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

Download the PDF version

FOR IMMEDIATE RELEASE
March 11, 2009
CONTACT:
Laura Henderson (202) 621-2951

WASHINGTON, D.C. – As our federal lawmakers continue to lay the groundwork to regulate and tax carbon, Institute for Energy Research (IER) today released two studies that analyze the economic impact that two of these proposals would have: the carbon tax and the so-called “Carbon Fed.” Though they differ in degree and detail, both programs would further extend the government’s role in Americans’ lives and increase taxes and energy costs—though the benefits of these policies remain unclear. 

“Americans know that the government’s heavy-handed attempts to tax, regulate, and commoditize carbon will kill jobs, decrease our ability to use our domestic energy resources, and prolong our current economic downturn,” said IER President Thomas J. Pyle.” 

“Policymakers should use the traditional legislative process—which would produce a straightforward plan that is honest about both the cost and the returns—to achieve these ends.  Unfortunately, the carbon tax and Carbon Fed are reflective of a backdoor strategy that provides little transparency to the public, not to mention that both would have potentially disastrous effects on our economy.”

Carbon Tax Background:

Carbon taxes’ supporters have grown in number as the debate over cap and trade continues.  Carbon Taxes: Reducing Economic Growth–Achieving No Environmental Impact explains that though economists favor carbon taxes, lawmakers hesitate, as taxpayers will not support a large, visible tax increase. The carbon tax, for which supporters’ best argument is that it’s better than cap and trade, would not only significantly increase Americans’ tax burdens, but would prove ineffective in its goal to reduce global carbon dioxide emissions.   

Carbon Fed Background:

Our current financial troubles clearly demonstrate that even well-intended financial regulatory bodies, such as the Federal Reserve, have the capacity to make mistakes that harm our economy. The Dangers of a "Carbon Fed" examines recent proposals to create a powerful body to control the way we access, use, and pay for our energy, as well as the likely outcomes of such plans. The financial sector’s recent performance shows that complex financial instruments with little intrinsic value, such as carbon permits, are susceptible to manipulation and game-playing that can lead to terrible results.

More from IER on the current trends in energy policy:

· Blog Posting: Low Carbon Fuel Standards: Recipes for Higher Gas Prices & More Foreign Oil

· Press Release: Administration Attempts to Sneak Biggest Tax Increase in History into Budget

· IER Study: Green Jobs: Fact or Fiction?

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

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www.InstituteforEnergyResearch.org

Energy makes modern society possible. It lights the night, heats our homes, powers our entertainment, and most importantly, it helps us conserve the ultimate non-renewable resource—time. Energy amplifies our ability to do work. Machines help autoworkers assemble cars, power tools help construction workers build our homes, gasoline-powered automobiles help us take care of our families, diesel-power trucks distribute fresh produce across the country, and electricity-powered computers give us unprecedented access to information. But the energy that supplies 85 percent of our needs—coal, oil, and natural gas—are under attack. Politicians and special interest groups are proposing various methods to tax these abundant and reliable sources of energy.

The newest attack on oil, natural gas, and coal are proposals to tax carbon dioxide emissions. Noted economist Art Laffer and current U.S. Rep. Bob Inglis (R-S.C.) argued in favor of a carbon tax in a New York Times[1] op-ed. Author, commentator, and syndicated columnist Charles Krauthammer made his case for a large increase in the gas tax in the Weekly Standard .[2] And Fred Smith, the CEO of FedEx, has publicly declared his support for a tax on carbon dioxide emissions.

The arguments boil down to the assertion that carbon taxes are favorable because they are better than cap and trade schemes. This is correct, but it does not mean that we should implement carbon taxes. Carbon tax implementation would run into many of the same problems that have plagued cap and trade. Politicians cannot resist new opportunities to raise tax revenues and dole out our dollars to favored constituencies, especially when the revenues range from hundreds of billions to trillions of dollars. Carbon taxes might hold some allure, but ultimately they are economically destructive. Neither carbon tax nor cap and trade is good for American consumers.

