China’s Economy and Economic Strategy

China became the world’s third largest economy in 2007, overtaking Germany, and it is expected to become the world’s second largest economy, unseating Japan, as early as this year.[iii] Forecasts by the Energy Information Administration, the U.S. Department of Energy’s statistical arm, predict that China will replace the U.S. as the world’s largest economy within the next 15 years.[iv]

As a result, Chinese economic growth rose to 8.9 percent in the third quarter of 2009, and the government is forecasting a full-year expansion of 8.3 percent. China’s trade boom has helped Beijing pile up the world’s biggest accummulation of foreign currency reserves— more than $2 trillion.[vi] Meanwhile, the U.S. and other countries are still struggling with a recession, continued high unemployment, and an energy policy that retards its growth.

The People’s Daily, a Chinese newspaper, indicated that the large level of economic growth achieved in 2009 was due to its leaders’ ability to make quick decisions and to ensure that underlings carry them out, something that leaders of the free-market countries cannot do.[vii]

The Auto Race

In the area of automobile sales, the China Passenger Car Association reported that China’s total vehicle sales soared 45 percent in 2009, to an estimated 13.6 million, partly as a result of the Chinese government’s stimulus programs. By contrast, U.S. sales of cars and light trucks dropped 21 percent last year to 10.4 million,[viii] because of the recession, credit crisis, uncertainty regarding government stimulus programs, and worries concerning the financially troubled U.S. automobile industry. That made last year the worst U.S. auto sales year since 1982.

Except for August, when U.S. auto sales were boosted by the cash-for-clunkers incentive program, China sold more vehicles than the U.S. in every month since January of last year. Increasingly, global auto makers are also looking to China for sales.[ix]

Kevin Wale, president of General Motors’ China Group, expects Chinese auto sales to grow to 14.5 million to 15.5 million in 2010, far above the level predicted for the United States (11.5 million to 12 million), creating a gap that may be too large to close. [x] There is uncertainty, however, among analysts regarding how much China’s auto sales will grow this year. Some think growth may be as low as 5 percent, whereas others think it may be as much as 15 percent, increasing Wale’s range slightly.[xi]

One reason why analysts do not believe the strong sales growth experienced in 2009 can be repeated is the scaling back of the Chinese government stimulus for autos. China’s central government last January halved the sales tax from 10 percent to 5 percent on smaller-engine vehicles, which resulted in the sales boom. But for 2010, the sales tax is set at 7.5 percent on small cars.  And while that is still lower than the normal 10 percent rate, the effect that the economic stimulus policies had in 2009 could subside in 2010.[xii]

The Auto Industry in China

General Motors has been making headway into China’s auto sales, with 14 factories there and more than 1.8 million cars sold in 2009, just shy of its U.S. sales of slightly more than 2 million vehicles. While Buicks in the U.S. are deemed cars for the 60-and-over crowd, many young and middle-aged Chinese like what GM delivers in its Buick series. However, China has its own automobile manufacturers, who are ready to make headway into the booming Chinese auto market as well as into overseas markets.[xiii]

The Great Wall Motor Company Limited, for example, is a large multinational automaker, with product sales in more than 120 countries and regions. The company, which has more than 30 subsidiaries and over 22,000 staff members, manufactures sedans, sport utility vehicles, and pickups. It has an annual capacity of 400,000 vehicles and the capability to independently produce key parts such as engines and front and rear axles.[xiv]

Another Chinese auto company, BYD or Build Your Dreams Auto, has grown to be one of the largest automakers in China in just seven years. In 2009, BYD sold 450,000 vehicles, and the company expects sales to increase to 800,000 this year. The company’s goal is to be China’s top automaker by 2015 and number one in the world by 2025. Bolstered in part by Warren Buffett’s 10 percent investment in the company, BYD has plans to begin selling vehicles in the U.S. by the end of 2010. It also plans to market a fully electric crossover called the e6 that uses a proprietary ferrous battery technology. BYD claims that the five-passenger e6 can go 205 miles between charges, double the expected mileage of electric vehicles in the works by Nissan and Ford. The company also purports that the e6 can be fully recharged in less than one hour when plugged into a high-voltage outlet and that a 10-minute charge will replenish the battery to 50 percent.[xv]

China’s Oil Imports Reach Record Share

To fuel both its growing economy and its transportation vehicles, China in 2009 imported 52 percent of its total oil consumption (204 million tons versus 190 million tons produced domestically). According to the China Daily, importing more than 50 percent constitutes a “globally recognized energy security alert level.”[xvi]

According to the chief geologist with the Chinese Ministry of Land and Resources, Zhang Hongtao, “This year we will control the amount of imported oil and accelerate the exploration of domestic oil and natural gas.”  He added that, owing to the country’s fast economic development, increased oil imports would continue for a long time and that China urgently needed to step up the exploration and development of natural gas as a substitute energy source.[xvii]

However, China has already agreed to purchase 1.04 million barrels per day from Saudi Arabia, up 12 percent from its 2009 import levels. This is a larger percentage increase than in 2009, when its imports from Saudi Arabia increased almost 10 percent over 2008 levels. China is now the world’s second largest oil consumer, behind the U.S.[xviii]

Believing in diversity of supply, China has made a bid for Canadian oil sands, reaping benefits from threatened U.S. energy policies that would limit such imports. The Canadian government recently approved PetroChina’s $1.8 billion bid for Alberta oil sands, making this PetroChina’s largest North American investment and providing a foray into the Canadian natural resource sector. Under the agreement, PetroChina will assume a non-operating majority interest in two oil sands projects in northeastern Alberta, which is believed to hold 5 billion barrels of recoverable reserves. In addition, PetroChina has agreed to invest $250 million to fund its equity share of the project’s development through 2013.[xix]

The prediction for China’s total crude oil imports in 2010 is a 15 percent increase over 2009 levels. While crude oil prices are still low, China is expected to launch the second phase of its state petroleum reserve, according to China Oil, Gas & Petrochemicals, a report published by the state-run Xinhua news agency.[xx] Phase one consisted of a 101.9 million barrel reserve, which was mostly completed by the end of 2008. The second phase of an additional 170 million barrels is expected to be completed by 2011. Recently, Zhang Guoboa, the head of the National Energy Administration in China, indicated that there will be a third phase that will expand reserves by 204 million barrels, with the goal of increasing China’s petroleum reserves to 90 days of supply by 2020.[xxi]

Conclusion

China is savoring in its world domination of export markets and auto sales, while quietly ensuring that it has the energy to sustain its economic development. Its economic stimulus policies have actually put the country on a path of huge economic growth, while the U.S. is still seeing high unemployment and slow economic growth. Our energy policy of going “green” (empasizing wind and solar power) while stalling the development of fossil energy, has resulted in more expensive and highly-subsidized energy and an increase in jobs that are temporary at best. Our government may need to learn by example from other countries, a policy that it hasn’t had to adopt in a very long time.

[ii] The Economist, “China’s Economy: Not Just Another Fake,” January 14, 2010, http://www.economist.com/displayStory.cfm?story_id=15270708 , and China Daily, The fastest in the world, December 28, 2009,  http://www.chinadaily.com.cn/bizchina/2009-12/28/content_9235505.htm

[iii] “China becomes biggest exporter, edging out Germany,” Associated Press, January 10, 2009, http://hosted.ap.org/dynamic/stories/A/AS_CHINA_TRADE?SITE=MSJAD&SECTION=HOME&TEMPLATE=DEFAULT

[iv] Energy Information Administration, International Energy Outlook 2009, http://www.eia.doe.gov/oiaf/ieo/index.html

[vi] “China becomes biggest exporter, edging out Germany,” Associated Press, January 10, 2009, http://hosted.ap.org/dynamic/stories/A/AS_CHINA_TRADE?SITE=MSJAD&SECTION=HOME&TEMPLATE=DEFAULT

[vii] “As China Rises, Fears Grow on Whether Boom Can Endure,” New York Times, January 11, 2010, http://www.nytimes.com/2010/01/12/world/asia/12china.html

[viii] “GM Exec: China Likely to Keep Auto Sales Lead,” New York Times, January 13, 2010, http://www.nytimes.com/aponline/2010/01/13/business/AP-US-GM-China.html?_r=1

[ix] “China Overtakes U.S. to Become Largest Auto Market,” The Wall Street Journal, January 12, 2010, http://online.wsj.com/article/SB10001424052748703652104574651833126548364.html?mod=googlenews_wsj

[x] “GM Exec: China Likely to Keep Auto Sales Lead,” New York Times, January 13, 2010, http://www.nytimes.com/aponline/2010/01/13/business/AP-US-GM-China.html?_r=1

[xi] “China Overtakes U.S. to Become Largest Auto Market,” The Wall Street Journal, January 12, 2010, http://online.wsj.com/article/SB10001424052748703652104574651833126548364.html?mod=googlenews_wsj

[xii] Ibid.

[xiii] “GM Exec: China Likely to Keep Auto Sales Lead,” New York Times, January 13, 2010, http://www.nytimes.com/aponline/2010/01/13/business/AP-US-GM-China.html?_r=1

[xiv] http://www.gwm.com.cn/eng/html/about/profile.asp

[xv] “Chinese Company Wants to Build Your Dream Car,” FOXNEWS.com, January 15, 2010, http://www.foxnews.com/story/0,2933,583042,00.html

[xvi] “Oil Imports Hit an Alarming Level in China: Study,” China Daily, January 14, 2010, http://www.chinadaily.com.cn/bizchina/2010-01/14/content_9317926.htm

[xvii] Ibid.

[xviii] “China oil imports from Saudi to rise by 12% in 2010,” November 22, 2009, http://www.gulfbase.com/site/interface/NewsArchiveDetails.aspx?n=117033

[xix] “China Buys Into Canadian Oil Sands,” Oil Voice, January 3, 1020, http://www.oilvoice.com/n/China_Buys_Into_Canadian_Oil_Sands/7d689186d.aspx

[xx] Reuters, January 19, 2010, http://www.reuters.com/article/idUSTRE5B30OK20100119

[xxi] http://en.wikipedia.org/wiki/Global_strategic_petroleum_reserves#China

Washington, DC – Though proponents of so-called government-funded ‘green jobs’ often reference the ‘success’ European countries have enjoyed in their experiments with such regulations and mandates, a study released today in the United States sheds new light on Germany’s experience with renewable energy and heavy taxpayer subsidies. Entitled ‘Economic impacts from the promotion of renewable energies: The German Experience,’ the study was published by German think tank Rheinisch-Westfälisches Institut für Wirtschaftsforschung (RWI).

According to the study, “Germany’s experience with renewable energy promotion is often cited as a model to be replicated elsewhere, being based on a combination of far-reaching energy and environmental laws that stretch back nearly two decades.” Researchers add this: “German renewable energy policy … has failed to harness the market incentives needed to ensure a viable and cost-effective introduction of renewable energies into the country’s energy portfolio.”

Thomas J. Pyle, president of the Institute for Energy Research (IER) – a non-partisan market-oriented energy think tank – issued the following statement:

“Today, Vice President Biden will tout the economic benefits of ‘green jobs’ and ‘green energy.’ However, this new analysis from Germany only further emphasizes the fact that when renewable energy has been mandated and subsidized by taxpayers, economies have constricted and suffered. Germany, like Spain, is just another example of how billions of tax dollars forced to support wind and solar energy create not a hint of economic or environmental benefits.

“Some in Washington, who are working to restrict, mandate and subsidize certain energy forms that would otherwise be unaffordable, continue to offer Germany as a case-study for success. However, such a policy could increase electricity prices nearly 20 percent and require a subsidy of nearly $240,000 dollars per ‘green job.’

“This study should serve as a cautionary tale of what is likely to occur should the US continue down the road of mandating politically-favored, expensive power. We would be well served to learn from, and not repeat, the mistakes of Germany, Spain and Denmark.”

Key findings:

• Financial aid to Germany’s solar industry has now reached a level that far exceeds average wages, with per worker subsidies as high as $240,000 US.

• In 2008, the price mark-up attributable to the government’s support for “green” electricity was about 2.2 cents US per kWh. For perspective, a 2.2 cent per kWh increase here in the US would amount to an average 19.4% increase in consumer’s electricity bills.

• Government support for solar energy between 2000 and 2010 is estimated to have a total net cost of $73.2 billion US, and $28.1 billion US for wind. A similar expenditure in the US would amount to about half a trillion dollars US.

• Green jobs created by government actions disappear as soon as government support is terminated, a lesson the German government and the green companies it supports are beginning to learn.

• Government aid for wind power is now three times the cost of conventional electricity.

On Monday, report co-author Dr. Colin Vance will be in Washington, D.C., part of a three-day tour (Monday-Wednesday) aimed at explaining to a wider American audience the core conclusions of their report. Those interested in speaking with Dr. Vance or setting up an interview should contact Patrick Creighton (202.621.2947) or Laura Henderson (202.621.2951).

More on the RWI Study

• Fact Sheet: Strike Three:  First Spain, Then Denmark, and Now Germany…

• Notable Quotes: Should the U.S. Follow Germany’s Renewable Energy Experiment?

• In pictures: Impact on electricity rates by region and by state

• Study: Economic impacts from the promotion of renewable energies: The German Experience

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

#####

• Fact Sheet
• Executive Summary
• Full Study

Executive Summary

The massive energy-regulating bill (H.R. 2454) the House of Representatives passed in June 2009 is now before the Senate. Though the cap-and trade program has received most of the media and public attention surrounding Waxman-Markey, the rest of the bill (at least 628 pages) could create economic harm just as great as cap-and-trade. Without cap-and-trade, H.R. 2454 might still be the most far-reaching, counterproductive package of new taxes, transfers and obstacles to economic growth and liberty ever assembled in one bill.

The bill affects so many facets of energy and the economy that simply summarizing its major provisions is challenging. To simplify, The Other Half of Waxman-Markey: An Examination of the Non-Cap-and-Trade Provisions in the Waxman-Markey Bill studies four types of policies: [1] “supply” measures intended to reduce industrial GHG emissions, most importantly in power generation; [2] “demand” policies intended to reduce energy (electricity) consumption that causes additional emissions, e.g. by power producers; [3] seemingly minor “stealth” provisions with the potential for major economic harm as the future unfolds; and [4] politically motivated transfers of wealth not covered in the first three classifications.

The centerpiece of the supply side is a national “renewable portfolio standard” (RPS), a provision that requires investor-owned utilities to obtain 20 percent of their power in 2020 from renewable sources or increased efficiency. (Municipal and co-operative systems that sell 25 percent of the nation’s power are exempt.) An RPS is both an inefficient environmental policy and an unnecessarily expensive way to produce power. It also cannot “create jobs”—power users pay the wages of workers in renewables, creating unemployment in industries that produce what users would have otherwise bought. Other supply provisions include a federal corporation—with a $1 billion annual price tag—that will coordinate research and development of carbon capture and sequestration. “Success” of this venture is defined as power costs that rise 40 to 70 percent. A new “Clean Energy Development Administration” will provide tax-supported finance for projects that a panel of political appointees determines are “breakthroughs.” Interestingly, the bill defines breakthrough projects as those that capital markets are unwilling to fund.

The bill also requires utilities and states (i.e. power consumers and taxpayers) to create infrastructures for electric vehicles that do not yet exist. Another $50 billion is available to vehicle producers and almost anyone else distantly connected with their technology; despite the fact that research has not shown that a shift to electric vehicles would actually reduce GHGs. . And despite a growing consensus that ethanol increases emissions, H.R. 2454 gives ethanol a six-year pass before any EPA regulation can take effect.

