language like this—his workers were going through a “trial period” on your house and that there were “rough edges” and you have to understand that his renovations were a “work in progress” that “does not need to be perfect at the beginning?” If we can all agree that such language would be very alarming concerning just your house, why should we be eager to sign up the whole economy for the program?

Ellerman’s excuses would be one thing if the EU cap-and-trade program got off to a rocky start—it was just a “trial,” you see—but then in the second phase, it really kicked in hard and reduced emissions dramatically, even though this would seriously hamper economic growth in the affected countries.

But Ellerman (and Keohane who cited him) didn’t know what the results would be, when writing that assessment. His paper came out in 2008, yet he was explicitly saying that the period 2005-2007 shouldn’t be held against the system, even though that was the only experience he had seen.

For those interested in the details, some of the “rough edges” that Ellerman has in mind include the fact that during Phase I of the EU ETS, from 2005-2007, total emissions of the participating nations increased 1.9 percent, and increased dramatically among certain countries (e.g. Finland’s emissions increased 28.5 percent in that three-year stretch). Moreover, the emission allowances were distributed so generously that their market price fell to €0.10 per ton in September 2007.

No one denies that a cap-and-trade scheme can “work”—if the government imposes serious enough penalties on greenhouse gas emissions, of course businesses will reduce them. But the most draconian governments can’t overturn economic law. The reason industry operates in its current configuration, is that this is the way to deliver the most output to consumers at the lowest possible prices. If the government imposes new constraints on businesses, this will necessarily reduce product quality and/or increase prices, compared to what otherwise would be the case.

Conclusion

The White House’s new man at the National Economic Council is no doubt a smart economist with extensive experience studying greenhouse gas policy. Unfortunately, Keohane’s educational video for the public reveals someone who only sees one side of the issue.

Academics can make a case for giving the government even more power over the economy—in the name of fighting climate change—but Keohane didn’t even make such a case. Instead, he presented the benefits while completely ignoring the costs of his favored program.

[i] The IPCC’s summary of the climatic changes that have already occurred—and mankind’s possible responsibility—is at the bottom of this link.

[ii] A. Danny Ellerman et al., “Lessons for the United States from the European Union’s Emissions Trading Scheme.” Cap-and-Trade: Contributions to the Design of a U.S. Greenhouse Gas Program (Cambridge, MA: MIT Center for Energy and Environmental Policy Research, 2008).

And while proponents of this legislation tout the “minimal costs” such a policy would have on household budgets, it’s important to note that the EPA has a history of systematically underestimating the costs of cap-and-trade legislation. Today’s analysis is no different.

Thomas J. Pyle, president of the Institute for Energy Research issued this statement on the economic analysis released today on the American Power Act:

“The American people overwhelming oppose an increase in the gas tax – yet, it’s included in this legislation. Cap-and-trade, which will cause electricity prices to “necessarily skyrocket,” has also been soundly rejected by the American people – yet, it is also included in this proposal. We can argue about how high the costs of this legislation will be, but no one denies that the consumer will end up with less money in their pockets after this legislation is signed into law.

“Bottom line: the more expensive it is to do business in this country, the less productive and competitive our economy will be. Mandating the use of expensive energy and artificially increasing the price of coal, oil and natural gas will only further harm our already struggling economy. It is clear that the American Power Act will do just that, so one has to ask: What are policymakers and Wall Street trying to accomplish with this legislation?”

Note: EPA’s analysis is not a cost-benefit analysis. According to EPA models, the global temperature savings of the Kerry-Lieberman bill is astoundingly small—0.043°C (0.077°F) by 2050 and 0.111°C (0.200°F) by 2100. In other words, by century’s end, reducing U.S. greenhouse gas emissions by 83% will only result in global temperatures being one-fifth of one degree Fahrenheit less than they would otherwise be. That is a scientifically meaningless reduction.