Reasons Why Carbon and Energy Taxes are a Bad Idea:

1. Carbon taxes are taxes on 85 percent of the energy we use. A carbon tax would impose a new tax on the vast majority of our nation’s economic activity. Fossil fuels power our nation and produce 85 percent of the energy we consume in the United States. [3] Nuclear and hydro power produced an additional 11 percent of our energy.[4] The remaining 4 percent comes from other renewables like biofuels, wind, and solar.[5] Carbon taxes may make hydro and nuclear power more attractive, but few sites remain where it is possible to build large hydroelectric dams and new nuclear power plants face major political obstacles.

2. A carbon tax that is perfectly offset by other tax cuts is neither a practical nor a political reality. The history and nature of politics shows that once politicians institute a tax, they will not give it up. Still, some argue in favor of a “tax swap” to reduce income taxes while implementing a new tax on carbon dioxide emissions. Theoretically, this could make sense. However, the argument does not reflect political reality.

The first challenge for promoters of a carbon tax “tax swap” is getting lawmakers to pass a carbon tax. Lawmakers are very wary of imposing easily identifiable taxes across the entire population. Instead, politicians prefer to hide the costs of government programs, while rewarding discrete and identifiable groups. Implementing carbon taxes would result in an identifiable tax increase similar to the unpopular gas tax increases that led to voter displeasure revolts against President George H.W. Bush and President Bill Clinton.

The second challenge for promoters of a “tax swap” is getting Congress to reduce income taxes. Congress could decrease some income taxes, but it is highly unlikely income taxes would be decreased for all income brackets.

Taxpayers will likely fight against a “tax swap” because they understand there is nothing to stop future lawmakers from increasing carbon taxes or returning income taxes to their former levels. Worse, from a taxpayer’s perspective, a carbon tax will give lawmakers another vehicle to raise large amounts of tax revenue.

Some argue that a revenue-neutral “tax swap” would be economically beneficial. There is, however, little evidence politicians are concerned about the economic effectiveness of plans to reduce carbon dioxide emissions. Most economists agree that carbon taxes are a superior to cap and trade.[6] Carbon taxes are more transparent, more understandable, and less subject to political manipulation. Though economists prefer carbon taxes, congressmen strongly prefer cap and trade plans.[7] Lawmakers have floated many cap and trade proposals, but they have not discussed any serious carbon tax proposals.

Lawmakers say they favor economically efficient global warming plans, but their actions demonstrate that the discussion about efforts to reduce greenhouse gas emissions is not about science or economics—it is about politics. Offsetting income taxes with carbon taxes is not a political reality because politicians will not propose such obvious tax increases on all Americans.

3. Politicians like to reward special interest groups with new tax revenues. When politicians have large amounts of tax dollars at their disposal, they tend to spend it on projects that reward special interest groups. A carbon tax would likely generate over $1 trillion in new revenue. Much of this revenue would likely be spent on inefficient “pork” projects.

The proposed cap and trade schemes contain hundreds of billions of dollars for special interests. The recession has spurred additional calls for hundreds of billions of dollars in additional spending to create “green jobs.” For example, the Center for American Progress is calling on Congress to spend $100 billion to create two million “green jobs”[8] and the Apollo Alliance wants Congress to spend $500 billion to create five million “green jobs.”[9] If a carbon tax were in place, lawmakers would almost certainly divert resources to “green job” subsidies or other similar programs, rather than back into taxpayers’ wallets.

4. It is impossible to create an optimal carbon tax. A carbon tax would need to be set at an optimal level that accounts for the economy and climate science. This is an impossible task. One of the greatest insights of the 20^th century was that economically efficient central planning is not possible. Friedrich Hayek and others demonstrated that central planners cannot aggregate all of the information necessary to make economically efficient choices.[10] Their insight remains true today. A planner (or Congress) cannot create an optimal tax because he or she does not have all of the necessary information. With global warming, the lack of perfect information is further compounded by partisan politics and uncertain climate science. This makes it impossible to determine an optimal carbon tax.