The bill also includes a massive federal takeover of state building codes and regulation. Even if we ignore the inherent constitutional issues the provision raises surrounding state jurisdiction, H.R. 2454 disregards the fact that market forces have steadily improved building energy efficiency and instead requires that by 2030 all new buildings use 75 percent less energy than our most efficient buildings today. The bill also tightens the regulation of lighting and appliances (including underwater installations) and is likely to require carbon labeling of many goods in the near future. Moreover, it requires that taxpayers reward retailers with $200 or more for each super-efficient appliance they sell and institutes the equivalent of a “cash for clunkers” program for industrial electric motors and related equipment. Finally, a last-minute 92 page addition to the bill provides grants for an assortment of “community” activities that are often only vaguely associated with energy efficiency.

Section 198 of the bill adds a presidentially-appointed “consumer advocate” to the Federal Energy Regulatory Commission (FERC), which already has such an office. H.R. 2454 gives the Commission itself no authority over the advocate, but gives the advocate authority over almost all of FERC’s legal staff. This “stealth” White House takeover of an independent regulatory commission is unprecedented andlikely reflects the political importance of FERC’s increased authority over markets for GHG allowances and renewable energy credits under the bill. Another likely time bomb is hidden in provisions on “adaptation” to climate change, which are largely devoted to protecting existing wildlife environments. Various appointed panels will become de facto environmental regulators not subject to usual oversight procedures. H.R. 2454 also funds extensive data collection and centralization of habitat databases, explicitly preparing for environmental pressure groups to utilize the data to fight state and local government proceedings that include energy development, urban planning and highway construction.

Finally, the bill includes a hodgepodge of transfer payments with little to unite them other than the political importance of their recipients. Applications for retraining funds and displaced worker “adjustment assistance” require participation by both political appointees and “community” groups. Adjustment assistance can be up to 70 percent of wages for up to three years, far higher and longer that ordinary unemployment compensation. Poor households will receive additional payments to compensate for purchasing power they will lose due to cap-and-trade, another indication that the administration sees the law’s effects on prices. After 2020, the President must impose labor-protecting tariffs on imports from countries with lagging climate programs, unless Congress says otherwise. The bill also contains numerous transfers to higher education for research on a range of the bill’s subjects. There will be at least six new types of research centers working on bill-related topics, including one whose only function is to coordinate the other centers.

The public has quite quickly come to understand that cap-and-trade is merely another tax. Though Waxman-Markey is superficially concerned with efficiency, in reality, the bill is an incredibly large and diverse package of inefficient projects, regulations and transfers. Its complexity reflects the complex political considerations that were necessary to induce the House to pass it by the tiniest of margins. This bill is a top-down, government-knows-best, division-of-the-spoils substitute for the serious legislation that is needed to address our nation’s energy challenges.

I. Introduction

A. H.R. 2454

On June 26, 2009, the U.S. House of Representatives passed H.R. 2454, the American Clean Energy and Security Act of 2009. The first page states that the measure’s purpose is “to create clean energy jobs, achieve energy independence, reduce global warming pollution and transition to a clean energy economy.”[1] At the heart of the bill is a “cap-and-trade” scheme that will set ceilings on greenhouse gases (GHG) and institute a market for emissions permits, also called allowances. Both supporters and opponents have produced studies purporting to show that provision’s effects on the economy, and controversy continues. Cap-and-trade, however, is only one part of the bill. The remaining provisions may produce an additional negative impact as great as the one created by cap-and-trade. Among them are a national requirement that utilities obtain some quota of electricity from “renewable” sources or efficiency improvements.[2] Others, such as a federal takeover of state building codes that will impose stringent efficiency standards, have yet to be subjected to a nonpartisan cost-benefit analysis. Numerous obscure provisions, such as grants for electric utility tree-planting programs and regulations on the design of underwater lighting, entail small expenditures that may be significant in the aggregate. Some sections of H.R. 2454 contain potential time bombs that may eventually cause as much harm as cap-and-trade, others transfer important regulatory decisions from the states to Washington, and still others needlessly and expensively restrict the choices of both producers and consumers of energy.

B. The Organization of H.R. 2454

The final version of H.R. 2454 (cited as “House Final”) combines the bill reported out of Committee on June 5,[3] with an addendum that first appeared at 3 a.m. on June 26. The entire bill passed later that same day, after the leadership had restricted floor debate to three hours.[4] It was received by the Senate on July 6 and placed on the calendar the next day.[5] The bill contains five broad titles:[6]

Title I—Clean Energy. This title imposes renewable-power and efficiency requirements on utilities, proposes a government corporation for carbon capture and sequestration research, provides funds to manufacturers and buyers of electric vehicles and developers of the infrastructure that will serve them, provides funding for research on a “smart” transmission grid, changes some transmission siting rules, sets up a “Clean Energy Deployment Administration,” and makes minor changes in existing loan guarantee provisions for nuclear power.

Title II—Energy Efficiency. This title imposes federal requirements on state and local building codes to greatly reduce energy consumed in newer buildings, and provides incentives for efficiency-related retrofits in older ones. There are new design requirements for lighting and appliances, emission rules for vehicle and aircraft engines, requirements and support for greater efficiency in industry, and plans for community-based efficiency programs.

Title III—Reducing Global Warming Pollution. This title specifies GHG reduction goals, sets up a registry and allowance market, provides for offsets, sets an initial allocation of allowances and rules for trading them in markets, and sets union-level wage rules for projects funded by the bill.

Title IV—Transitioning to a Clean Energy Economy. This title includes programs to reduce emissions “leakages” from production relocations to other countries, including the option of imposing carbon-based tariffs on these leakages. It provides for job training and adjustment assistance to displaced workers, energy refunds to low-income consumers, and foreign aid programs to mitigate emissions in less developed countries. It also programs to monitor and guide adaptation to climate change.

Title V—Agricultural and Forestry Related Offsets. This title, negotiated to gain the support of farm interests, first appeared in the 3 a.m. addendum to the bill. It allows farmers and forest owners to create and exchange emissions offset credits under Department of Agriculture oversight.

C. The Organization of This Report

H.R. 2454’s overarching purpose is to determine and enforce a sequence of GHG reductions. [7] Using 2005 levels as a base, the bill requires a 3 percent reduction in GHG emissions by 2012, a 17 percent reduction by 2020, and an 83 percent reduction by 2050. The cap-and-trade program will be central to that effort, but it will be supplemented by policies intended to affect such important sectors as electricity generation, which accounts for 40 percent of GHG emissions as defined under the law.[8] The program’s provisions are to affect both the supply of and demand for emissions. Section II below covers the bill’s major supply-side measures, intended to limit the production of emissions in power generation and elsewhere: [1] a national renewable electricity requirement, [2] carbon sequestration for conventional powerplants, [3] support of “advanced” technologies, including nuclear, and [4] support for the “Smart Grid.” Section III is devoted to demand side measures, intended to reduce and restrict household and business activities that induce greater emissions of GHGs: [1] support for electric vehicles and alternative fuels, which could produce fewer GHGs per mile than conventional ones, [2] changes in the design of electricity-using equipment, [3] more restrictive building codes, and [4] localized conservation and efficiency efforts. Section IV covers two “stealth” issues that may upset federal-state regulatory relationships and increase the scope of environmental interventions: [1] changes in the organization of the Federal Energy Regulatory Commission (FERC), and [2] policies intended to facilitate “adaptation” to climate change. Section V covers some other politically motivated wealth transfers not discussed in earlier sections, such as: [1] transfers to workers, including retraining, transitional assistance and union-scale wage requirements; [2] new powers to impose tariffs on imports from emitting countries; and [3] funding for research to be performed by important interest groups.[9] Section VI summarizes the discussion. Even without cap-and-trade, H.R. 2454 might be the most impressive package of new taxes, wealth transfers, and obstacles to economic activity that a Congress has ever assembled.

II. Supply-Side Interventions

A. Renewables: The National Renewable/Efficiency Portfolio Standard

Setting aside automotive sources, the production of electricity emits approximately 40 percent of U.S. greenhouse gases as the law defines them. Even without any of H.R. 2454’s new provisions, electricity is already comprehensively regulated. State public utility commissions approve utilities’ generation and transmission investments and set rates to final (“retail”) customers, and FERC has jurisdiction over “wholesale” exchanges of power between utilities and non-utility power producers, as well as most hydroelectric activity. The Environmental Protection Agency (EPA) and state agencies regulate emissions from fossil-fueled generators, and the Nuclear Regulatory Commission oversees licensing and operation of nuclear powerplants. In addition, the siting of virtually all generating facilities and transmission lines is under state, and sometimes local, regulation, in addition to the “alphabet soup” of federal laws and regulations pertaining to their construction and use permits. These include the National Environmental Policy Act (NEPA), the Clean Water Act, the Clean Air Act, Clean Air Act (CAA) and the Endangered Species Act (ESA), to name but a few.

Adding to the mass of existing regulation, H.R. 2454 will impose a national “Renewable Portfolio Standard” (RPS) on all but the smallest investor-owned utilities. It will require each utility to obtain at least 6 percent of its power from sources defined as renewable (though some may come from efficiency-related savings instead) by 2012, 9.5 percent by 2014, and 20 percent by 2020.[10] There will also be a corresponding and equal federal renewable-energy purchase requirement schedule.[11] But because of their status as governmental and quasi-governmental agencies, municipal and cooperative electric systems that distribute 25.7 percent of the nation’s power are exempt from the requirement.[12] Currently, 29 states and the District of Columbia have RPS laws, most of which require timetables for gradually increasing the percentage of energy their utilities obtain from renewables. [13] Like most of those state policies, H.R. 2454 defines renewables as: wind turbines, geothermal steam plants, small hydroelectric facilities, burners of biomass (plant and wood waste not from federal lands[14]), and thermal and photovoltaic solar installations.[15]

The Federal Energy Regulatory Commission (FERC) will determine the details of RPS regulation and monitor utilities’ compliance. Those that cannot produce or purchase renewable power will have the option to buy “Renewable Energy Credits” (RECs) from generation owners who do not need the credits for their own compliance. Utilities will also be able to claim energy savings from efficiency-related programs (e.g., load and peak reductions) for up to 25 percent of their RPS obligations. Any utility short of the requisite total of renewable power, RECs, and efficiency improvements faces an “alternative compliance payment” to its state government of $25 for each MegaWatt-hour (MWh) that it is in deficit. This is above and beyond the costs of the power it actually distributes. H.R. 2454 will require that states spend these payments on either the deployment of renewable generation or “cost-effective energy efficiency programs,” to be defined by FERC.[16] The new efficiency standards and techniques for measuring savings will replace a variety of existing state rules.[17] The complexity and delays that have been seen at the state level will be mirrored and magnified in complex and lengthy FERC proceedings. These new uncertainties are almost sure to further distort and delay efficient investments that utilities might have made in the absence of the jurisdictional change.[18]

The economic case for a federal RPS regulation is at best weak, and the existing state-level record can only increase our doubts about its likely efficacy. The supposed logic of a national RPS is counter to almost all economic reasoning about competitive markets and their economic efficiency. An RPS is possibly the most inappropriate policy imaginable for controlling atmospheric emissions, whether dealing with EPA “criteria pollutants” (including oxides of sulfur and nitrogen) or greenhouse gases. Instead of setting a policy goal, examining its costs, and letting the market function to reach it as economically as possible (very roughly, EPA’s strategy toward criteria pollutants), RPS percentages are arbitrary, set without considering the benefits of lower pollution or the costs of alternative policies that might reduce pollution more cheaply. Instead, an RPS simply orders utilities to invest in certain politically favored generation technologies that are needlessly costly ways to both produce power and reduce pollution.[19]

As a “jobs” program, most generators of renewable power have higher labor requirements for construction and operation than conventional ones. In effect, those people who endorse the rationale of creating jobs support throwing away part of the labor force on inefficient production.[20] Nor is a national RPS likely to bring forth renewable technologies that can compete without subsidies against conventional power plants. Almost two-thirds of U.S. electricity is already consumed in RPS states, and there is no evidence that expanding RPS will make breakthroughs more likely. Renewables are already a worldwide industry, and there is also no evidence that a federal RPS will boost America’s position in these global markets. Alarmism about resource exhaustion is rapidly fading as we have recently witnessed the discovery of literally hundreds of years of onshore natural gas supplies in “unconventional” formations (shale, tight sands, and coal seams) and the development of cost-competitive technologies to explore for and produce them. Better yet for those with climate concerns, natural gas emits less carbon per unit of power produced than any other fossil fuel.

Despite years of popular attention and decades of subsidies, non-hydro renewables delivered only three percent of the nation’s electricity in 2008. That production is increasingly concentrated in wind turbines, the only renewables to have experienced substantial growth since 1999. Generation from biomass (burning plant and wood waste) fell by 6.2 percent over the period, and geothermal energy increased by only 0.6 percent. Solar’s seemingly impressive 70.3 percent increase still left it producing less than 1 percent of all renewable power.[21] RPS or no, renewables will continue as a minor presence for the next several decades.[22] Their capital costs are considerably higher than those of conventional generators, and using reasonable assumptions about allowance prices under cap-and-trade they will remain at a disadvantage. The U.S. Department of Energy’s Energy Information Administration (EIA) simulated several RPS proposals using its National Energy Modeling System (NEMS). The model has numerous flaws and often predicts poorly, but both advocates and critics generally agree with its finding that under a national RPS, such as that of H.R. 2454, the bulk of generation capacity needed to meet growing demand over the next four to six decades will continue to be fossil-fueled, even under optimistic assumptions about improvements in energy efficiency.

Renewables (particularly hydroelectric and geothermal facilities) are often site-specific and will require new transmission facilities to integrate them into the existing grid.[23] Localized resistance to new transmission facilities has become highly effective and remains strong against lines intended to carry renewable power.[24] Site specificity is a matter of degree – the few U.S. areas with persistently strong winds (the Dakotas, West Texas) are far from consumers. By contrast, fossil fuels can be transported to plants that are located where they best contribute to efficiency and reliability. Wind and solar power are intrinsically intermittent, and in most regions the wind blows least during the warm-weather peaks when additional generation would be most valuable. This lack of “dispatchability” increases utilities’ costs because they must run additional reserves to pick up their loads if the wind dies unexpectedly. In most regulatory regimes, ratepayers in general pay the costs of transmission dedicated to renewables and the operation of additional reserves, rather than investors in the renewables.[25]

As a practical matter, the great bulk of any increase in renewables to meet a growing RPS requirement will come from wind.[26] Wind and solar are the only renewables with potential sites widely dispersed around the country. Wind also lacks the polluting properties of biomass and is close to passing a market test in some locations. Despite this success relative to other renewables, almost all wind generation depends for survival on a federal production tax credit that roughly amounts to a 20 percent subsidy per kWh, and the more optimistic projections for its future generally assume that the subsidy will remain in place indefinitely. [27] Barring breakthroughs in other technologies (batteries, flywheels and compressed air storage of intermittent power), the likely dominance of wind implies that the RPS is largely special-interest legislation intended to benefit a single industry. Regions such as the relatively windless Southeast will be disadvantaged because they will have to purchase RECs from generators or renewable power that may not be deliverable, in which case they must also produce power from local resources. While utilities will probably be able to sell the undeliverable power near its source, there is no guarantee that such sales will cover the costs of the purchased RECs.