Senators John Kerry and Joe Lieberman have finally released their cap-and-trade energy tax bill. Like the Kerry-Boxer energy tax bill and Waxman-Markey energy tax bill, this is shaping up to be incredibly costly and restrictive of Americans’ energy freedom.

All cap-and-trade bills drive up the cost of energy and harm the economy, but this bill goes one step further and includes an explicit gas tax (see Sec. 729). Do Americans really need to pay higher prices at the pump?

This bill has been shopped around to big business and environmental special interests for months, but this is the first time that the American people, ones who will be forced to pay the higher energy prices get to see the bill.

Amazingly, even though the bill will cost Americans billions in higher taxes, their bill will not affect global temperature in any significant way. Chip Knappenberger reports that:

“The global temperature “savings” of the Kerry-Lieberman bill is astoundingly small—0.043°C (0.077°F) by 2050 and 0.111°C (0.200°F) by 2100. In other words, by century’s end, reducing U.S. greenhouse gas emissions by 83% will only result in global temperatures being one-fifth of one degree Fahrenheit less than they would otherwise be. That is a scientifically meaningless reduction.”

A full copy of the 987 page bill is available here.
A 21 page summary Kerry and Lieberman’s bill is available here.

Washington, DC – With Sens. John Kerry (D-Mass.), Lindsey Graham (R-S.C.) and Joe Lieberman (I-Conn.) set to introduce their much awaited global warming legislation later this week, the Institute for Energy Research compiled and defined a list of terms expected to be included.

It is important to remember that the principal behind the KGL approach is identical to that of the House-passed Waxman-Markey bill: reduce carbon emissions by artificially increasing the price of coal, oil and natural gas.

Cap-and-trade: Everyone now knows that cap-and-trade is a tax on energy. Since this term is now toxic these three senators have tried to all but eliminate it from their vernacular. Sen. Kerry told reporters “I don’t know what ‘cap and trade’ means. I don’t think the average American does…This is not a cap-and-trade bill, it’s a pollution reduction bill.”

Cap-and-trade, or whatever the Senators want to call it, is nothing more than a tax on energy. Period. And while KGL does not advocate for the exact same cap-and-trade scheme as Waxman-Markey, KGL will use this mechanism to regulate electricity generation, hospitals, schools, nursing homes, sports arenas and yes, even dry cleaners. What does this mean for you, the consumer? Well, that’s anyone’s guess, as the authors have refused to share the legislative language with the American people. But we do know this: if Congress implements policies that increase the price of coal, oil and natural gas, consumers will end up with less money in their pockets.

Renewable Electricity Standard: A renewable electricity “standard” is a mandate to force Americans to use expensive, unreliable, intermittent forms of electricity. While some may characterize the description of these sources as unfair, it is a fact that solar power and wind power are more expensive generating technologies than their more efficient alternatives. And while the renewable industry is quick to ask for—and receive—handouts from Uncle Sam, those billions are not enough. Now they are lobbying for guaranteed market share. There is only one other industry (that we’re aware of) that has guaranteed market share: corn-based ethanol. And we all know how well that’s working. Think about it this way; the U.S. Government bailed out Detroit automakers. In fact, they still hold a 61 percent stake in General Motors. Now, imagine if policymakers on Capitol Hill mandated that the public purchase a GM vehicle. Not exactly a good policy for consumers.

Linked Fee: A linked fee is a Washington code word for a gas tax. The linked fee—thought to be the cornerstone of this legislation—applies a fee on gasoline at the pump, as opposed to inside the refinery gate. The fee was a bargaining tool used to gain the support of a few big oil companies. What KGL are not telling you is that it’s a gas tax – and 71 percent of Americans oppose an increase in the gas tax. And while it is rumored that this exact proposal may have been shelved, rest assured, any proposal to regulate carbon dioxide emissions from a car’s tailpipe will increase the price at the pump. In essence, one way or another, a gas tax will be included in this proposal.