The cost of a carbon tax will increase the costs of nearly everything that is produced, manufactured, or transported, including food and gasoline. How one would construct a credible methodology for accurately and precisely measuring and accounting for these effects remains, perhaps intentionally, an unaddressed question.

5. A carbon tax is a regressive tax, but increased wealth transfers will likely make it increasingly progressive. Lower income families spend more of their income on energy than higher income families. The Wall Street Journal explains:

The Congressional Budget Office—Mr. Orszag’s former roost—estimates that the price hikes from a 15% cut in emissions would cost the average household in the bottom-income quintile about 3.3% of its after-tax income every year. That’s about $680, not including the costs of reduced employment and output. The three middle quintiles would see their paychecks cut between $880 and $1,500, or 2.9% to 2.7% of income. The rich would pay 1.7%. Cap and trade is the ideal policy for every Beltway analyst who thinks the tax code is too progressive (all five of them).[11]

It appears that some of the proponents of carbon taxes are some of those five beltway analysts who believe the tax code is too progressive. They argue in favor of a carbon tax because it will not retard the formation of capital because it applies to everyone. In other words, since it would be spread over the population without regard to income, carbon tax proponents argue it will not reduce the incentives for high-income earners to generate wealth and create new jobs.

This alleged advantage, however, would never last politically because a carbon tax will be a visible and ever-increasing new tax. In response to that reality, lawmakers are likely to execute new, politically popular transfers of wealth—all with an eye on limiting the tax’s effect on lower-income families. Sales taxes, for example, could be uniformly applied across the economy, but in practice, sales taxes vary on certain items, in part, to help lower-income Americans deal with the increased costs imposed by them.

Carbon taxes would likely be accompanied by various rebate schemes to soften the regressive nature of the tax and make it a more progressive tax. This is currently happening with cap and trade proposals. One plan calls for the government to auction all emission permits and give each citizen a $700 check every year.[12] Another option is to only give the rebate checks from auction revenues to lower-income citizens.[13]

If the government imposes a carbon tax, it is very unlikely that the tax will remain uniform. In the end, not only will it hit the poor with a disproportionate burden of a carbon cap, but it will create yet another series of loopholes in the tax code.  As history has shown, such a plan will further distort the market, render the tax code even more complicated, and hide yet another round of handouts to well-connected special interests.

6. A carbon tax set at a wrong level will cause great economic harm. Even the proponents of carbon taxes, such as Yale University Professor William Nordaus, find that once there is deviation from worldwide participation, the costs of achieving environmental global improvements dramatically rise. Nordhaus’ economic model shows that an overly ambitious and/or inefficiently structured policy can swamp the potential benefits of a perfectly calibrated and efficiently targeted plan.[14] For example, Nordhaus’ optimal plan yields net benefits of $3 trillion ($5 trillion in reduced climatic damages and $2 trillion in abatement costs). Yet, other popular proposals have abatement costs that exceed their benefits. The worst is former Vice President Al Gore’s 2007 proposal to reduce carbon dioxide emissions 90 percent by 2050. Nordhaus’ model estimates this plan would make the world more than $21 trillion poorer than if there were no controls on carbon dioxide.[15]

7. Realistically, a carbon tax would lead to lower energy use and lower economic output because low-carbon replacement technologies simply do not exist. Carbon taxes effectively increase the cost of fossil fuels in an effort to make non-fossil fuels more economically attractive. The technologies to significantly reduce greenhouse gas emissions from fossil fuels, however, are decades away and extremely costly.[16] Instead, the only real way to reduce greenhouse gas emissions in the short run is to reduce energy use and economic output.

Consider automobile use and gas prices. People have begun to transition toward fuel-efficient cars, but the real impact of high gasoline prices in 2008 was to reduce vehicle miles traveled. Just as higher fuel prices led to less driving, higher energy prices will lead to reduced energy consumption. That will lead to a corresponding drop in our ability to make economic choices.