B. Coal: Carbon Sequestration

Perhaps Congress already realizes the impracticality of providing for all of the nation’s growing electricity demand with renewables and improved efficiency. To address emissions from new coal-fired plants that must almost surely be built in the future, H.R. 2454 contains “technology forcing” provisions for development of carbon capture and sequestration (CCS) technologies that will store these emissions below ground.[28] To coordinate CCS policies, the bill institutes a nonprofit “Carbon Storage Research Corporation” to be administered by the Electric Power Research Institute, an organization funded by utilities and government.[29] The corporation’s required expenses (between $1 and 1.1 billion per year for ten years) will be funded by kilowatt-hour taxes that are twice as high for coal-generated power as for natural gas. This tax will cost the typical residential user 25 cents per month. However, homes use only 37 percent of U.S. power, and taxes nominally paid by business users will affect households through higher product prices, increasing the costs American families must pay. [30] The tax burden will be somewhat consistent with Congressional politics—Vermonters with hydroelectric and nuclear power will pay substantially less than Alabamans with electricity from coal and natural gas.[31] In addition to this cost, there is no guarantee that the corporation’s research will succeed. Concerns have also been raised about the safety and efficacy of CCS.[32] To incentivize other innovative efforts, H.R. 2454 includes a complex set of rules that will allocate free allowances to generator owners who experiment with CCS between now and 2019.[33] (All “free” allowances will have some cash value on markets, and the bill will spur wasteful rent-seeking competitions to obtain them.) After 2020 all newly permitted coal-fired plants must use CCS when they begin operating and must reduce their emissions by 65 percent.[34] Because of this mandate, new CCS-equipped plants will have higher costs than older plants without CCS. Utilities will therefore have an obvious incentive to keep older plants in operation, rather than replacing them with costly new facilities. If, as seems likely, further advances in the reduction of criteria pollutants occur the new policy could leave the nation operating more older generators (producing more pollutants known to be harmful) over a longer future than in the absence of subsidies to CCS. Therefore, this rule will almost surely produce the unintended consequence of higher emissions of criteria pollutants than would otherwise occur. The current readiness of CCS technology is doubtful. The most advanced U.S. project in progress will begin its sequestration trials on 25 MW of the output of a 2,545 MW facility in Alabama, beginning in 2011.[35]

The research and administrative costs in H.R. 2454, however, pale relative to the likely costs of sequestration. Current state-of-the-art technologies allow approximately 60 percent of total carbon to be sequestered.[36] The costs of sequestration are both capital and fuel-related. According to a study for the environmentally oriented Pew Center on Climate Change, adding CCS will increase capital costs of new plants by 20 to 25 percent, (from their current levels of $500 million to $1 billion for a 550 MW plant), and its energy demands will reduce a plant’s usable power output by 15 to 30 percent. The two effects will increase the cost of a delivered megawatt-hour by 40 to 70 percent.[37] The industry’s investment requirement will increase because a generator with a nominal 550 MW capacity will produce a net output of only 390 MW.

C. Nuclear Power and “Advanced” Technologies

H.R. 2454 exemplifies the prevailing political schizophrenia over nuclear power that stems from its low emissions, waste disposal issues, and psychological impact on some citizens. Little publicity has been given to the fact that EIA’s previously described simulations show that investments in new nuclear power plants and extensions of the lives of existing ones will be necessary to achieve H.R. 2454’s GHG reductions. In 2008 nuclear power produced 19.6 percent of all electricity generated in the United States.[38] Depending on the exact scenario, the nation will require nuclear generation to increase between 8 and 26 percent by 2020 and between 10 and 109 percent by 2030. Because nuclear plants generally operate whenever they possibly can (as “baseload” units) even the low figures will entail additional construction rather than more intensive operation of available units.[39] The prospects for new units are problematic in today’s regulatory climate. The Nuclear Regulatory Commission is currently processing applications for 26 new reactors, but the Obama administration has effectively closed the Yucca Mountain waste facility prior to its ever opening.[40] H.R. 2454 leaves the central problem of waste disposal unresolved. Its most important nuclear provisions are instead minor modifications to a loan-guarantee program established by the 2005 energy law.[41]

Instead of facilitating carbon-free nuclear power, the bill puts in place a “Clean Energy Deployment Administration” (CEDA) that will provide “access to affordable financing” for clean energy technologies, energy infrastructure technologies (e.g., smart transmission grids), energy efficiency technologies, and any manufacturing technology associated with the previous three.[42] It will lend from a revolving fund with a $7.5 billion capitalization of Treasury “green bonds.”[43] The amount is actually quite small when compared with an estimated $50 billion allocated to these technologies under the American Reinvestment and Recovery Act of 2009.[44] The CEDA will be administered by a presidential appointee with a five-year term and substantial discretion. That person’s powers include the ability to determine what constitutes a “clean energy technology.” H.R. 2454 says that it is one for which “as determined by the Administrator, insufficient commercial lending is available at affordable rates to allow for widespread deployment.”[45] The bill appears to say that by definition a “clean energy” technology is one that fails a market test but nevertheless strikes CEDA’s unelected management as promising. CEDA’s Advisory Council will contain a mix of academics, industry, and political personnel.[46] It will determine whether a technology qualifies as a “breakthrough,” defined by H.R. 2454 as one that has “generally not been considered commercially ready … as a result of high perceived technology risk or other similar factors.”[47] Quite simply, the Council will determine that some technologies are valuable enough to risk taxpayers’ money on, despite the fact that private investors with their own money to lose will not fund them. The Council’s standards will be based on the politics and preferences of its own members. Beyond CEDA are a multitude of political programs. H.R. 2454 covers entrepreneurs (formerly thought of as market-oriented independents) with a “Clean Energy Technology Business Competition Grant Program” through which the Secretary of Energy gives grants to organizations that provide “incentives, training and mentorship” to entrepreneurs in renewable energy.[48] Numerous specific energy sources get their own organizational support. There will, for example, be a “National Bioenergy Partnership” of regional public-private organizations to coordinate development and deployment of “sustainable biomass fuels and bioenergy technologies.” [49]

D. Transmission Policy

Electricity can only be reliably delivered over adequate transmission facilities. During the 1990s, power sales continued to grow in the face of a substantial and prolonged fall in transmission investment that has given rise to legitimate concerns about reliability.[50] A recent upsurge in transmission spending is welcome, but its likely duration is unknown. The decline had several plausible causes. First, increased competition enabled by federal policies gave large transmission-owning utilities good reason to avoid expanding the capacities of lines that competitors had obtained legal rights to use. Second, beginning in the 1980s the abilities of localized groups to block construction of new lines led to regulatory permit delays that sometimes exceeded ten years or resulted in project abandonment. Third, federal law continues to give state regulators the ability to approve new transmission, and the physical properties of power flows sometimes reward delay—a line built in one state can actually decrease (or sometimes increase) the cost of delivered power in another, and there is no easy way to negotiate compensation payments. States still have authority over siting, but the Energy Policy Act of 2005 gave FERC “backstop” powers to order eminent domain if states prohibit or needlessly delay lines that satisfy certain “national interest” criteria. Since then, the courts have imposed limits on this authority, but in any case the underlying legal process is so complex and time-consuming that FERC has yet to exercise it.

H.R. 2454 contains two attempts to resolve these quite real problems, neither entirely satisfactory and both more governed by politics than economics. The first will give FERC increased backstop authority to invoke eminent domain in the West while leaving its powers unchanged elsewhere.[51] FERC will now be able to override Western states’ decisions to refuse siting or to impose “unreasonable conditions,” provided the line was conceived in a regional planning procedure (as most are today) and is intended to transmit energy from renewable sources.[52] As a practical matter this is one of the bill’s few provisions that may bring consumer benefits, but they will be an unintended consequence. Lines to reach yet-unbuilt renewable generators often pass through areas where coal- and gas-fired generation already exist or can be built quickly. In the early years (which may become decades) their unused capacity can transmit less expensive fossil-fuel power to distant users.

The second attempt to resolve transmission problems is embodied in the bill’s provisions to support the modernization of transmission technology, a set of initiatives generically referred to as the Smart Grid. H.R. 2454 requires the EPA Administrator and Secretary of Energy to assess the value of incorporating Smart Grid–compatible hardware and software into appliances.[53] The hardware will include controllers that allow users to choose their responses to power prices that will change over the day (e.g., dishwashing only after midnight) and possibly to allow electricity suppliers to remotely control customer-owned appliances, particularly air conditioning. The California Energy Commission proposed such requirements in 2008, although they were promptly withdrawn after widespread protests.[54] H.R. 2454 stacks the deck in favor of the government by determining benefits on the basis of a “best case” analysis under “optimal circumstances.” It unrealistically assumes that all consumers have the ability to communicate with their utilities electronically and schedule appliance use to maximize their savings.[55] A related mandate requires utilities to prepare peak-load reduction plans. They will submit the plans to FERC, which will publish annual data on their content and on utilities’ compliance. The standards, unsurprisingly, are those of perfectionists. The minimum reduction a utility can propose “shall be the maximum reductions that are realistically achievable with an aggressive effort to deploy Smart Grid and peak demand reduction technologies and methods.” [56]

III. Demand-Side Interventions

Like its supply-side policies, H.R. 2454’s demand-side policies are a massive collection of unjustified, inefficient and inequitable federal interventions into markets, few if any of which would pass a cost-benefit test. Higher market prices induce energy users to take cost-effective steps to reduce their consumption; they induce suppliers of energy commodities to find and produce more; and they bring forth innovations and inventions that better allow users to adjust to changing market realities.[57] There are theoretical cases where interventions can be justified, but H.R. 2454 goes far beyond them. Its demand-side provisions are intended to reduce emissions by reducing demand for fossil energy in four broad areas: [1] Motor vehicles, including development and manufacture of electric cars and subsidies to alternative fuels; [2] Lighting, appliances, and industrial equipment, for which the bill mandates design changes; [3] Structures, which will be under a federalized building code with national standards for retrofits and timetables for efficiency improvements; and [4] “Community” activities to be subsidized in the name of energy efficiency.

A. Electric Vehicles and Alternative Fuels

1. Vehicles

H.R. 2454’s transportation policy begins with an unfunded requirement that utilities develop plans for a network of charging stations and other facilities to support the growth of plug-in hybrid and electric vehicles (PHEVs).[58] These activities will support a “Large Scale Vehicle Electrification Program” that will provide transfers to three different sets of market participants: [1] governments, utilities, auto manufacturers, car-sharing companies or organizations, and “other persons or entities,” that is, anyone with enough political importance; [2] vehicle buyers, who will get the difference between the PHEV price and that of a supposedly comparable model; and [3] providers of charging and related facilities. [59] Several of these programs may be coordinated with automaker bailouts. Assistance to manufacturers (“such sums as are necessary”) will in part be determined by their location “in local markets that have the greatest need” rather than a high probability of success. [60] The bill also allocates to vehicle manufacturers some free carbon allowances, which can be used to meet some of their manufacturing costs, and those that save more fuel will receive larger allocations.[61] Lastly, H.R. 2454 raises the ceiling on loans to manufacturers from $25 billion (set by the 2007 Energy Law) to $50 billion.[62] The bill’s language makes it impossible to guess the total amounts that will be allocated to the various activities.

The most fundamental issue about electric vehicles has hardly been studied: Assuming GHGs are really a problem, what are the costs and benefits of policies toward them? Since electricity output will largely be generated by fossil fuels for at least the next several decades, will reduced vehicle emissions lower the economy’s net carbon output? There will also be costs (both economic and carbon-related) of new vehicles and infrastructure, as well as increased accident costs from lighter weight vehicles. Many electric vehicle technologies are still under development and their costs are largely matters for conjecture. H.R. 2454’s gamble on electric vehicles reflects today’s politics. Natural gas is accessible and domestic, and vehicles of all types have been successfully converted to run on it. We have recently learned that it is superabundant in hitherto untapped “unconventional” shales, and the development of hydraulic fracturing has made centuries of this gas accessible at today’s prices. In contrast with its largesse to electric vehicles, H.R. 2454’s only attention to gas appears in a last-minute addendum ordering a modest study of gas-fueled vehicles.[63]

2. Ethanol

After years of research we are still not certain about the algebraic sign of ethanol’s environmental benefits, that is, whether its GHG emissions are above or below those of the fuels it replaces. The currently definitive study from the National Academy of Sciences compared the climate change and health costs of one billion gallons of ethanol with its gasoline equivalent, finding costs of $469 million for gasoline and a range from $472 to $952 million for corn ethanol.[64] Add the cost of growing and processing the corn to the comparison with the oil and the outcome becomes even less favorable. If we are interested in the well-being of consumers we would further need to include the effects on grocery prices of converting 30 percent of the corn crop to ethanol. Ethanol, however, is well-represented in Washington and its representatives are aware of the risks of such comparisons. Prior to H.R. 2454, the EPA was charged with determining ethanol’s lifecycle emissions.[65] H.R. 2454 puts EPA on hold while the National Academy of Sciences spends three years assessing existing ethanol research. Following that, EPA has another year to propose a rule and one more year to make it final, after which it will become effective six years after the bill becomes law. Whatever the scientific outcome, H.R. 2454 gives ethanol six years’ exemption from regulations that affect other fuels. If the findings on ethanol are negative, the bill gives the farmers’ friends at the U.S. Department of Agriculture the option of running their own study, with results due six years from enactment.[66]

H.R. 2454 also institutionalizes an “open fuel standard” which will allow the Department of Transportation to require automakers to manufacture vehicles that are capable of running on E85 (85 percent ethanol, 15 percent gasoline) or M85 (the same for methanol) with the concurrence of EPA and DOE, through and possibly after 2016.[67] The proportions of gasoline and ethanol or methanol are for DOT to choose. Barring some unlikely political events, H.R. 2454 cements in place ethanol requirements whose likely effects are increased GHG emissions and higher food prices worldwide. By themselves the bill’s ethanol provisions would probably not pass, but burying them in a bill like H.R. 2454 might do the trick.[68]

B. Building Codes and Retrofits

H.R. 2454’s provisions on energy use in buildings is a departure from federalism, based on a claim that people don’t really know what’s best for them but Washington does. A large number of state and local building codes and regulations already exist to ensure that new and remodeled buildings meet standards of engineering integrity and adequately address local conditions—whether climatic, economic, or social. The state and local codes set broad limits on design and construction but leave builders and owners free to explore tradeoffs within those limits according to their personal standards (which may include their expectations about what subsequent owners will value). H.R. 2454 will replace today’s deference to local conditions and preferences with a national building code far more stringent than any state codes.

The rationales for this change are several, and all are weak. One alleged reason for a federal takeover is that nine states have no statewide energy codes for commercial buildings and eleven lack them for residences.[69] Perhaps unfamiliar with competitive markets, Congress apparently concluded that architects and contractors actively choose to design and construct buildings that needlessly waste energy. Congress thus disregarded the fact that these professionals are constantly in competition to offer packages of quality and price that appeal to buyers, with energy use being but one of a buyer’s many cost considerations. There is no evidence that homeowners in codeless Illinois are worse off than those who live in states with codes. In reality, households and businesses economize on energy where doing so is effective by their own standards. Even the Pew Center on Global Climate Change notes approvingly that between 1979 and 2001 average energy consumption per household decreased by 27 percent, from 126 million BTUs per year to 92 million.[70] This reduction occurred while the average square footage of new single-family homes rose by 32 percent.[71]

H.R. 2454 starts from “baseline” codes that are the most stringent currently available. (The baseline code for residences is the “Conservation Code” created by the International Code Council.) The drafters of Waxman-Markey apparently believe that the baseline codes waste too much energy, and so the bill specifies by how much. After Waxman-Markey is enacted, new buildings must consume 30 percent less energy than specified by a baseline that was set by building industry consensus. Five years ahead, in 2014 (2015 for commercial buildings), all new construction must consume 50 percent less than the baseline. Beginning in 2017, there is to be a further five percent reduction every three years, with an ultimate drop of 75 percent relative to the already-tight 2009 baseline codes. [72] Local consensus on building codes will largely end. Instead, the U.S. Department of Energy will write national regulations and determine whether they are “life-cycle cost justified.” If the Department finds a code that is thus justified and gives larger energy use reductions, it may specify that code as its new standard. [73] The government can deny funding under some of the bill’s other provisions to states that are out of compliance. In states below 90 percent compliance, the Department of Energy may “conduct training and education of builders and other professionals in the jurisdiction.”[74] H.R. 2454 also provides funds from the sale of emission allowances to states that will support stronger code enforcement.[75]

If H.R. 2454’s changes really are efficient, the nation has missed out on an incredible free lunch, one that could have simultaneously enriched builders and lowered the costs of occupants. The free lunch claim comes from a group of architects calling themselves Architecture 2030, whose president presented his case in testimony before the House Energy and Environment Subcommittee.[76] The organization reached its favorable conclusions about building codes on the basis of its own data, which are not publicly available and have yet to appear in peer-reviewed publications.[77] The National Renewable Energy Laboratory (NREL) also appears to favor code changes, again without the benefit of any known peer-reviewed studies. Architecture 2030 cites NREL studies claiming that code changes that force a 30 percent cut in residential energy use will save households in all regions between $403 and $612 per year. The average cost-neutral point for home efficiency upgrades is a 45 percent reduction.[78] Architecture 2030 and NREL apparently missed the implications: If code changes cut energy use by less than 45 percent, their analyses show that households will be better off, but if the cut exceeds 45 percent they will be worse off. H.R. 2454, however, will require 50 percent reductions in five years (and ultimately 75 percent reductions), leaving households worse off, according to numbers taken from the bill’s supporters.