Offshore Drilling/Revenue Sharing: Today, the entire Outer Continental Shelf (OCS) is open for new exploration and development. New legislation is not necessary. The holdup is the Administration’s decision to slow walk any new energy exploration. But, in the wake of the Gulf of Mexico oil spill, there is much debate around whether KGL will include any new provisions to increase domestic exploration and production of oil and natural gas offshore. This provision was drafted by Sen. Graham in an attempt to get the oil and natural gas industry on board to support, or at least remain neutral on the bill. But the reality is this: there is no amount of offshore drilling language that could make this bill worth supporting. Fact is, when you seek to regulate an energy source that will increase the cost to consumers on the one hand, and give industry a carrot on the other, the consumer loses. As for revenue sharing, it’s a must-have in any legislation that seeks to increase domestic production, but in this context is meaningless because of the toxic elements contained in the package as a whole.

Price Collar: A price collar is the maximum and minimum price that the government will auction the right to emit carbon dioxide. A price collar is Goldilocks policy for carbon dioxide prices—not too high and not too low, but just right. The intended purpose of the price collar is to minimize price volatility and not inflict too much harm too fast on trade-intensive industries such as manufacturing, petrochemical refining and agriculture. A price collar may be more efficient than just a price ceiling, but it will strangle the economy nevertheless, as the point of the collar is to artificially raise the price of energy.

Preempting EPA and State Carbon Dioxide Regulation: This bill is said to include language to preempt the Environmental Protection Agency (EPA) from regulating carbon dioxide using the Clean Air Act and to preempt individual states from regulating carbon dioxide. This is a worthy and laudable goal, but until we see the bill, we will not know if the bill’s language will achieve real preemption of EPA’s regulatory authority. For example, the Waxman-Markey bill preempted EPA from regulating greenhouse gases using the Clean Air Act, but it did not forbid EPA from using the Clean Water Act or the National Environmental Policy Act (NEPA). Furthermore, it did not forbid the Fish and Wildlife Service from using the Endangered Species Act to regulate greenhouse gases. In other words, while Waxman-Markey had preemption language, it is not clear that it would actually preempt much regulation.

The three senators involved in crafting this legislation were quick to share their details with big business, the utility industry, and selected environmental groups, but their behind the scenes negotiating left one important interest group out of the equation: the American people. In fact, our affiliate, the American Energy Alliance had to file a freedom of information request with the EPA and Energy Information Administration (EIA) to obtain the details of the legislation. To date, these requests have been acknowledged by the respective agencies, but no response has been issued.

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FOR IMMEDIATE RELEASE:
May 10, 2010
CONTACT:
Patrick Creighton: 202.621.2947
Laura Henderson: 202.621.2951

Sensing that the public is very suspicious of massive new taxes levied on energy, the supporters of “carbon pricing” continue to tweak their messaging. Although Senators Kerry, Graham, and Lieberman (KGL) have yet to formally introduce their version of a cap-and-trade bill, they have informally shared some of its presumed components.

One of the distinguishing aspects of the (rumored) KGL plan will be a 50% rebate for consumers from any auction revenues for emission allowances. This is an explicit admission that cap-and-trade is economically harmful. But all this does is return half of what the government takes away, and it still forces the economy to use less-efficient energy sources. “Cap-and-dividend” will still raise energy prices, will still transfer billions of dollars annually from the public into the government’s coffers, and is still a bad deal for consumers.

The Rumored 50% Consumer Rebate

KGL have released an eight-page draft outline of their pending bill, which contains “[u]niversal rebate checks from 50% of auction revenues.” The idea of “cap and dividend,” as well as some other measures, were incorporated from the CLEAR Act (S. 2877) introduced last December by Senators Maria Cantwell (D-Wash.) and Susan Collins (R-Maine), though the Cantwell-Collins bill proposed giving American citizens 75% of the money back.