Given current technologies, carbon taxes will result in less economic output. The graphic below illustrates that point. The implication is clear—there is a strong correlation between energy use and GDP.

8. Just because a proposal is “budget neutral” for the government does not mean it is “budget neutral” for American families. Carbon taxes or cap and trade programs will transfer wealth from rural areas, where people drive more and use more energy, to more densely populated urban areas.[17] Not coincidentally, many urban and Northeastern politicians favor a cap and trade program or carbon taxes.

Also, carbon taxes will disproportionally harm states that generate the majority of their electricity from coal-fired power plants.[18] These states tend to be more rural states.

9. Domestic carbon taxes, even in the best case, can only produce marginal impacts on climate. In 2006, China surpassed the United States as the world’s largest emitter of carbon dioxide.[19] But the difference in emission growth rates is striking. According to data from the Global Carbon Project, from 2000 through 2007, global total greenhouse gas emissions increased 26 percent. During that same period, China’s carbon dioxide emissions increased 98 percent, India’s increased 36 percent and Russia’s increased 10 percent. Carbon dioxide emissions in the United States increased by three percent from 2000 through 2007.[20] These data are displayed in the graphic below:

As time goes on, the United States will emit a smaller and smaller share of the world’s total greenhouse gas emissions,[21] which makes unilateral efforts— such as a domestic carbon tax—an ineffective way to influence climate. If the United States were to completely cease using fossil fuels, the increase from the rest of the world would replace U.S. emissions in less than eight years.[22] If we reduced the carbon dioxide emissions from the transportation sector to zero, the rest of the world would replace those emissions in less than two years.[23] Increases in worldwide carbon dioxide emissions are driven by developing economies, not the United States.

10. Domestic carbon taxes will force more industries to leave America. Energy costs are a major expenditure for heavy industry. America’s natural gas prices are the highest in the world,[24] even though we have the world’s sixth largest proven natural gas reserves.[25] The high price of natural gas has significantly contributed to the loss of more than three million manufacturing jobs since 2000.[26] Carbon taxes will drive up the cost of natural gas because companies would use it as a substitute for coal in electricity production, which means increased electricity costs for industry and increased natural gas prices. This is especially troublesome for chemical companies, all of which use natural gas not only as an energy source, but also as a feedstock. Higher natural gas prices will force them to pursue options offshore and overseas, reducing American jobs.

11. Domestic carbon taxes cannot address “leakage.” High costs of doing business in America will force jobs and economic activity to leave this country in favor of countries with lower energy prices. China and India have stated they will not impose burdensome climate regulations on their citizens.[27] Because not all countries will implement carbon taxes, industries will take their jobs to countries where taxes do not eat their profits. Despite a huge American economic sacrifice, global emissions will remain the same.

12. Carbon taxes will lead to calls for trade protectionism. Carbon taxes will lead to reduced economic competitiveness. In turn, organized labor will likely call for new barriers to trade. For example, a top priority for the United Steelworkers is a “border adjustment” to penalize the steel imports from countries that do not curb their greenhouse gas emissions.[28] Increased U.S. trade protectionism will almost certainly lead to greater trade protectionism worldwide that will further harm the American economy and all of America’s trading partners.

13. If we are truly concerned about reducing carbon dioxide emissions, the best path forward is increasing humankind’s ability to adapt. Rich countries and societies can adapt more easily to changed circumstances than poor countries. Environmental improvements are more likely to be realized in prosperous societies than in poorer ones.[29] Carbon taxes and cap and trade reduce society’s aggregate wealth, which make environmental improvements more difficult to achieve.