H.R. 2454 also encourages energy-related building retrofits. It requires EPA to institute a program to partially fund state-authorized retrofits of existing buildings with more efficient equipment and materials, using funds from allowances allocated to the state for up to 50 percent of the cost of the retrofit. The allowable percentage of funding from allowances will increase with expected energy savings, and other bonuses are possible for such project attributes as water saving.[79] H.R. 2454 also puts the government into the business of providing publicly available “energy performance labeling” of buildings, probably including their GHG emissions. The labeling was originally to apply to all buildings, but the final version of the bill applies only to new construction.[80]

The bill also contains seemingly trivial provisions. For example, there are thirteen pages that authorize up to 50 percent federal funding for electric utility tree-planting programs that “utilize targeted, strategic tree-siting guidelines” determined by the “best available science.” In most circumstances, utilities can seek grants only if they have signed contracts with “nonprofit tree-planting organizations.”[81] Each utility participating in the program is to consult with a “local technical advisory committee” that will design an “approved plant list.” The bill takes three pages to specify that the committee must have a board with members representing eight different interested parties, including landscapers, local governments, environmental organizations, and people who represent “affordable housing.” [82] Though superficially amusing, the tree-planting material is sobering: there is no imaginable case for federal grants to electric utilities that wish to plant trees, and no conceivable way in which the composition of a local board so affects the national interest that it should be specified in federal law.

C. Equipment Redesigns, Information and Assistance

H.R. 2454 brings new design regulations for lighting, appliances, engines, and an array of industrial equipment. There are 22 pages of technical specifications on light bulbs and lamps, some strengthening existing standards and others extending past standards to previously exempt goods.[83] Art lovers will find that after 2012, “art work light fixtures” attached to picture frames cannot exceed 25 watts if they have one socket and 15 watts each if they have two or three.[84] Swimmers will learn that the design of underwater lights for pools may now be under federal jurisdiction.[85] H.R. 2454 also specifically regulates water dispensers and hot food-holding cabinets, and there will be new limits on “normalized standby power” for pumps in hot tubs.[86] Less exotic housewares are not left out. “[S]howerheads, faucets, water closets, and urinals” will each get either “a minimum level of water efficiency or a maximum quantity of water use,” determined in accordance with test procedures prescribed under the bill’s Section 323.[87] The Secretary of Energy is also ordered to produce a new rule for measuring the energy consumption of televisions.[88]

The bill also offers financial incentives to aggressive marketers of energy-efficient appliances. It initiates a “best in class” program of bonuses to retailers who sell models at the top of the “Energy Star” list.[89] The program will have an annual appropriation of $600 milion.[90] If retailers are competitive, the program’s cash will at least in part be passed through as discounts to (mostly well-off) people who buy “best in class,” a wealth transfer from the rest of the public. Retailers will also get “bounties” for trade-ins of inefficient appliances for new efficient ones.[91] Developers of super-efficient appliances that go into production will also get substantial bonuses—for example, $250 for each washer or drier produced and $200 for each refrigerator.[92] Analogous to Energy Star, EPA will also receive funds to begin a “WaterSense” program that rates products based on their water use.[93]

Beyond energy and water use, H.R. 2454 includes provisions on disclosure and labeling of the carbon content of products sold at retail and wholesale. EPA will first study the feasibility of initiating procedures for measuring, reporting, and labeling greenhouse gas content.[94] Next, EPA will have 36 months to establish the program. This order does not appear to be conditional on the results of the feasibility study. Participation will be voluntary, but H.R. 2454 specifies that EPA will “utilize incentives and other [unstated] means to spur the adoption of product carbon disclosure and product carbon labeling.”[95] Also on the information front, the bill’s last-minute addenda include an “Industrial Energy Efficiency Education and Training Initiative,” intended to “educate and motivate commercial building owners and industrial facility managers to utilize” a particular politically-favored product [mechanical insulation]..[96]

In places, H.R. 2454’s language appears to imply that businesses (including regulated utilities) have failed to see obvious sources of profit and must be told to pursue them. For example, it directs the Secretary of Energy to reward companies that devise methods for “innovative recovery of thermal energy.”[97] If the recovery (for example to generate saleable electric power) is worth the cost in private markets, we can safely assume that it will happen. Someone who invents a new production technique can usually devise a patent or licensing scheme that allows him to capture some of the benefits that accrue to society from its more widespread use. The same criticism applies to the bill’s requirement that DOE conduct an assessment of electric motors and the electric-motor market that will “characterize and estimate the opportunities for improvement in . . . energy efficiency.” Upon completing its assessment the Department will formulate a “proactive, national program … delivered in cooperation with [unspecified] interested parties” that will make people aware of “energy and cost saving opportunities” they would apparently have otherwise missed.[98]

To incentivize electric motor users, H.R. 2454 has its own “cash for clunkers” program, in the form of rebates for the purchase of motors that meet certain efficiency standards. Since the electric motor industry does not have a dealer organization, as the auto industry does, the Secretary of Energy will take applications for rebates. As in the clunkers program, an applicant must show that it has “properly disposed” of the old motor and send in its nameplate along with the application.[99] Going a step farther than “cash for clunkers,” the distributor of the motor also gets its own rebate from the $350 million that has been appropriated for the program.[100] Note that even if energy efficiency is a valid goal there is no reason to expect that this program is worthwhile. It does not consider the energy expended in making the new motor, and it fails to account for the lower present value of costs if construction of the motor is deferred.

The last-minute addenda to the bill include a section that sets up a “revolving loan fund” consisting of grants to states (up to a maximum of $500 million per year, per state) that will be used to help small manufacturers adjust to clean-technology markets. An inclusive definition means that the program will probably be available to any manufacturer with a work force under 500. Eligible firms include any whose products “relate to the production, use, transmission, storage, control, or conservation of energy.”[101] H.R. 2454 appropriates $15 billion per year for this program for the next two fiscal years.[102]

D. Community Programs

This entire 92-page Subtitle of H.R. 2454 was inserted as part of the last-minute addendum. It mandates efficiency standards for buildings affected by the subtitle’s various programs.[103] There are provisions giving preference to lenders that originate mortgages to finance improvements in home energy efficiency in “underserved” areas, and, and there is a pilot program for efficiency-related loans to governmentally “assisted housing.” [104] The bill also includes an “education and outreach” campaign in which the Department of Housing and Urban Development (HUD) will be “encouraged” to work with “appropriate entities” to hold “renewable energy expositions.”[105] HUD will also be allowed to guarantee the “green” portions of mortgages under its purview, but the guarantee cannot exceed 10 percent of the amount loaned.[106] Federal financial regulatory agencies are also asked to encourage institutions under them to open “green banking centers” that will provide information on efficiency, home improvements, and eligibility for federal loans and subsidies.[107]

There are also energy efficiency block grants of $2.5 billion in 2010 and “such sums as may be necessary for each fiscal year thereafter.”[108] Another part of this title institutes a Department of Energy “Grant Program to Increase Sustainable Low-Income Community Development Capacity,” with nonprofit organizations as the only eligible applicants. The grants may be used for training organizations to “improv[e] efficiency,” for providing loans or grants to others “to carry out energy efficiency improvements,” or for “such other purposes as the Secretary [of Energy] determines are in accordance with the purposes of this subsection.” [109] Lastly, this title of the bill has a section called “Making it Green,” which asks DOE to set incentives for developers to contract with tree-planting organizations in order to “ensure that plants at sites affected by community programs survive for at least three years.[110] There is also a call for “selection and installation of indigenous trees, shrubs, grasses, and other plants based upon applicable design guidelines and standards of the International Society for Arboriculture.”[111]

IV. “Stealth” Inclusions

Important parts of H.R. 2454 may affect the economy only in the relatively distant future. These consequences, however, were well understood by all interested parties prior to the bill’s passage. H.R. 2454 also includes at least two “stealth” provisions that have gone virtually unnoticed but whose effects will probably be substantial. One is a seemingly minor reorganization of the Federal Energy Regulatory Commission, and the other is a new set of institutions that will oversee “adaptation” to climate change. There are surely other such provisions in the bill just waiting to be found.

A. “Consumer Advocacy” at FERC

Electric utilities operate under both state and federal regulation, with the division of responsibilities set by the Federal Power Act of 1935 and later laws amending it. Broadly, state regulators set the rates utilities may charge final users, known as “retail” customers. They also oversee utilities’ investments in generation and transmission necessary to discharge their service obligations. FERC regulates “wholesale” power transactions, which are defined not by their size but by the fact that they do not entail delivery to final customers. It sets allowable rates for utilities’ power and transmission transactions with other utilities and independent generators, even if the parties are in the same state. Natural gas enjoys a roughly similar separation of federal and state regulation. FERC is an anomaly among regulatory agencies—during the administrations of both political parties, it has rather consistently attempted to increase competition in wholesale power and gas markets. Almost alone among agencies, it operates under a legal requirement that no more than three of its five Commissioners (including the Chairman) may be members of the same party.

Section 198 of H.R. 2454 establishes an “Office of Consumer Advocacy” (OCA) at FERC, to be an “advocate of the public interest,” while somewhat contradictorily “represent[ing] the interests of energy customers,” whom it defines as residential and small commercial users served at retail by utilities under its jurisdiction.[112] Its Director will be a Presidential appointee confirmed by the Senate, and must be an attorney.[113] The Director in turn appoints a “Consumer Advocacy Advisory Commission” with five members, two of whom must “[represent] state utility consumer advocates” and one of whom must be from a “nongovernmental organization representing consumers.”[114] OCA will “monitor and review [retail] energy customer complaints” about their rates or service, with powers to “investigate” them “independently,” collect data and issue reports.[115]

Since states set retail rates, the rationale for OCA at first appears unclear. However, section 198 mentions, almost in passing, that FERC’s “Office of Administrative Litigation [OAL] shall be incorporated into [OCA].”[116] Currently, OAL is coequal with the Office of Administrative Law Judges and the Office of Executive Director.[117] At this level, the requirements for independence are greatest. All contacts between staff and Commissioners must be made public, and the Commission may generally act only after someone at this level has written a preliminary decision. OAL in particular must be independent, since it is charged with negotiating settlements when possible and litigating cases that do not settle. It has powers to conduct discovery (often of confidential information), analyze data, submit testimony, conduct cross-examination, file briefs, and ensure an adequate evidentiary record.[118] H.R. 2454 removes OAL’s independence by putting it under the Presidential appointee who heads OCA, who in turn answers to no one. OCA will have no responsibility to report to the Commissioners (or anyone else in government), and the Commissioners will have no authority over OCA. In effect the founding of a seemingly minor bureaucracy will take FERC’s most important regulatory office away from the authority of the Commission.

OCA is not just another bureaucratic office: H.R. 2454 specifies that it will be almost dynastic. A new President’s only power over OCA is the ability to appoint a new Director. The Advisory Committee, whose membership qualifications virtually guarantee an anti-market orientation, has no specified expiration. OCA’S startup Director can name the Committee, but there are no provisions for replacement by a new director. Instead, “[n]otwithstanding any other provision of law, the Advisory Committee shall continue in operation during the period for which the office exists,” that is, their appointments are for life unless the law is changed.[119]

OCA’s real purpose is in all likelihood only dimly related to FERC’s current rate-setting roles, and statements about its intervention into markets that are not in the Commission’s jurisdiction are probably better viewed as distractions. Under H.R. 2454, FERC will gain broad new powers to monitor markets for GHG allowances, enforce renewable power requirements, and design and oversee markets for renewable energy credits. Under the bill, it will initiate massive rulemakings that will determine the institutional details of these markets and have important financial implications for all involved interests. Attorneys who will be under OCA’s control will also have powers to initiate proceedings against market participants without requiring the approval of FERC commissioners. If a regulatory agency must have oversight of these markets, FERC as it is organized today is by far the least objectionable candidate. Reorganized under Section 198, it might well be the most objectionable one.

B. Adaptation to Climate Change

For all its length, H.R. 2454 never discusses its own likely efficacy. There is general agreement[120] that even the most optimistic projections of U.S. emissions reductions will have so little effect on overall atmospheric carbon that there will be no detectable effect on world temperature.[121] If increases in GHGs will have substantial harmful effects, protecting America from their consequences (an activity known as adaptation) may be more effective than preventing the increases themselves. H.R. 2454 includes an extensive adaptation program, but one that appears less concerned with dealing with the issue than with forming a coalition to move the bill forward. A remarkably large assortment of committees and panels will administer and perform research on adaptation.

Sections 451 to 453 introduce the organizational basics. At the top will be a presidentially appointed Interagency Committee charged with developing the plan, and a separate Interagency Global Change Research Program to be administered by the Office of Science and Technology Policy.[122] The research program will include an Assessment Plan to establish the program’s goals, identify its effects, and evaluate its research.[123] There will be Annual Reports, data exchange mechanisms, “Vulnerability Assessments” every five years, and “Policy Assessments” every four years.[124] H.R. 2454 also authorizes formation of a National Climate Service as a counterpart to the National Weather Service, its output to be evaluated by a Climate Service Advisory Committee and publicized through a new Climate Service Program. There will also be Regional Assessment Centers and Regional Climate Teams centered around universities.[125] The politics of state allowance allocations seen elsewhere in the bill is also present here. Allowances awarded to help build state resilience to climate change will be distributed on the basis of population and per capita income (the lower the income the more a state gets).[126] Health aspects of climate change will be under the Department of Health and Human Services, which has two years to develop a “strategic action plan” that enumerates threats and proposed responses. It will issue a new plan every four years.[127] There will also be a scientific advisory board, commissioned reports and a “Climate Change Health Protection and Promotion Fund” whose appropriation is not disclosed.[128]

H.R. 2454 also contains additional stealth provisions in “natural resources adaptation.” It will create institutions with powers that extend existing environmental regulation in important ways. These extensions will apply in areas other than climate change. Ninety days after enactment of H.R. 2454, the President is to appoint a “Natural Resources Climate Change Adaptation Panel.” Led by the Chair of the Council on Environmental Quality, its ten designated members will all be secretaries or administrators of such agencies as EPA, the Department of Interior, Bureau of Land Management, and the National Park Service.[129] There will be no representatives from the private sector or other levels of government. Alongside the Adaptation Panel will be yet another group, a “Science Advisory Board” of between ten and twenty members chosen in part by their political interests. Its membership will be “balanced” among federal, state, and local representatives, Indian tribes, universities, and conservation organizations.[130]