The other major feature of the Cantwell-Collins CLEAR Act—which KGL may adopt to win more supportwas strict curbs on the secondary market in emission allowances. In other words, they want to take “cap and trade” and knock out the “trade.” (Why not knock out the “cap” too?) According to E&E (Darren Samuelson, 3/10/2010):

Cantwell said a primary driver on the legislation was to avoid creating a multitrillion-dollar trading platform susceptible to market manipulation and price volatility — something she fears will be created by the Kerry-Graham-Lieberman proposal.

“I think there’s some who believe you have to have trading to have liquidity,” Cantwell said. “I think a clear price market signal without volatility will unleash the investment. We’re not going to look for any backdoors to just allow the kind of manipulation and abuse that’s happened in the European markets or happened in our credit defaults swap market to take place here.”

This is wrongheaded for several reasons. In the first place, the whole (alleged) virtue of cap-and-trade—as opposed to the government laying out command-and-control regulations, a la the EPA—was that it is a “market-based” solution. Well, part of the Ivory Tower justification for that label is that people in the market get to trade the emissions allowances. By hampering the resale of the allowances—and this includes prohibiting derivative products based on the underlying assets—the government would undercut the whole (alleged) purpose for cap-and-trade in the first place.

Contrary to Cantwell, in general the existence of derivative markets helps to smooth out price fluctuations, and makes investors more likely to pour money into a sector. For example, a futures market in wheat allows farmers to concentrate on planting and harvesting, rather than becoming commodity speculators. The wheat farmers lock in a price today for their future harvest, by selling futures contracts. For a different example, airlines can focus on their customers and routes, rather than worrying about the fluctuating price of jet fuel, by buying futures contracts in crude oil. Looking at the actual data, it is not clear that “speculation” caused the massive run-up in oil prices in the summer of 2008.

Now if Senator Cantwell really wanted to provide industry with certainty, she would come out and advocate an explicit carbon tax. With cap-and-trade, the price to emit a ton of greenhouse gases fluctuates based on the demand (and fixed supply) in the allowance market. So in addition to all the other things they need to forecast, the people running electric utilities and other major emitters will need to guess at what the future price of allowances will be.

At least with an explicit carbon tax—where the government says, “The price of emitting a ton of emissions will be $x this year, $y next year,” and so on—businesses know exactly how much pain they are in store for. Indeed, this certainty was one of the reasons that the CBO came out in favor of a carbon tax over cap-and-trade in a February 2008 study [.pdf].

Don’t misunderstand us: A carbon tax would be damaging to the U.S. economy, and it would yield little environmental improvements. But the point is that if Cantwell really cares about limiting the price fluctuations due to greenhouse gas legislation, she could propose an explicit carbon tax. Yet she won’t do that, of course, because policymakers want to continue the myth that a “cap” is somehow less punitive than a tax.

Price Collars?

There is one respect in which the (rumored) structure of KGL will limit price volatility: the inclusion of so-called “price collars,” reportedly in the range of $10 – $30 a ton in the early years, which would then increase at a fixed rate (to be determined). What this measure means is that if the auction price should ever break above the collar, then the government would override the ostensible “cap” and issue more allowances for that time period. The collar thus provides a ceiling on how expensive emission allowances can get, in any time period.

Other things equal, the inclusion of price collars would limit the damage to the economy, but it’s only because they effectively negate the legislation. After all, it’s not really a “cap” if the government is allowed to issue more permits whenever the burden becomes too onerous; “cap-and-trade with a price collar” is essentially a tax. The discussion of these “safety valves” should warn Americans that the government is playing with dangerous legislation indeed.

Cap-and-Dividend Still Raises Energy Prices

The simple fact is that greenhouse gas legislation is going to damage the economy, in terms of conventional measures such as output, income, and job creation. The various tweaks such as “price collars” and “consumer rebates” reinforce this conclusion: the government is acknowledging that caps on emissions can be potentially devastating. The reason consumers will need those rebate checks is that their energy bills will increase—which is the whole point of the legislation, remember.

Consumers will not be able to have their cake and eat it too. If the government’s new regulations really do induce a fundamental shift away from carbon-based energy sources, then total economic output will drop, along with incomes. That’s what happens when you force utilities to produce energy using relative inefficient sources. There is no getting around this basic result.