14. Real world experience counsels against a carbon tax. Ken Green, a former supporter of a revenue-neutral carbon tax, changed his mind because of political and economic realities. Mr. Green writes: [30]

I previously felt that a revenue-neutral carbon tax was a good idea, because it would be both effective and could even be economically beneficial. But three developments have caused me to retract my support. First, rising energy costs have already imposed a huge carbon tax with little GHG reduction. This suggests that the elasticity of energy use could be lower than prior estimates, meaning it would be a useless gesture. Second, as implementations of carbon taxes in Europe and Canada have demonstrated, governments simply cannot implement such tax systems without sucking up some of the revenue, and using the rest to benefit crony-capitalists and steer money to favored constituencies. And finally, because using biofuels such as ethanol would let people save on carbon taxes, demand for such fuels will grow, only compounding the environmental and nutritional mischief they cause.

Just because a carbon tax is a bad idea does not mean that cap and trade is better

Nearly all of the above arguments against a carbon tax apply equally to cap and trade schemes. The only real difference is that cap and trade is a stealth tax that brings a large amount of reporting, implementation, and regulatory problems.

The point of cap and trade plans, like carbon taxes, is to increase the price of energy from oil, coal, and natural gas. Lawmakers may say they have plans to rebate some people so that everyone does not suffer, but it is not possible to craft a cap and trade plan that is perfectly offset by rebates. Just because a politician promotes a plan that is “budget neutral” for government does not mean it is “budget neutral” for American families. When politicians redistribute money, there will be winners and losers. The winners will be the politically well-connected groups and the populace as a whole will lose.

Like carbon taxes, it is not possible to set a cap for cap and trade plans at an optimal level. The smartest people in the world could not aggregate enough data quickly enough to discover the optimal level of the cap or a cap and trade scheme or the level of a carbon tax. It would require too much data about American’s preferences and about uncertain climate science. To complicate matters, if the cap set at the wrong level, or if the plan does not include all nations, the inefficiencies will swamp any possible benefits. Most disturbingly, if the United States unilaterally reduces our carbon dioxide emissions, it will not have a real effect on global carbon dioxide concentrations. This means there will be no environmental benefits to the United States unilaterally reducing carbon dioxide emissions.

Cap and trade schemes are very regressive taxes. They will transfer wealth from poorer areas of the country to wealthier areas. Cap and trade will also reduce energy use and thereby reduce economic output. Also, if we drive up costs, cap and trade plans will reduce American economic competitiveness and cause more jobs to flee to foreign countries.

In short, cap and trade and carbon taxes are two different ways to raise energy prices. Both carbon taxes and cap and trade would harm the United States’ economy without making any meaningful differences in global concentrations of carbon dioxide.

Conclusion

Energy is the lifeblood of the economy. Policies that increase the price of energy harm the economy. However, the entire point of policies like carbon taxes and cap and trade is to increase energy prices. These cost increases make the economy less efficient domestically and it makes the United States less economically competitive internationally. Higher energy prices harms America’s ability to grow its economy at home and it means more American jobs will be shipped overseas.

Now is not the time to implement an economically harmful plan like carbon taxes or cap and trade. Americans need an efficient economy to reverse the recession and improve the lives of American workers. Carbon taxes and cap and trade will just make it more difficult to reverse the recession.

[2] Charles Krauthammer, The Net-Zero Gas Tax: A Once in a Generation Chance, Jan. 5, 2009, http://weeklystandard.com/Content/Public/Articles/000/000/015/949rsrgi.asp

[3] Energy Information Administration, U.S. Energy Consumption by Energy Source, http://www.eia.doe.gov/cneaf/alternate/page/renew_energy_consump/table1.html. (May 2008).

[4] Id.

[5] Id.

[6] See e.g. William D. Nordhaus, Life After Kyoto: Alternative Approaches to Global Warming Policies, NBER Working Paper No. 11889, Dec. 9, 2005, http://www.econ.yale.edu/~nordhaus/homepage/kyoto_long_2005.pdf; N. Gregory Mankiw, One Answer to Global Warming: A New Tax, N.Y. Times, Sept. 16, 2007, http://www.nytimes.com/2007/09/16/business/16view.html; Kenneth P. Green et. al., Climate Change: Cap vs. Taxes, American Enterprise Institute Environmental Policy Outlook, June 1, 2007, http://www.aei.org/publications/filter.all,pubID.26286/pub_detail.asp.