The Adaptation Panel has one year to develop a strategy based on the “best available science” (not further defined) after “consult[ing] with local governments, conservation organizations, scientists, and other interested stakeholders.”[131] Again, no consumer or producer interests are to be consulted, and policy formation will be independent of federal administrative procedures. Two more new institutions will disseminate its research: a National Climate Center (not to be confused with the National Climate Service described earlier) and a National Climate Change and Wildlife Science Center, both under the U.S. Geological Survey.[132] The latter will “forecast the ecological impacts of climate change” and develop tools for wildlife management. H.R. 2454 contains no statements on the limits of possible interventions or the Center’s decision-making process, which might not be public.[133] Each federal resource agency with a seat on the Climate Adaptation Panel will create a report for the President and Congress on aspects of climate change under its jurisdiction. The reports are to identify “specific conservation actions,” which might strongly suggest new laws that Congress might enact. The specific areas for action include ”protection and restoration” of marine habitats, establishment of “habitat linkages and corridors,” “restoration and conservation of ecological processes,” and “protection of fish, wildlife and plant health.”[134]

The potential scope of federal expansion becomes clearer in the bill’s “National Wildlife Habitat and Corridors Information Program.” In this program, the Department of the Interior will act as lead agency in constructing a database of habitats and corridors. Various unspecified agencies may use it to set policies that “avoid, minimize, and mitigate the impacts on fish and wildlife habitat and corridors in siting energy development, water, transmission, transportation, and other land use projects; [and] assess the impacts of existing development on habitats and corridors.”[135] It is easy to see the potential value of this data to people attempting to impede otherwise locally permitted economic activity. The invitation to intervene in energy production, housing, and local planning is even more explicit in a requirement that the database “incorporate biological and geospatial data on species and corridors found in energy development and transmission plans, including renewable energy initiatives, transportation, and other land use plans.”[136] There is a further and more comprehensive call for recommendations on how to apply the data to state programs that will “promote the landscape connectivity necessary to allow wildlife to move as necessary to meet biological needs, adjust to shifts in habitat, and adapt to climate change; and minimize the impacts of energy, development, water, transportation, and transmission projects and other activities expected to impact habitat and corridors.”[137]

V. Other Wealth Transfers

A. Displaced Workers

H.R. 2454’s supporters call it an engine of “job creation,” but its language implies that it will have adverse employment effects, particularly in the industries most affected by cap-and-trade. The bill funds retraining for “green” occupations and directly assists individuals and groups who can demonstrate harm from H.R. 2454’s provisions. It authorizes curriculum development grants by the Department of Education to “partnerships” that include an institution of higher education and “experienced … [unspecified] representatives of the community”, even if a lower-level institution offers the program.[138] The bill creates a clearinghouse for job and training information in which each politically important renewable electricity source will get its own department. There will also be a “Green Construction Workers Demonstration Project” aimed generally at workers in poverty rather than those displaced by the law.[139]

Alongside education is “adjustment assistance” for certified groups of workers, unions and employers (but not individuals) who have successfully applied to their state’s governor and the Secretary of Labor. Workers in energy-related industries can qualify, as well as those in “other industries whose employment the Secretary determines has been adversely affected by any requirement of title VII of the Clean Air Act.”[140] Displaced workers who qualify can get “Climate Change Adjustment” payments of 70 percent of average weekly wages for up to three years.[141] This is considerably more liberal than most existing assistance programs, and there is no discernible ceiling written into H.R. 2454. A worker judged to be without a “marketable skill” generally must take retraining, either from educational institutions or on the job. The Department of Labor also allows displaced workers to apply for relocation allowances that include cash grants of no more than $1,500.[142]

B. Employed Workers

Workers on nearly all projects contemplated in H.R. 2454 are to be paid in accordance with the prevailing (basically, union) wage standards of the Davis-Bacon Act. Employers found in violation are subject to a loss of funding or allowance allocations.[143] The effects of the requirement will be the same as elsewhere. Some nonunion workers who get the coveted jobs will be wealthier. Employers will respond to higher wages with decreased hiring, leaving the displaced workers to seek jobs elsewhere. As these workers add themselves to the labor supply in non-green industries, they will likely depress wages in those industries, or at best leave them unchanged.

C. Tax and Welfare Policy

H.R. 2454 will also use the tax code to redistribute income in order to lessen the effects of the higher prices that cap-and-trade will inflict on low-income people. The bill’s “Energy Refund Program” is intended to “reimburse households for the estimated loss in their purchasing power as a result of [the law].”[144] EIA will estimate these losses in order to calculate monthly payments that state governments will make to households with incomes below 150 percent of the poverty line.[145] The payments will not qualify as taxable income. There will also be an increase in the percentage Earned Income Credit for childless individuals.[146] There are as yet no estimates of how much is to be redistributed.

D. International Trade

H.R. 2454 contemplates a negotiated agreement to control “leakages” of carbon-intensive production from nations with tighter GHG limits to nations without them.[147] There would be an international “reserve allowance” program (i.e., national quotas) with assistance for harder-hit countries. The bill requires a report from the President in 2017 that will estimate its costs to different sectors of the economy.[148] After 2020, the President will be obliged to impose “border adjustments” (i.e., tariffs) on countries that fail to limit their emissions.[149] The President can escape this obligation only if Congress votes that he can do so. The tariff provisions were not in the draft bill and were inserted as part of the last-minute addendum. There are a substantial number of questions about implementation and measurement. For example, if the prices of GHG permits fluctuate, how will a tariff be calculated based on these costs? And will it in fact be possible to set tariffs that fluctuate this way? Further, estimating the carbon in foreign products will require detailed knowledge of their technologies, which foreigners would resist divulging even if there were no carbon issues.

Lastly, H.R. 2454 sets up a Clean Energy Technology export program to increase employment in producing carbon-limiting technologies.[150] A country will be eligible for the exports if it has an acceptable strategy for reducing an acceptable amount of emissions, as determined by the Secretaries of State, Treasury, and Energy. Aid will be in the form of allowances (amounts set elsewhere in the bill) whose proceeds will be used to obtain equipment that embodies the technologies.[151] The scope of this program will depend on the market value of allowances. The government has an interest in raising that value, which is clearly at odds with the interests consumers and businesses have in minimizing harm from high prices.

E. Higher Education

H.R. 2454 is rife with research grants, many of which will go to higher education, national laboratories, and consulting firms. Some of the largest will go to eight “Energy Innovation Hubs,” each of which will specialize in developing some new technology. Each Hub will be a consortium of at least two research universities and another qualified entity such as a nonprofit or government lab. Applications to become a Hub will be competitive, and their operations will be funded in part by allowance allocations made elsewhere in the bill.[152] Allowances will also fund “advanced energy research” by both universities and businesses.[153] Businesses, however, cannot obtain funds to study what they build—only institutions of higher education are eligible to operate “Building Assessment Centers” that analyze efficient construction and building management.[154] The list goes on. H.R. 2454 increases funds for “Industrial Research and Assessment Centers” and “Clean Energy Application Centers” initiated by 2005 and 2007 energy legislation. To coordinate activities of the Hubs and Centers, the bill also establishes “Centers for Energy and Environmental Knowledge and Outreach.”[155]

VI. Conclusions

Almost all of H.R. 2454’s intricate programs reduce to simple strategies of taxation and wealth redistribution whose only purpose is the elicitation of political support for a policy that is questionable on scientific grounds and untenable on economic ones. As vehicles for redistribution, allowances are ideal. Important interest groups such as researchers would normally want low allowance prices because they are also consumers, but high allowance prices increase their funding. High allowance prices also increase the numbers of workers and consumers who will qualify for various transfers and subsidies. Well-off environmentalists will be happy with increasingly stringent regulations that drive allowance prices upward, and a large set of current and future Washingtonians will be happy to learn of the Congressional Budget Office’s finding that $8 billion will have to be spent over the next ten years just to staff H.R. 2454’s bureaucracies.

H.R. 2454’s authors, and members of their coalition, are clearly aware that it will have perverse outcomes and harm a broad range of Americans. The awareness lives in its provisions on displaced worker assistance and in its revisions of tariffs and the tax code, among other places. The underlying economics is worth a further look. These outcomes are not so much unfortunate side effects as they are basic elements of the logic that make it a highly attractive legislative package. Normally, tax bills and spending bills come before Congress separately, which raises the cost of bargaining and increases the risk that some coalition members will defect and upset a complex bargain. Legislation like H.R. 2454 combines tax and spending legislation into a single package that lessens the difficulty of enforcing the political agreements that brought it into existence. In one legislative act, legislators can determine who gets free allowances, who must pay for them, how much revenue to give various beneficiaries, and how much to compensate certain victims.

Regarding the science, even if the bill’s schedule for GHG reductions is met, there is general agreement that its impact on global temperatures will be undetectable. [156] If climate change would indeed cause important dislocations, there is much to be said for “hardening the target,” particularly if halfhearted efforts at GHG control by a minority of nations will have little effect on its buildup. To their credit, the authors of H.R. 2454 have noted the importance of adaptation. Their adaptation policies, however, almost exclusively take the form of new regulations and agencies devoted to maintaining pre-existing natural environments in the face of climate change. The bill never reaches questions about the effects of these policies on the nation’s production and employment.

Regarding the economics, economists continue to debate whether the better response to GHG buildup is a carbon tax or a cap-and-trade program. Their debates have largely been held in a vacuum that naively assumes governments will understand economic logic and pass legislation to remedy the so-called “market failures.” H.R. 2454 provides a compelling illustration of the irrelevance of these debates. Far from any visions of theoretically optimal legislation, it is an almost randomly assorted collection of dozens of programs, intended to transfer wealth to interest groups rather than efficiently attack the ostensible problem. The bill’s only sure effect will be to cut opportunities for productive employment in the economy.

H.R. 2454’s basic supply-side and demand-side measures are little more than taxes, individually and in the aggregate. A national renewable portfolio standard is an inefficient way to clean the environment and, as a practical matter, will do little more than transfer wealth from electricity consumers to wind-power producers and to speculators and venture capital firms that specialize in such schemes. There are theoretical rationales for governmental funding of research support for new technologies and subsidies to industries that produce and use them, but there is as of yet no showing that they are economically warranted in the context of climate change. They are, however, politically warranted—the inclusion of the Hubs in the last-minute addendum to the bill was sufficient to attract the votes of some Members of Congress who believed their districts would otherwise be left in the cold.

Governments generally prefer to increase rather than decrease their powers over private activity, and higher levels of government prefer to do likewise over lower levels. H.R. 2454’s provisions on building codes and appliance designs are little more than attempts to move decisions best made at lower levels of government upward, for reasons that have never been comprehensibly articulated. Governments also prefer to concentrate power in ways that make them less accessible to the electorate, and here too H.R. 2454 does not disappoint. It will effectively replace the Federal Energy Regulatory Commission’s imperfect (but often market-oriented) decision mechanisms with a politicized legal staff that answers to the President. As elsewhere, H.R. 2454 combines increased federal powers with increasingly poor economic analysis. With or without cap-and-trade, it will be as efficient a tool as has ever been imagined for creating poverty, unemployment, and dependence. Government, however, will probably do just fine.[157]

Perhaps inadvertently, Congress left in the bill some signs of its attitudes toward the public and its knowledge of energy and history. When introducing an “open fuel standard” that will tax consumers and vehicle producers to support an expanded market for ethanol and biofuels that primarily benefits their producers, H.R. 2454 tries a historical analogy:

The Congress finds that—

(1) the status of oil as a strategic commodity, which derives from its domination of the transportation sector, presents a clear and present danger to the United States;

(2) in a prior era, when salt was a strategic commodity, salt mines conferred national power and wars were fought over the control of such mines;

(3) technology, in the form of electricity and refrigeration, decisively ended salt’s monopoly of meat preservation and greatly reduced its strategic importance;

(4) fuel competition and consumer choice would similarly serve to end oil’s monopoly in the transportation sector and strip oil of its strategic status;

(5) the current closed fuel market has allowed a cartel of petroleum exporting countries to inflate fuel prices, effectively imposing a harmful tax on the economy of the United States[158]

There are in fact few if any historical examples of foreign governments using salt to extract monopoly gains from other nations, if only because most of them have competitive sources of imports and domestic deposits. The actual story of salt was more often one of government using its control of supply to extract taxes from its own citizens. One important cause of the French revolution was aggressive taxation of salt. Before the Revolutionary War, the American colonists knew of locally abundant salt but were unable to access it thanks to monopolies operated by the British government.[159] Revolution terminated salt monopolies in both countries, people became free to discover and sell it, and complaints about high prices and scarcity vanished. Today’s energy policy is like that of the salt monopolists, and the monopoly is not foreign—it is enforced by U.S. government bans on access to hydrocarbon deposits and taxation of what energy the nation can still produce. The intent of H.R. 2454 is to strengthen that monopoly and increase the taxes.

* Robert J. Michaels is Professor of Economics at California State University, Fullerton, Senior Fellow at the Institute for Energy Research, and an independent consultant. The views expressed in this paper are not necessarily those of his affiliations, their sponsors, or his clients.

[2] The Department of Energy’s Energy Information Administration has performed several studies of a national “renewable portfolio standard” (RPS). The latest was a report on a 25–percent renewable energy requirement by 2025, prepared for Congressman Edward Markey in connection with H.R. 2454. It estimated an effect of 2.7 percent on average power costs in 2020, using what appear to be highly optimistic assumptions about the future evolution of renewable technologies. See EIA, Impacts of a 25-Percent Renewable Electricity Standard as Proposed in the American Clean Energy and Security Act, Discussion Draft SR/OIAF/04-2009, Executive Summary at v.

[3] Original GPO Print as passed by committee 6/5 at http://thomas.loc.gov/cgi-bin/cpquery/R?cp111:FLD010:@1(hr137).

[4] GPO print of Report to Accompany House Resolution 547, June 25, 2009 at http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_reports&docid=f:hr185.111.pdf.

[5] http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h2454pcs.txt.pdf.

[6] Title V did not appear in the original bill. It was part of the last-minute addendum, intended to bring some farm state Democrats into the winning coalition. The bill’s table of contents includes references to Titles VII, VIII and XXII. The first two of these are new titles that the legislation will incorporate into the Clean Air Act, and the last will go into the Social Security Act.

[7] These portions of the bill were first proposed in 2006 as the “Safe Climate Act” by Congressman Waxman. Indicative of the haste with which H.R. 2454 was drafted and passed, this portion retains its old name.

[8] House Final at 682. GHGs as legally defined include carbon dioxide (CO₂) from energy use (81.2 percent of total GHGs by weight), methane (9.6 percent), nitrous oxide (5.3 percent), miscellaneous gases (3.8 percent), and a small number of others known to have similar effects. See U.S. Energy Information Administration, Emissions of Greenhouse Gases in the United States, 2007 (Dec. 2008). CO₂ accounts for 0.03 percent of total atmospheric gas. The law is not concerned with the quantitatively most important greenhouse “gas,” water vapor.

[9] Since this study is not about cap-and-trade I do not discuss many other transfers to interest groups in the bill, such as “free” allocations of allowances to favored groups and the opportunity for farmers to profit from the offset provisions of Title V.

[10] House Final at 24–25 and 31 (Sec. 101).

[11] House Final at 54 (Sec. 103). This was introduced in the addendum.

[12] 15.4 percent is distributed by municipal utilities and 10.3 by rural cooperatives. See American Public Power Association, “Sales to Ultimate Customers”, http://www.appanet.org/files/PDFs/SalestoUltimateConsumersElectricRevenues.pdf.

[13] Database of State Incentives for Renewables and Efficiency (DSIRE), North Carolina State University, http://www.dsireusa.org/incentives/index.cfm?SearchType=RPS&&EE=0&RE=1 .

[14] H.R. 2454 defines wood and plant waste from non-federal lands as renewable, but wood and plant waste from federal lands as non-renewable.

[15] There are numerous differences among state requirements and goals, a summary of which appears in DSIRE [above].

[16] House Final at 45–46 (Sec. 101). The willful failure of a utility to report will require that it pay $50 per MWh in deficit. Most state regulators allow the pass-through of such expenses, meaning that the deficiency is in reality paid for by retail customers.