One of the more odious elements of the Waxman-Markey cap-and-trade proposal is that it would indirectly redistribute money from lower- and middle-class citizens into the pockets of particular wealthy shareholders. This aspect of cap-and-trade would be mitigated, to the extent that allowances were auctioned (not handed out to favored groups) and revenues were rebated to individuals.

However, we shouldn’t fool ourselves into thinking that “cap-and-dividend” is therefore a boon to consumers. At best, it is a way to harm the economy that spreads the pain around more evenly. But we doubt that’s the spin that KGL will put on their bill.

Washington, DC – Tax Day is an annual reminder to the many Americans that pay income taxes of just how much of our hard-earned money goes into the government’s pocket. But as we mark this annual “holiday,” the Institute for Energy Research would like to focus on a tax that 100 percent of Americans pay: energy taxes.

When we head to the gas station to fuel up for a family vacation or simply top off the tank to begin the work week, roughly 15 percent of what we pay goes directly to the federal and state government. The gas tax is an energy tax consumers pay directly, but we also pay indirectly for our energy when we purchase a host of other products and services. For example, everyone eats food; it’s necessary for survival. Yet many people don’t think about the fact that it takes vast amounts of energy to grow fruits, vegetables, wheat and raise livestock such as cattle, chicken, and hogs. When the price of energy increases, food prices follow suit.

Energy is the foundation of everything. Americans rely on fossil energy, that is, coal, oil and natural gas, for 85 percent of our energy needs. In addition to keeping food on the table, cars on the road and lights on at home, these energy sources are used to manufacture countless everyday goods, such as clothing, cellular telephones, computers, eye glasses, cleaning supply—the list goes on and on. So when politicians in Washington speak of “pricing carbon,” “enacting a cap-and-trade scheme on electric power generation,” or “ a carbon linkage fee,” it isn’t hard to translate. They’re talking about increasing the price of energy.

We call this an energy tax. The Los Angeles Times had a great story yesterday outlining a proposal that Senator Lindsey Graham (R-S.C.) is working on to increase the price at the pump.

Now, the logic behind increasing the price of energy through taxation is a bit cloudy. Unemployment is holding steady at just under 10 percent, gasoline and diesel prices are on the rise, and oil trading is at an eighteen-month high, so one would have to wonder why policymakers would be fighting to increase energy and gasoline taxes.

Since taking office, the Obama Administration has waged a war on coal, oil and natural gas. And while the President has dangled a few carrots in front of the coal folks in the form of billions of taxpayer dollars for a technology called “carbon capture and storage,” we point to several other instances where this administration has put policy forward to bankrupt the coal industry. Look no further than the recent Environmental Protection Agency (EPA) announcement that would make it next to impossible to obtain a permit to harvest this vital energy resource.

In the case of domestic oil and natural gas production, look no further than the Administration’s fiscal year 2011 budget proposal that would levy an additional $36.5 billion on these industries—taxes that the industry would automatically pass on to the consumer. That’s me and you. Or we could look at the litany of examples of where the Obama Administration has repealed, delayed or outright canceled oil and natural gas projects that were on the books for years, and are now in bureaucratic purgatory.

So as Americans fill their gas tanks to get to work, take the kids to their soccer game, or pick up their mail (some in rural America have to drive to their mailbox pick up their mail), keep in mind that if Washington has its way, these very basic chores will end up costing you, the consumer, more.

And when you flip that switch to turn on the lights or head to the grocery store to pick up food for the week, remember, that affordable energy, the commodity that allows Americans to live the “American Dream,” will indeed become more expensive and artificially scarce if these policies are enacted.

Happy Tax Day from the Institute for Energy Research.

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FOR IMMEDIATE RELEASE:
April 15, 2010
CONTACT:
Patrick Creighton: 202.621.2947
Laura Henderson: 202.621.2951

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