[7] The following is some of the cap and trade bills introduced during the 110^th Congress: S. 2191, The Climate Security Act of 2008; S. 1766, the Low Carbon Economy Act, S. 280, the Climate Stewardship and Innovation Act; S. 309, the Global Warming Pollution Reduction Act; S. 485, the Global Warming Reduction Act; H.R. 620, the Climate Stewardship Act; and H.R. 1590, the Safe Climate Act of 2007.

[8] Robert Pollin, et. al, Green Recovery: A Program to Create Good Jobs and Start Building a Low-Carbon Economy, Sept. 2008, http://www.americanprogress.org/issues/2008/09/pdf/green_recovery.pdf.

[9] Jeffery Ball, Does Green Energy Add 5 Million Jobs? Potent Pitch, but Numbers are Squishy, Wall Street Journal, Nov. 7, 2008, http://online.wsj.com/article/SB122601449992806743.html.

[10] See e.g. Friedrich A. Hayek, The Use of Knowledge in Society, 4 Am. Econ. Rev. 519 (Sept. 1945).

[11] Editorial, Who Pays for Cap and Trade? Wall Street Journal, March 9, 2009.

[12] James K. Boyce & Matthew Riddle, Cap and Dividend: How to Curb Global Warming While Protecting the Incomes of American Families, Political Economy Research Institute (Nov. 2007), http://www.peri.umass.edu/fileadmin/pdf/working_papers/ working_papers_101-150/WP150.pdf.

[13] Robert Greenstein et. al., Designing Climate-Change Legislation that Shields Low-Income Households from Increased Poverty and Hardship, Center on Budget and Policy Priorities (May 9, 2008), http://www.cbpp.org/10-25-07climate.pdf.

[14] Robert P. Murphy, Rolling the DICE: Nordhaus’ Dubious Case for a Carbon Tax, p. 20, June 2008, http://www.instituteforenergyresearch.org/wp-content/uploads/2008/06/2008-06_rolling_the_dice_murphy.pdf.

[15] Id. at 20.

[16] See Kenneth P. Green, Climate Change: Science and Policy, Oct. 27, 2008, http://www.aei.org/publications/filter.all,pubID.28838/pub_detail.asp.

[17] Alaska has the higher per capita energy use, followed by Wyoming, Louisiana, North Dakota and Texas. The states with the lowest energy use per capita are Rhode Island, New York, Massachusetts, California, and New Hampshire. The average Rhode Islander uses only 18% as much energy as an Alaskan and 22% as much energy as someone from Wyoming. See Energy Information Administration, Table R2. Energy Consumption by Source and Total Consumption per Capita, Ranked by State, 2006, Nov. 28, 2008, http://www.eia.doe.gov/emeu/states/hf.jsp?incfile=sep_sum/plain_html/rank_use_per_cap.html.

[18] The states with the most affordable electricity either generate the majority of their electricity from coal-fired power plants or from hydro power. See Energy Information Administration, Table S1. Energy Consumption Estimates by Source and End-Use Sector, 2006, State Energy Consumption Estimates: 1960 through 2006, Nov. 2008, http://www.eia.doe.gov/emeu/states/sep_use/notes/use_print2006.pdf; Energy Information Administration, Table 5.6.B. Average Retail Price of Electricity to Ultimate Customers by End-Use Sector, by State, Year-to-Date through September 2008 and 2007, Dec. 12, 2008, http://www.eia.doe.gov/cneaf/electricity/epm/table5_6_b.html.

[19] See e.g. Netherlands Environmental Assessment Agency, China now no. 1 in CO2 emissions; USA in second position, June 19, 2007, http://www.pbl.nl/en/news/pressreleases/2007/20070619Chinanowno1inCO2emissionsUSAinsecondposition.html.