[17] House Final at 38 (Sec. 101). The measurement criteria and methods are by turns vague and incomprehensible. What is one to make of the acceptability of “measurable and verifiable electricity savings achieved as a result of market transformation efforts” (at 39)

[18] States will be able to petition Washington to institute their own efficiency measurement programs, but that means their programs will require Washington’s approval and oversight, and H.R. 2454’s criteria for rejecting or accepting a state’s request are vague.

[19] The bill also creates inefficiencies by putting purely political restrictions on power sources – “Qualified hydropower” under the standard must be from a facility approved by FERC, which eliminates relatively plentiful Canadian imports from qualifying under the RPS. House Final at 18 (Sec. 101).

[20] For more on why renewables are poor tools for macroeconomic policy and for bringing the American renewables industry to dominate a worldwide market, see Robert J. Michaels, “A National Renewable Portfolio Standard: Politically Correct, Economically Suspect,” Electricity Journal 21 (April 2008), 9–28.

[21] U.S. Energy Information Administration, “Net Generation by Energy Source: Total,” http://www.eia.doe.gov/cneaf/electricity/epm/table1_1.html and Net Generation by Other Renewables: Total,” http://www.eia.doe.gov/cneaf/electricity/epm/table1_1_a.html.

[22] Nuclear generators produce virtually no greenhouse gases or EPA “criteria pollutants,” but politics stands in the way of treating them on a par with sources officially classified as renewable.

[23] H.R. 2454 does not specify the treatment of states and utilities whose planned renewables go unbuilt because of localized resistance to siting them or the necessary transmission facilities. This resistance has been an important cause of noncompliance with California’s seemingly stringent requirement. The state’s three large investor-owned utilities obtained a smaller percentage of their power from renewables in 2008 (13.0%) than they did in 2003 (14.0%). California Public Utilities Commission, Renewables Portfolio Standard Quarterly Report July 2009 at 6. http://www.cpuc.ca.gov/NR/rdonlyres/EBEEB616-817C-4FF6-8C07-2604CF7DDC43/0/Third_Quarter_2009_RPS_Legislative_Report_2.pdf.

[24] See, e.g., Peter Slevin and Steven Mufson, Alternative Energy Still Facing Headwinds, Washington Post, Feb. 27, 2009, http://www.washingtonpost.com/wp-dyn/content/article/2009/02/16/AR2009021601199.html.

[25] Transmission to intermittent renewables will typically be fully utilized a smaller percentage of the time than transmission that reaches dispatchable units.

[26] Biomass is potentially abundant, but its low heat content means that generation will be expensive, and in any case burning it produces GHGs.

[27] Robert Michaels, “A Federal Renewable Electricity Requirement: What’s Not to Like?” Cato Institute Policy Analysis 627 (Nov. 2008), http://www.cato.org/pubs/pas/pa-627.pdf.

[28] House Final at 56. The bill specifies an interdisciplinary Geologic Sequestration Task Force that will report within a year on the possibilities for sequestration and propose rules for certifying underground facilities and preventing leakage (House Final at 57–62).

[29] Even if CCS is viable the proper role for governmentally funded research is not clear because the private sector is already working on the problem. American Electric Power and Southern Company are separately designing and testing capture and sequestration technologies. See http://www.aep.com/environmental/climatechange/carboncapture/ and http://www.southerncompany.com/commonsense/capturingCo2.aspx. Mississippi Power Company, an operating unit of Southern Company, has applied to the Mississippi Public Service Commission for a permit to build a 500 megawatt lignite-fired plant incorporating Southern’s sequestration technology. See Mississippi Public Service Commission, Docket No. 2009-UA-0014.

[30] Since power from various sources is commingled, determination of the actual mix of delivered energy is difficult or impossible. Not surprisingly, H.R. 2454 gives the Secretary of Energy a year to formulate a rule for estimating percentages of a customer’s power generated by the different technologies. See House Final at 80-82. The residential percentage is from Energy Information Administration, Retail Sales to Ultimate Customers, http://www.eia.doe.gov/cneaf/electricity/epm/table5_1.html.

[31] The tax will be at .00043 per kWh for coal-generated power and .00022 for gas-generated. Average U.S. household power consumption is 936 kWh per month, which (excluding TVA-served Tennessee) varies from 502 in Vermont to 1,305 in Alabama. 80 percent of Vermont’s power is hydro or nuclear and 80 percent of Alabama’s is from coal or gas. See U.S. Energy Information Administration, 2007 State Data Tables at http://www.eia.doe.gov/cneaf/electricity/epm/table1_1.html and http://www.eia.doe.gov/cneaf/electricity/esr/table5.html.

[32] Advocates of sequestration argue that these concerns should be minimal. See National Energy Technology Laboratory, Carbon Sequestration FAQ, at http://www.netl.doe.gov/technologies/carbon_seq/FAQs/ concerns.html, and Summary of DOE’s Monitoring, Mitigation, and Verification Program and Modeling Program, at http://www.netl.doe.gov/technologies/carbon_seq/refshelf/overviews/MMV%20 and%20Modeling%20Presentation.pdf. NETL is the federal research laboratory devoted to fossil-fuel technology.

[33] House Final at 86–103 (Sec. 114).

[34] House Final at 104. Complex compliance formulas will also be in effect for units beginning operation before 2020. The Administrator of EPA will have powers to remove or alter them.

[35] Southern Company and MHI To Demonstrate CCS Technology, Carbon Capture Journal, May 26, 2009. http://www.carboncapturejournal.com/displaynews.php?NewsID=392.

[36] As in the previous note, the federal National Energy Technology Lab is working on technologies “expected to be able to capture” 90 percent of the CO₂.

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

[38] EIA, “Net Generation by Energy Source: Total,” http://www.eia.doe.gov/cneaf/electricity/epm/table1_1.html.

[39] EIA, Energy Market and Economic Impacts of H.R. 2454, SR/OIAF/2009-5 (Aug. 2009) at xi.

[40] NRC, Location of Projected New Nuclear Power Reactors, http://www.nrc.gov/reactors/new-reactors/col/new-reactor-map.html.

[41] House Final at 265–69 (Sec. 181).

[42] House Final at 269 (Sec. 182).

[43] Green Bonds are federally guaranteed savings bonds intended to be purchased by small investors, acknowledged to earn lower returns than most competitive investments but more than savings accounts. http://www.greenbonds.com/faq/.

[44] The exact amount one calculates is a matter of classification. This figure is calculated from material in National Council for Science and the Environment, Summary of Federal Energy, Environmental and Education Funding in the American Recovery and Reinvestment Act and 2009 Omnibus Bills, http://ncseonline.org/conference/CEDD%20-%20ARRA%20&%20Omnibus%20Funding.pdf.

[45] House Final at 271 (Sec. 183).

[46] The Advisory Council will be appointed by CEDA’s Board of Directors, who are in turn Presidential appointees who must be confirmed by the Senate. House Final at 282 (Sec. 186).

[47] House Final at 270 (Sec. 183). CEDA may also engage in transactions that provide credit support for outside market transactions in renewables, e.g., letters of credit (at 295). The law also allows other forms of support such as profit participation by the agency (at 297).

[48] House Final at 310–311 (Sec. 196). Funding is $20 million. The full text might almost be mistaken for a parody:

incentives, training, and mentorship to entrepreneurs, including minority-owned and woman-owned, and early stage start-up companies throughout the United States to meet high priority economic, environmental, and energy security goals in areas to include energy efficiency, renewable energy, air quality, water quality and conservation, transportation, smart grid, green building, and waste management.

[49] House Final at 312 (Sec. 197). Funding is $7.5 million annually through 2014. Again, the law’s painstaking language of favoritism is remarkable. The Partnership will:

provide coordination among programs of State governments, the Federal Government, and the private sector that support the institutional and physical infrastructure necessary to promote the deployment of sustainable biomass fuels and bioenergy technologies for the United States….[It] shall consist of five regions, to be administered by the CONEG [Coalition of Northeastern Governors] Policy Research Center, the Council of Great Lakes Governors, the Southern States Energy Board, the Western Governors Association, and the Pacific Regional Biomass Energy Partnership led by the Washington State University Energy Program.

[50] Edison Electric Institute, Meeting U.S. Transmission Needs (July, 2005) at vii, at http://www.eei.org/ourissues/ElectricityTransmission/Documents/meeting_trans_needs.pdf.

[51] The bill specifically applies to the “Western Interconnection,” which consists of most transmission located to the west of a north-south line from the Dakotas to Oklahoma. On the other side is the Eastern Interconnection. Texas operates its own electrically isolated grid, located entirely within the state.

[52] This provision was inserted in the last-minute addendum, restricted to the West by political reality. Massachusetts Congressman Edward Markey, Chairman of the House Energy and Environment Subcommittee is on record as opposed to it.

[53] House Final at 156. (Sec. 142). The bill does not give the government power to order these design changes.

[54] “California Commission Delays Plan to Install Programmable ‘Communicating’ Thermostats,” Electric Utility Week, Jan. 21, 2008.

[55] House Final at 157–159 (Sec. 142).

[56] House Final at 163 (Sec. 144).

[57] The first of these is just a statement that demands for energy are price-elastic, which numerous studies have shown. See, for example, James Beierlein et al, “The Demand for Electricity and Natural Gas in the Northeastern United States,” Review of Economics and Statistics 63 (Aug. 1981), 403–408. For the third see Richard Newell et al, “The Induced Innovation Hypothesis and Energy-Saving Technical Change,” Quarterly Journal of Economics 114 (Aug. 1999), 143–175.

[58] House Final at 109–111 (Sec. 121). The bill is nothing if not detailed – the other facilities include “highway rest stops.” Vehicle designs must also contain ownership identifiers so that the owner’s accounts with its utility correctly track both power consumed and power sold to the utility when the car is serving as a storage device.

[59] House Final at 112–116 (Sec. 122). Car-sharing companies are organizations that intend to park small cars at various locations, and allow qualified persons to use them for short trips, after which they will return the car for others to use. They are basically very short-term rental agencies, often planned as nonprofits. See http://www.carsharing.net/index.html.

[60] House Final at 116–118 (Sec. 123).

[61] House Final at 120–123 (Sec. 124).

[62] House Final at 122 (Sec. 125).

[63] House Final at 135–136 (Sec. 130A).

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

[65] The EPA study was apparently likely to reach adverse conclusions on ethanol because of a decision to account for “indirect land use changes” outside the U.S. as foreigners reacted to higher prices for agricultural imports by cultivating more land and thereby and decreasing the capacities of their carbon sinks.

[66] House Final at 1418–1425 (Sec. 551).

[67] House Final at 125–132 (Sec. 127).

[68] Since the ethanol industry’s financial situation depends critically on oil prices, there are fears that such risk discourages “necessary” investments. Accordingly, H.R. 2454 also provides loan guarantees for ethanol pipelines. See House Final 133–134 (Sec. 129).

[69] “Why we need the Climate Bill’s Building Code,” Reuters, July 26, 2009. In all of these states, local codes are possible and do exist.

[70] Marilyn Brown et al., Toward a Climate-Friendly Built Environment, (Pew Center for Global Climate Change, 2005) at 2, at http://www.pewclimate.org/docUploads/Buildings_FINAL.pdf.

[71] U.S. Census Bureau, “Median and Average Square Footage of Floor Area in New One-Family Houses Completed, by Location,” at http://www.census.gov/const/C25Ann/sftotalmedavgsqft.pdf.

[72] House Final at 320–322 (Sec. 201).

[73] House Final at 322 (Sec. 201). What happens if a code that meets current standards is not justified is unclear.

[74] A potentially serious intervention into local design prohibits (save in special cases) local restrictions on the addition of solar facilities to single-family homes. See House Final at 419–421 (Sec. 209).

[75] House Final at 337–347. (Sec. 201).

[76] http://www.architecture2030.org/about.php.

[77] Architecture 2030, “Oh Those Sexy Building Codes,” at http://www.architecture2030.org/news/news_072209.html.

[78] I am unable to find any NREL documents containing these figures or suggesting their derivation. They are taken from “Oh Those Sexy Buildng Codes.” H.R. 2454 has specified reductions in energy use of up to 75 percent, but NREL’s research generally finds 50 percent reductions to be the present-day limits. See http://www.nrel.gov/buildings/projects.html.

[79] House Final at 348–371 (Sec. 202).

[80] Congressman Ed Perlmutter (D-Colorado) introduced the amendment to exclude existing buildings, in hopes that “the legislation would prevent negatively categorizing existing properties which would lead to further decreasing property values” (States News Service, June 26, 2009).

[81] House Final at 397–401 (Sec. 205).

[82] House Final at 402–406 (Sec. 205).

[83] House Final at 421–422 (Sec. 211).

[84] House Final at 438–439 (Sec. 211).

[85] House Final at 422 (Sec. 211). Christmas light strings appear to still be exempt.

[86] House Final at 442–445 (Sec. 212).

[87] House Final at 447–448 (Sec. 213).

[88] House Final at 453 (Sec. 213). The California Air Resources Board is considering a ban on most flat-panel TVs as inefficient under the state’s climate change program.

[89] House Final at 468–470 (Sec. 214). These models are also expected to be capable of communicating via the electric utilities’ future Smart Grids.

[90] House Final at 486 (Sec. 214).

[91] House Final at 472–475 (Sec. 214). H.R. 2454 refers to the payments by that name. It also calls on EPA to make rules for trade-ins that still contain refrigerants that may be sources of GHG emissions.

[92] House Final at 479–480 (Sec. 214).

[93] House Final at 490 (Sec. 215).

[94] House Final at 574 (Sec. 274). The bill (at 575) asks EPA to evaluate the costs of the program but is silent on evaluating the benefits.

[95] House Final at 576–577 (Sec. 274). Funding will be $5 million for the initial study and $25 million each year through 2025.

[96] House Final at 580–582. Funding will be $3.5 million per year from 2010 through 2014. Mechanical insulation is the insulation of “mechanical piping, equipment and ductwork in commercial and industrial buildings.” See http://www.misinsulation.org/.

[97] House Final at 525–527 (Sec. 242). No funding limits are specified, and there is no way to decide the percentage of saving that makes one eligible for the award.

[98] House Final at 530 (Sec. 244).

[99] House Final at 532 (Sec. 245).

[100] House Final at 533–534 (Sec. 245).

[101] House Final at 534–536 (Sec. 246).

[102] House Final at 550 (Sec. 246). The bill’s next section includes similar support for “clean energy and efficiency manufacturing partnerships,” with five years total funding of $1.5 billion. House Final at 552-3 (Sec. 247).

[103] House Final at 585–606 (Secs. 284–285). Section 286 provides 125 percent credit for associated mortgages that are purchased by Fanny Mae of Freddie Mac.

[104] House Final at 609–611 (Sec. 287) and 625–627 (Sec. 294). There are similar provisions for Native Hawaiians and Indians under laws that apply to programs for them.

[105] House Final at 616–619 (Sec. 289). Funding is $5 million per year through 2014. “Appropriate entities” are not defined.

[106] House Final at 668–678 (Sec. 299I).

[107] House Final at 659–664 (Sec. 299E). This section also contains special provisions applicable only to credit unions.

[108] House Final at 635 (Sec. 296).

[109] House Final at 638–641 (Sec. 298). Funding is authorized at $10 million a year through 2014. There is a requirement that each grant be at least matched by nongovernmental funds, but the likely sources of these funds are matters for conjecture.

[110] No rationale is given for the choice of three years rather than some other duration.

[111] House final at 628–630 (Sec. 295). The bill also asks DOE to consult with such groups as the National Arbor Day Foundation.

[112] House Final at 313 and 317 (Sec. 198). These customers make up approximately half of total retail power sales. The remainder is sold to large commercial and industrial users, who go unmentioned in the bill. Municipal and cooperative utilities (which together deliver 25 percent of all electricity) are not regulated by FERC and will be largely unaffected.

[113] There is no corresponding requirement that the Chairman of FERC be an attorney, and the same holds true for other regulatory agencies.