[20] Calculated using the emission data from the Global Carbon Project. In 2000, China emitted 910,950 GgC, India 316,804 GgC, Russia 391,652 GgC, and the U.S. 1,541,013 GgC. By 2007, China emitted 1,801,932 GgC, India 429,601 GgC, Russia 432,486 GgC, and the U.S. 1,586,213 GgC.

[21] According to the Global Carbon project, in 2007, China emitted 21% of the world’s carbon equivalent and the U.S. emitted 19%.

[22] Calculated using the emission data from the Global Carbon Project. According to these data, the U.S. emitted 1,586,213 GgC in 2007. Without the U.S., the world’s emissions were 5,203,987 GgC in 2000, increasing to 6,884,787 GgC in 2007.

[23] Calculated using the emission data from the Global Carbon Project. According to EPA, the GHG emissions from the transportation sector total 28% of total U.S. emissions. Environmental Protection Agency, Regulating Greenhouse Gas Emissions Under the Clean Air Act; Proposed Rule, 73 Fed. Reg. 44354, 44403 (July, 30, 2008). Twenty eight percent of the U.S.’s 2006 carbon dioxide emissions are 436,141 GgC. From 2005 to 2007, the world’s emissions, with the emissions from the U.S., grew by 476,324 GgC.

[24] Paul N. Cicio, Testimony of Paul N. Cicio, President of Industrial Energy Consumers of America before the House of Representatives, Dec. 6, 2007, http://www.ieca-us.com/documents/IECAHouseTestimony-NaturalGas_12.06.07.pdf.

[25] Energy Information Administration, Annual Energy Review 2007, Table 11.4, http://www.eia.doe.gov/emeu/aer/txt/ptb1104.html.

[26] See Testimony of Paul N. Cicio.

[27] See e.g. Shai Oster, China Asks Rich to Pay for Cleanup, Wall Street Journal, Oct. 30, 2008, http://online.wsj.com/article/SB122530768753281185.html; Nitin Sethi, As Climate Talks Resume, India Accuses UN of Bias, The Times of India, Aug. 21, 2008, http://timesofindia.indiatimes.com/Climate_talks_resume_today_India_accuses_UN_of_bias/articleshow/3386789.cms.

[28] Christa Marshall, Report says climate rules could shut down energy-intensive companies, ClimateWire, Feb. 2, 2009.

[29] Bruce Yandle, Environmental Kuznets Curves: A Review of the Findings, Methods, and Policy Implications, 2004, http://www.perc.org/articles/article207.php.

[30] Kenneth P. Green, Climate Change: Science and Policy, http://www.aei.org/publications/filter.all,pubID.28838/pub_detail.asp.

Cap-and-trade regimes have advantages, notably the ability to set a limit on emissions and to integrate with other countries. But they are complex and vulnerable to lobbying and special pleading, and they do not guarantee success.

The experience of the European Union is Exhibit A.

The Post’s answer to the flaws with cap-and-trade schemes is to implement a carbon tax instead. Cap and trade and carbon taxes have a similar goal—increase the price of energy to encourage conservation. Carbon taxes increase the price of anything that uses oil, coal, or natural gas an input. This includes nearly all goods or services in the United States because 85 percent of the energy we use comes from coal, oil, or natural gas.

Increasing the costs of doing business in American makes it harder for American businesses to compete with foreign companies. The high price of natural gas in the United States has already contributed to the loss of 3.1 million manufacturing jobs since 2000.[1] Higher energy taxes will further drive more businesses overseas and make life more difficult for American consumers struggling to make ends meet.

It is not clear what The Washington Post hopes to accomplish with a carbon tax. The earth has warmed over the past 30 years, but not as much as the climate models predict. Climate alarmists point to the models as evidence of catastrophic warming, even though there has been no warming trend since 2001 according to the satellite data.

One thing that is clear is that a unilateral carbon tax imposed on U.S. citizens will do little to nothing about global warming. Global carbon dioxide emissions are not driven by the United States, but by the developing world. According to data from the Global Carbon Project, between 2000 and 2007 the U.S.’s carbon dioxide emissions increased 3% while China’s increased 98% and became the world’s largest emitter of carbon dioxide. By way of comparison, from 2000 to 2007 India’s carbon dioxide emissions increased 36%, the global total increased 26%, Russia’s increased 10%, and Japan’s increased 3%. These data are displayed in the graph below:

The U.S. will emit a smaller and smaller share of the world’s total greenhouse gas emissions[2] making unilateral efforts, such as a domestic carbon tax, ineffective at influencing climate. If the U.S. were to completely cease using fossil fuels, the increase from the rest of the world would replace U.S. emissions in less than eight years.[3]

The Washington Post says that “A carbon tax, by contrast, is simple and sure in its effects.” This is correct. A carbon tax is simple, and we can indeed be sure of its effects: it will harm America economically with few corresponding environmental benefits.

[1] Paul N. Cicio, Testimony of Paul N. Cicio, President of Industrial Energy Consumers of America before the House of Representatives, Dec. 6, 2007, http://www.ieca-us.com/documents/IECAHouseTestimony-NaturalGas_12.06.07.pdf.

[2] According to the Global Carbon project in 2007 China emitted 21% of the world’s carbon equivalent and the U.S. emitted 19%.

[3] Calculated using the emission data from the Global Carbon Project. According to these data, the U.S. emitted 1,586,213 GgC in 2007. Without the U.S., the world’s emissions were 5,203,987 GgC in 2000, increasing to 6,884,787 GgC in 2007.

While the costs for this action are substantial, the benefits will be miniscule. These regulations will only reduce carbon dioxide emissions by a tiny amount. In fact, if every car in the US met these standards, the amount of carbon dioxide reduced would be overcome by the increase in other parts of the world within 134 days.[1] American jobs, American workers and American family budgets will suffer. Meanwhile carbon dioxide emissions savings will essentially be “background noise.”

According to the rosy and dated estimates from California’s regulators, granting the waiver and allowing California to further regulate automobiles will increase the average price of a car by over $1,000. In addition to California, 16 other states have indicated that they plan to implement California’s costly regulations. If California and other states choose to deliberately increase the cost of automobiles for their citizens, their voters can express their discontent to their government. However, since California and the 13 other states’ citizens make up 50 percent of the nation’s population, in order to make car cost-effectively, automakers will likely be forced to implement California’s regulations on all cars, not just ones for California. This means that California will become the de facto national regulator and all Americans will pay a hidden $1,000+ tax per car.

Worse, there are infinitesimally small benefits generated from the planned regulations. In fact, if every car and truck complied with California’s regulation today (in reality, California’s regulation will likely only apply to new cars and trucks) U.S. emissions of greenhouse gases would decrease by 5 percent overnight.[2] But emissions from the rest of the world are increasing so dramatically that by mid-June, emissions increases from the rest of the world make our decrease moot.[3] This small and costly policy would have no noticeable impact on carbon dioxide emissions.

This program hurts family budgets and transportation affordability and provides no real benefits. It is a luxury that our nation should not be subjected to when economic times were good and we certainly cannot afford it now.

President Obama should ensure that Detroit builds cars Americans want to buy, not to satisfy California’s regulators. After all, should the U.S. be forced to follow the policies of a state nearing bankruptcy and losing massive numbers of jobs?

[2] According to the Energy Information Administration report Emissions of Greenhouse Gases in the United States 2007, http://www.eia.doe.gov/oiaf/1605/ggrpt/pdf/0573(2007).pdf p. 5, U.S. transportation emissions account for 28% of total U.S. carbon dioxide emissions. According to p. 19 of the same report, motor gasoline accounts for 59% of the total U.S. transportation emissions. The California regulations will reduce greenhouse gas emissions from cars and light trucks by about 30 percent. See California Air Resources Board, ARB Approves Greenhouse Gas Rule, Sept. 24, 2004, http://www.arb.ca.gov/newsrel/nr092404.htm. Thirty percent of 59 percent of 28 percent is 5 percent of the total.

[3] See Footnote 2.