[114] House Final at 316 (Sec. 198). Candidates for such organizations might include Ralph Nader groups and ACORN.

[115] House Final at 314–315 (Sec. 198). FERC already has an internal staff that investigates wholesale dockets and reports its findings to the Commission. FERC also produces numerous statistical reports.

[116] House Final at 313 (Sec. 198).

[117] See FERC’s organization chart at http://www.ferc.gov/about/strat-docs/fy08-an-rpt.pdf.

[118] http://www.ferc.gov/about/offices/oal.asp.

[119] House Final at 316–317 (Sec. 198). This has been verified in conversations with attorneys formerly employed at FERC.

[120] Using a standard modeling technique, climate scientist Chip Knappenberger found that if the United States met the Waxman-Markey targets, while the rest of the world continued on its baseline emissions path, then the mid-range estimate has the earth warming only one-tenth of a degree Celsius less by the year 2100, because of the cap-and-trade program contained in H.R. 2454. See http://masterresource.org/?p=2355. It is interesting to note that the pro-climate legislation scientists at the website “Real Climate” endorsed Knappenberger’s analysis and simply claimed that if the United States did nothing, then neither would any other major governments. See: http://www.realclimate.org/index.php/archives/2009/05/the-tragedy-of-climate-commons/.

[121] If the justification for the climatic benefits of H.R. 2454 is that it will give the U.S. government a credible bargaining position in order to get other major emitters to enact comparable legislation, then this strategic argument needs to be carefully spelled out. After all, one could plausibly argue that unilateral U.S. commitments to penalize carbon-intensive industries could make other countries less likely to constrain their own economies, as they would benefit from the unbalanced playing field.

[122] House Final at 1230–1237 (Sec. 451). $10 million per year is to be appropriated through 2014.

[123] House Final at 1240–1245 (Sec. 451). A sign that politics will play a role is that the two most important reviews of this material will come from the National Academy of Sciences and the National Governors’ Association.

[124] House Final at 1245–1258 (Sec. 451). The bill singles out special studies on ice sheet melting and hurricanes.

[125] House Final at 1257–1290 (Sec. 452). They will of course offer summer outreach programs to high school teachers.

[126] House Final at 1291–1294 (Sec. 453). There are further adjustments if a state’s income has recently fallen due to a natural disaster.

[127] House Final at 1305–1312 (Sec. 463).

[128] House Final at 1315–1316 (Sec. 467).

[129] House Final at 1319–1321 (Secs. 474–475).

[130] House Final at 1328 (Sec. 477). No other agents of the private sector will sit on it.

[131] House Final at 1322–1323 (Sec. 476). The National Adaptation Strategy appears quite similar to the many failed “national energy strategies” proposed in the past by administrations of both parties.

[132] House Final at 1325 (Sec. 477). Note that wildlife has been singled out for special attention in the name.

[133] House Final at 1328 (Sec. 477).

[134] House Final at 1332–1333 (Sec. 478).

[135] House Final at 1359 (Sec. 481).

[136] House Final at 1361–1362 (Sec. 481).

[137] House Final at 1363 (Sec. 481).

[138] House Final at 1127–1131 (Sec. 422 and 423). Priority goes to online learning, with a focus on poorly performing students rather than promising ones. $150 million is to be allocated to the retraining fund. House Final at 1131 (Sec. 422).

[139] House Final at 1124–1140 (Secs. 423 and 424A).

[140] House Final at 1140–1144 (Sec. 425). Public sector workers are also eligible to form groups.

[141] House Final at 1146–1151, 1157–1165 (Sec. 426).

[142] House Final at 1169–1173 (Sec. 427).

[143] House Final at 1024–1025 (Sec. 338).

[144] House Final at 1194–1195 (Sec. 431).

[145] House Final at 1198–1200 (Sec. 431).

[146] House Final at 1208–1210. (Sec. 432).

[147] House Final at 1115–1116 (Sec. 766).

[148] House Final at 1117–1123 (Sec. 768).

[149] House Final at 1125–1126 (Sec. 768).

[150] House Final at 1212–1214 (Sec. 441).

[151] House Final at 1223–1230 (Sec. 443).

[152] House Final at 238–243 and 246–249 (Sec. 171).

[153] House Final at 249–251 (Sec. 172).

[154] House Final at 251–253 (Sec. 173). These will be funded by $50 million in annual appropriations through 2014.

[155] House Final at 259–274 (Sec. 174). It appears that these will receive funding of $15 million per year in total.

[156] Patrick Michaels and Robert Balling, Climate of Extremes, (Cato Institute, 2009), 122–149.

[157] “Climate Bill Would Bloat Federal Agencies,” Washington Times, Aug. 17, 2009, at http://washingtontimes.com/news/2009/aug/17/climate-bill-would-bloat-federal-agencies/.

[158] House Final at 125–126 (Sec. 127).

[159] Robert Leroy Hilldrup, “A Campaign to Promote the Prosperity of Colonial Virginia,” The Virginia Magazine 67 (Oct. 1959), 410–428.

Who Benefits From Free Emission Allowances? (PDF 358 KB)

WASHINGTON – With Sens. Barbara Boxer (D-Calif.) and John Kerry (D-Mass.) expected to reveal a draft of the Senate’s climate bill this week, free-market think tank Institute for Energy Research (IER) released a new analysis today outlining how cap-and-trade would precipitate a financial windfall for well-connected special interests and politically-favored companies.  The study, entitled “Who Benefits from Free Emission Allowances? An Economic Analysis of the Waxman-Markey Cap-and-Trade,” details how shareholders, not ratepayers, will be the primary beneficiaries of cap-and-trade’s largess. The analysis also outlines the significant wealth-transfer that cap-and-trade would initiate – a $14 billion redistribution of resources from the nation’s poorest citizens to the nation’s wealthiest citizens.

The study’s lead author, Andrew Chamberlain, issued the following statement today:

“Many of the current estimates of cap-and trade’s distributional impact are in direct contradiction to microeconomic theory. Using implausible assumptions about free emissions allowances, the government’s analysis concludes that the costs associated with cap-and-trade legislation are progressive. Unfortunately, they are almost certainly regressive, with America’s top income-earners profiting by more than $14 billion per year, and low- and middle-income households footing a large portion of the burden. What’s more, the free allowances distributed under Waxman-Markey will result in large windfall profits for the corporate allies of the legislation.”

Based on these findings, IER economist Bob Murphy made the following remarks:

“Andrew Chamberlain’s analysis of the Waxman-Markey bill’s cap-and-trade title illustrates just how flawed and skewed this legislation is toward rent-seeking special interests. For one, Chamberlain puts to rest the ‘postage stamp a day’ claim that proponents and some in the media point to as the cost of this misguided legislation. And secondly, and more important, it shows that cap-and-trade, as outlined in Waxman-Markey, is nothing more than a transfer of wealth from the poorest to the richest among us.

“These new findings should send a clear message to the American people – cap-and-trade helps the powerful and hurts the rest of us. And as Congress’ corporate allies receive the bulk of the benefits Waxman-Markey has to offer, our environment, along with our struggling economy, will suffer for years to come. Congress needs to get out of the business of picking winners and losers and allow the market to determine which energy and electricity sources should power our economy.”

Note: To speak with ANDREW CHAMBERLAIN or BOB MURPHY, please contact Laura Henderson, (202) 621-2951, lhenderson@ierdc.org, or Patrick Creighton, (202) 621-2947, pcreighton@ierdc.org

More from IER on the Chamberlain Study:

Summary: Who Benefits From Free Emission Allowances?

Fact Sheet: Main Street Under Attack from Cap-and-Trade

Study: Who Benefits From Free Emission Allowances? An Economic Analysis of The Waxman-Markey Cap-and-Trade Program

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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• In 2008, solar represented 0.09 percent of all energy consumed in the U.S. [1] and 0.02 percent of all electricity generated in the U.S.[2]

• In 2008, solar generating capacity in the U.S. totaled 514 megawatts and generated 843 million kilowatt hours.[3] Solar turbines generated only a percentage of their theoretical maximum output due to their intermittency (the sun does not always shine).
• In 2006, photovoltaic cell and module shipments totaled 337 megawatts, and were estimated at 430 megawatts in 2007. These include communications, transportation, health, and grid-interactive and remote electric generation applications. [4]
• Due to incentives in the stimulus and to state mandates highlighted below, the Energy Information Administration projects solar thermal and photovoltaic generating capacity in the electric power sector to increase to 0.60 gigawatts by 2010, 1.02 gigawatts by 2020, and 1.24 gigawatts by 2030. End-use photovoltaic capacity is expected to grow to 1.86 gigawatts in 2010, 10.78 gigawatts in 2020, and 12.3 gigawatts in 2030. Together, generation from solar is projected to increase to 4.12 billion kilowatt hours by 2010, 20.11 billion kilowatt hours by 2020, and 23.22 billion kilowatt hours by 2030. This level of projected solar generation in 2030 represents 0.46 percent of total U.S. electricity generation.[5]
• Because solar power is available only when the sun shines and varies with the seasons of the year, statements about how solar units can produce enough electricity to serve a large number of homes are misleading. Since a solar unit cannot supply power continuously, dispatchable generators (usually fossil-fuel) are required to provide back-up power to the system.

Transmission Facts

• Total spending on new transmission by all investor-owned utilities in 2006 [current dollars] was $6.9 billion.[6] This figure underestimates total transmission spending since it excludes Government-owned utilities and cooperatives.
• According to a November 2008 study by Brattle Group, total investment in transmission and distribution through 2030 is expected to total $880 billion, where $298 billion would be for transmission and $582 billion would be for distribution. The figure includes integration of 214 gigawatts of new generating capacity of which 39 gigawatts is for renewable technologies required under existing state renewable portfolio standards, continued installation of a “smart grid”, accommodation for new end-use technologies such as plug-in hybrid electric vehicles, and bringing new efficiencies and service options to end use customers. The authors caution that the figure could be an underestimate since it is derived from shareholder-owned electric utility expenditure data that excludes investments made by electric cooperatives and Government-owned utilities. [7]
• There is no standard definition of a “smart grid”. It generally refers to technologies that: 1) provide customers with information and tools that allow them to be responsive to system conditions, 2) ensure more efficient use of the electric grid, and 3) enhance system reliability. The latest federal stimulus law provides $11 billion for smart grid technology, including $4.5 billion for smart-technology matching grants. [8] The $11 billion is a small percentage of what’s needed to get to the $880 billion mark, and that amount does not support a 20 percent renewable scenario by 2030.
• In Europe, it is estimated that 1.2 trillion Euros ($1.55 trillion) would be needed to build a super grid that captures offshore wind, hydropower, and solar panel arrays. [9] It would require a new network of cables and interconnectors to bring offshore generated electricity to land and modernization of the onshore grid to deal with sudden changes in supply and demand and clear bottlenecks.

Solar Subsidies

• The Energy Information Administration estimates that total Federal subsidies for electric production for fiscal year 2007 from solar power are $24.34 per megawatt hour, compared to 44 cents for traditional coal, 25 cents for natural gas and petroleum liquids, 67 cents for hydroelectric power, and $1.59 for nuclear. Solar subsidies for non-electric production in fiscal 2007 totaled $2.82 per million Btu, second only to ethanol/biofuels at $5.72 per million Btu. (Figures are in 2007 dollars.) [10]

• According to the General Accounting Office, in fiscal year 2007, solar received 9.2 percent of all federal research subsidies to power generation but produced only 0.016 percent of U.S. electricity. Per kilowatt-hour, this was 1255 times higher than the amount allocated to coal, most of which was spent to develop cleaner technologies. Coal produced 51.4 percent of all U.S. electricity in fiscal year 2007.[11]

Policies Affecting Solar

• While no federal renewable portfolio standard (RPS) exists, 28 states and the District of Columbia have a renewable portfolio standard mandating a certain percentage of a utility’s power plant capacity or generation to come from renewable sources by a certain date.[12] However, most States are out of compliance with their own program due to issues with their RPS formulation, reporting mechanisms, monitoring, and exaction of penalties for non-compliance.[13] (Texas is the major exception.)
• Tax incentives directed toward solar generation originated with the Energy Tax Act of 1978 (Public Law 95-618), which established a business energy tax credit of 10 percent of investment in solar technologies. The business tax credit was extended periodically until passage of the Energy Policy Act of 1992. As part of the Energy Policy Act of 1992, it became a permanent 10 percent tax credit. Section 1335 of the Energy Policy Act of 2005 (EPACT2005)(Public Law 109-58) established a 30-percent personal tax credit, not to exceed $2,000 for the purchase of solar electric and solar water heating property. The Emergency Economic Stabilization Act of 2008 extended it to 2016 and lifted the $2,000 cap. The 2008 law allowed electric utilities to qualify. [14]
• The New Technology Credit , also known as the Production Tax Credit (PTC), was first introduced as part of the Energy Policy Act of 1992 (EPACT1992) (Public Law 102-486). The credit was defined as a 1.5-cents-per-kilowatthour (kWh) payment (adjusted annually for inflation), payable for 10 years, to private investors as well as to investor-owned electric utilities for electricity from wind power and closed-loop (dedicated crops) biomass facilities. The American Jobs Creation Act of 2004 (AJCA) (Public Law 108-357) expanded the PTC to include solar energy. However, the recipient of the credit had to choose one of the two credits (i.e. either the PTC or the ITC). The Energy Policy Act of 2005 (EPACT2005) (Public Law 109-58) made solar facilities placed into service after December 31, 2005, ineligible for the PTC. While solar was eligible for the PTC for a brief period, its impact on solar development was largely inconsequential. [15]

What Does Solar Cost?

• The Energy Information Administration assumes the total overnight capital cost of solar thermal technology to be $5,021 per kilowatt (in 2007 dollars).[16]
• The Energy information Administration calculates the levelized cost of generating technologies, which is the present value of the total cost of building and operating a generating plant over its financial life, converted to equal annual payments and amortized over expected annual generation. In 2016, the levelized cost of solar thermal is 26.37 cents per kilowatt hour (in 2007 dollars) and for solar photovoltaic, it is 50 percent higher, 39.57 cents per kilowatt hour. The costs for solar technologies are higher than that of natural gas combined cycle, whose costs are 7.99 to 8.39 cents per kilowatt hour. Pulverized coal and coal-fired integrated gasification combined cycle have levelized costs at 9.46 and 10.35 cents per kilowatt hour, respectively. EIA includes a 3-percentage point increase in the cost of capital when evaluating investments in greenhouse gas intensive technologies, such as these coal projects, which is equivalent to a $15 per ton carbon dioxide emission fee, and a 2 percentage point reduction in the cost-of-capital for eligible renewable technologies under the loan guarantee program of the Stimulus Act. [17]
• According to Houston-based Standard Renewable Energy, an installed residential solar system for a 2,100-square-foot-home would cost about $25,500. [18]

Land Mass

• For comparison purposes, the land mass and output of California’s Diablo Canyon Power Plant is compared to the land mass required to produce a similar quantity of electricity using solar power. The 2,200 megawatt nuclear facility requires 3 square kilometers, while a solar power station would require 687.5 square kilometers with a power density of 3 watts per square meter.[19]
• Examples of solar plants are the 14-megawatt Nellis solar facility in Nevada with some 70,000 panels and the 11-megawatt solar facility in Serpa, Portugal, with 52,000 panels. [20]

Texas

• Texas law requires that 5,880 megawatts of new renewable generation be built in the state by 2015, which will meet about 5 percent of the state’s projected electricity demand. The legislation also sets a cumulative target of installing 10,000 megawatts of renewable generation capacity by 2025. The measure also includes a requirement that the state must meet 500 megawatts of the 2025 target with non-wind renewable generation.[21]
• According to Houston-based Standard Renewable Energy, an installed residential solar system for a 2,100-square-foot-home would cost about $25,500. The existing federal incentives (the 30-percent ITC) would subsidize that cost by $7,650. In Austin, residents get an additional subsidy of $13,500, and in Dallas, they get approximately another $7,900. [22]
• The Texas legislature recently passed a measure to let homeowners finance their solar installations with help from the local government, and pay back the cost via extra property taxes over 20 years. [23]
• The staff of the Electric Reliability Council of Texas (ERCOT) with input from stakeholders estimated the costs and benefits of various generating technologies. The cost of solar photovoltaic was estimated at $314 per megawatt hour (about 8 times more than a coal-fired plant) and the cost of solar thermal was estimated at $169 per megawatt hours (over 4 times the cost of a coal-fired plant). These costs are approximate generation cost averages with many variable factors including capital costs, life expectancy, operation and maintenance, capacity factor and fuel costs. They exclude ancillary services costs and transmission impacts. [24]

California

• The California Energy Commission has estimated that its requirement of 33 percent renewables in 2020 will entail $5.7 billion in new 500 and 230 kV transmission lines alone, in addition to lower-voltage lines, substations, and reactive power supplies. The figure does not include lines associated with new or upgraded conventional generation.[25]
• In 2006, solar capacity in California was 402 megawatts, 0.6 percent of the state total capacity of 63,213 megawatts.[26]
• In 2007, California’s solar capacity produced 0.26 percent of the state’s electricity.[27]
• In 2008, California had the most installed photovoltaic panels that are tied to the power grid, and increased its share by 179 megawatts.[28]

International

• The U.S. ranks fourth in the world for cumulative installed solar electric power. Germany is first, Spain is second, and Japan is third. [29] In Germany, a feed-in tariff of 27 cents per kilowatt hour has produced an explosion in the use of solar photovoltaics. Under a feed-in tariff, electric utilities are obligated to purchase renewable electricity at a higher rate than retail, in order for the renewable technology to overcome price disadvantages. In Japan, the government has set a target for 30 percent of all households to have solar panels installed by 2030. [30] See the bullet below on Spain.
• The International Energy Agency is projecting solar capacity to reach 208 gigawatts by 2030, 2.7 percent of the total capacity projected for that year, generating one percent of the world’s electricity. In 2006, it generated 0.02 percent of the world’s electricity and represented 0.2 percent of the world’s capacity. [31]
• Britain has a European target of meeting 15 percent of its electricity demand in 2020 with renewable sources. Some government insiders feel the task is hopeless. The government’s own clean-energy advisers have warned that Britain could spend £100bn over the next decade and still not hit the target. The credit crunch slowed the already slow rate of renewable deployment to a crawl. Almost half the power generated in Britain comes from coal and a bit more than a third from natural gas. Nuclear power stations contribute 17 percent and wind provides 0.6 percent. [32] In 2007, solar PV provided 0.3 percent of the UK’s renewable generation capacity and 0.1 percent of its renewable electricity. [33]
• Spain has legislation that requires 20 percent of its electricity production to be from renewable energy by 2010. Spain’s National Energy Commission estimates that 2,945 megawatts of solar capacity were installed by year-end 2008, with 2,253 megawatts installed in 2008, making Spain the second-largest country for installed solar capacity. Solar energy generated less than 1 percent of Spain’s total electricity production in 2008 at a price per kilowatt hour that was over 7 times higher than the average price. To attract investors and make renewable energy profitable against other forms of energy, Spain found that renewable energy must be subsidized. Spain provides both regulated rates and direct incentives to attract investment and meet its policy goals. However, a Spanish university researcher found that the “green jobs” agenda that the Spanish Government has instituted, and to which the U.S. government now promotes, has, in fact, resulted in job loss elsewhere in the country’s economy. For each “green” megawatt installed, 5.28 jobs on average were lost in the Spanish economy, and for each megawatt of solar energy installed, 12.7 jobs were lost. Although solar energy may appear to employ many workers in the plant’s construction, in reality it consumes a great amount of capital that would have created many more jobs in other parts of the economy. [34] Recently, the Spanish Government decided to slash subsidies to solar power. The government will subsidize just 500 megawatts of solar projects this year, down sharply from 2,400 megawatts last year. [35]

[2] Energy Information Administration, Monthly Energy Review, Table 7.2a, http://www.eia.doe.gov/emeu/mer/pdf/pages/sec7_5.pdf

[3] Capacity found at Energy Information Administration, Electric Power Annual, http://www.eia.doe.gov/cneaf/electricity/epa/epaxlfile2_2.pdf for 2007 and preliminary 2008 data provided in an email from R. Schnapp, EIA, to M. Hutzler, IER, April 29, 2009; generation at Energy Information Administration, Monthly Energy Review, http://www.eia.doe.gov/emeu/mer/pdf/pages/sec7_5.pdf.

[4] Energy Information Administration, Annual Energy review 2007, Table 10.8, http://www.eia.doe.gov/emeu/aer/contents.html, and Energy Information Administration, Annual Energy Outlook 2009, Table A16, http://www.eia.doe.gov/oiaf/aeo/index.html .

[5] Energy Information Administration, Annual Energy Outlook 2009, Tables A8 and A16, SR-OIAF/2009-3, April 2009, http://www.eia.doe.gov/oiaf/aeo/index.html .

[6] Edison Electric Institute, Actual and Planned Transmission Investment by Shareholder-Owned Utilities, 2000-2009. http://www.eei.org/common/images/industry_issues/Energy_Data_Alert/bar_Transmission_Investment.jpg

[7] The Brattle Group, “Transforming America’s Power Industry: The Investment Challenge 2010-2030, November 2008, www.thebrattlegroup.org/_documents/UploadLibrary/Upload726.pdf

[8] Greenwire, Electricity: “Will Americans learn to love the ‘smart grid’?”, www.eenews.net/Greenwire/2009/02/27/archive/1?terms=smart+grid+cost .

[9] ClimateWire, “Renewable Energy: Pricey ‘supergrid’ seen as key to offshore wind power in Europe”, 2/9/09, www.eenews.net/climatewire/2009/02/09/1

[10] Energy Information Administration, Federal Financial Interventions and Subsidies in Energy Markets 2007, http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/pdf/execsum.pdf, Tables ES5 and ES6.

[11] General Accounting Office, Federal Electricity Subsidies, Oct. 2007, page 21, http://www.gao.gov/new.items/d08102.pdf

[12] Annual Energy Outlook 2009, Legislation and Regulations, Table 3, http://www.eia.doe.gov/oiaf/aeo/pdf/leg_reg.pdf.

[13] “A National Renewable Portfolio Standard: Politically Correct, Economically Suspect,” Robert J. Michaels, April 2008 Electricity Journal.

[14] Energy Information Administration, Federal Financial Interventions and Subsidies in Energy Markets 2007, http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/index.html, and American Solar Energy Society, http://www.ases.org/index.php?option=com_content&view=article&id=286&Itemid=58.

[15] Energy Information Administration, Federal Financial Interventions and Subsidies in Energy Markets 2007, http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/index.html .

[16] Energy Information Administration, Assumptions to the Annual Energy Outlook 2009, Table 8.2, http://www.eia.doe.gov/oiaf/aeo/assumption/index.html.

[17] Email from C. Namovicz, Energy Information Administration, to M. Hutzler, Institute for Energy Research, April 29, 2009.

[18] Houston Chronicle, “Solar power, Looking for ray of sunshine”, May 27, 2009, http://www.chron.com/CDA/archives/archive.mpl?id=2009_4744238 .

[19] Seth Myers, Energy Tribune with input from the Energy Information Administration and the Pacific Gas and Electric Co.

[20] Energy Information Administration, International Energy Outlook 2009, May 2009, http://www.eia.doe.gov/oiaf/ieo/pdf/0484(2009).pdf

[21] http://www.pewclimate.org/node/1303

[22] Houston Chronicle, “Solar power, Looking for ray of sunshine”, May 27, 2009, http://www.chron.com/CDA/archives/archive.mpl?id=2009_4744238 .

[23] Greenwire, Solar Power, June 1, 2009, http://www.eenews.net/Greenwire/2009/06/01/archive/10?terms=solar .

[24] Issues Associated with Renewable Energy in Texas, Informal White Paper for the Texas Legislature, Mar. 28, 2005, http://www.ercot.com/news/presentations/2006/RenewablesTransmissi.pdf

[25] California Energy Commission, Intermittency Analysis Project: Summary of Final Results, CEC 500-2007-081 (2007) at 26. http://www.energy.ca.gov/2007publications/CEC-500-2007-081/CEC-500-2007-081.PDF.

[26] http://www.eia.doe.gov/cneaf/solar.renewables/page/state_profiles/california.html

[27] Energy Information Administration, http://www.eia.doe.gov/cneaf/electricity/epa/epa_sprdshts.html

[28] Reuters, U.S. installed solar capacity up 17 percent in 2008, March 20, 2009, http://www.reuters.com/article/rbssUtilitiesMultiline/idUSN2050533620090320 .

[29] Solar Energy Industries Association, http://www.seia.org/cs/about_solar_energy/industry_data .

[30] Energy Information Administration, International Energy Outlook 2009, May 2009, http://www.eia.doe.gov/oiaf/ieo/pdf/0484(2009).pdf .

[31] International Energy Agency, World Energy Outlook, November 2008.

[32] The Guardian, March 21, 2009, http://www.guardian.co.uk/environment/2009/mar/21/renewable-energy , and “Windmills flap helplessly as coal remains king”, February 18, 2009, http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/article5755210.ece

[33] House of Lords, The Economics of Renewable Energy, HL Paper 195-I, November 25, 2008, http://www.publications.parliament.uk/pa/ld200708/ldselect/ldeconaf/195/195i.pdf.

[34] Study of the effects on employment of public aid to renewable energy sources, Universidad Rey Juan Carlos, March 2009, http://www.juandemariana.org/pdf/090327-employment-public-aid-renewable.pdf .

[35] Wall Street Journal, “Darker Times for Solar-Power Industry”, May 11, 2009, http://online.wsj.com/article/SB124199500034504717.html .

Coal-fired electricity generation is far cleaner today than ever before. The popular misconception that our air quality is getting worse is wrong, as shown by EPA’s air quality data. Modern coal plants, and those retrofitted with modern technologies to reduce pollution, are a success story and are currently providing about 50% of our electricity. Undoubtedly, pollution emissions from coal-fired power plants will continue to fall as technology improves.

Executive Summary

America’s improving air quality is an untold success story. Even before Congress passed the Clean Air Act Amendments of 1970, air quality had been improving for decades.[i] And since 1970, the six so-called criteria pollutants have declined significantly, even though the generation of electricity from coal-fired plants has increased by over 180 percent. [ii] (The “criteria pollutants” are carbon monoxide, lead, sulfur dioxide [SO₂], nitrogen oxides [NO_x], ground-level ozone, and particulate matter [PM]. They are called “criteria” pollutants because the EPA sets the criteria for permissible levels. [iii]) Total SO₂ emissions from coal-fired plants were reduced by about 40 percent between 1970 and 2006, and NO_x emissions were reduced by almost 50 percent between 1980 and 2006. On an output basis, the percent reduction is even greater, with SO₂ emissions (in pounds per megawatt-hour) almost 80 percent lower, and NO_x emissions 70 percent lower.

Figure 1 below shows the increases in Gross Domestic Product, vehicle miles traveled, energy consumption, and population since 1980, and it compares them to the decline in the aggregate emissions of criteria pollutants. Today, we produce more energy, drive further, and live more comfortably than we did in the past, all the while enjoying a cleaner environment.

Figure 1: EPA’s Comparison of Air Quality, Emissions, and Societal Trend

Source: http://www.epa.gov/airtrends/images/comparison.jpg

One factor in improving air quality has been the pollution-control technologies used by coal-fired power plants. Today’s coal-fired electricity generating plants produce more power, with less emission of criteria pollutants, than ever before. According to the National Energy Technology Laboratory (NETL), a new pulverized coal plant (operating at lower, “subcritical” temperatures and pressures) reduces the emission of NO_x by 86 percent, SO₂ by 98 percent, and particulate matter (PM) by 99.8 percent, as compared with a similar plant having no pollution controls [xv]. Undoubtedly, air quality will continue to improve in the future because of improved technology.

Today, coal-fired electricity generation produces nearly half of the electricity generation in America and provides many jobs. For example, Prairie State Energy Campus, a 1,600-megawatt coal plant under construction in southern Illinois, provides 1,200 people with jobs in around-the-clock construction. Between its power plant, coal mine, and other assets, the campus will inject some $2.8 billion into the Illinois economy, creating 2,300 to 2,500 temporary construction jobs and 500 permanent positions, while emitting 80 percent less in pollutants than most existing power plants.[iv] When completed, the power plant will deliver electricity to 2.4 million homes in at least nine states.

Background

• Even before Congress passed the Clean Air Act Amendments of 1970, creating the Environmental Protection Agency, air quality was improving. Prior to 1970, business saw certain types of pollution as waste, and worked to reduce them through technological improvements in order to increase efficiency. Furthermore, state and local policymakers worked to reduce pollution.[v]
• The Clean Air Act, last modified in 1990, requires the Environmental Protection Agency (EPA) to set National Ambient Air Quality Standards to control pollutants considered harmful to public health or the environment: these are the so-called criteria pollutants.
• Two of these pollutants, SO₂ and NO_x are the principal pollutants that cause acid precipitation (colloquially known as acid rain). SO₂ and NO_x emissions react with water vapor and other chemicals in the air to form acids that fall back to earth. Prior to controlling for these emissions, power plants produced most (about two-thirds) of the SO₂ emissions in the United States. The majority (about 50 percent) of NO_x emissions came from cars, buses, trucks, and other forms of transportation, with power plants contributing about 25 percent. The remainder came from other sources, such as industrial and commercial boilers.[vi]
• The 1990 changes to the Clean Air Act introduced a permanent cap on the total amount of SO₂ emissions that may be emitted by electric power plants nationwide, thereby reducing the level of these emissions in the atmosphere. The approach used was a cap-and-trade program with a steadily declining cap through 2010.
• In order to comply with the Clean Air Act Amendments of 1990, electric utilities could either switch to low sulfur coal, add equipment (e.g., scrubbers) to existing coal-fired power plants in order to remove SO₂ emissions, purchase permits from other utilities that exceeded the reductions needed to comply with the cap, or use any other means of reducing emissions below the cap, such as operating high-sulfur units at a lower capacity utilization.
• EPA devised a two-phased strategy to cut NO_x emissions from coal-fired power plants. The first phase, finalized in a rulemaking in 1995, aimed to reduce NO_x emissions by over 400,000 tons per year between 1996 and 1999. The second phase began in 2000, and it aimed to reduce NO_x emissions by over 2 million tons per year. The second phase reduction goal was exceeded, owing in part to additional state-initiated NO_x reductions in the Northeast.[vii]
• In 1998, EPA issued a rule that required 21 states and the District of Columbia to further reduce NO_x emissions through the use of newer, cleaner control strategies. The rule gave each affected state a NO_x emission target and let the state determine how to reduce its emissions. The goal was to reduce total emissions of NO_x by 1 million tons in the affected states by 2007. Most states were required to begin reductions in 2004.[viii]
• EPA issues air pollution control standards under the Clean Air Act Extension of 1970. These standards are called New Source Performance Standards (NSPS). EPA’s NSPS require all power plants for which construction commenced after February 28, 2005, to not exceed 1.0 lb/megawatt hour (0.11 lb/million Btu) of NO_x, 1.4 lb/megawatt hour (0.15 lb/million Btu) of SO₂, and 0.14 lb/megawatt hour (0.015 lb/million Btu) of particulate matter (PM). [ix] However, as can be seen below, most new plants are built to more stringent criteria.

Coal Industry Emissions Reduction

• Of the 328,720 megawatts of coal-fired capacity reporting their control technologies to the Energy Information Administration in 2005, 48 percent (158,493 megawatts) have cooling towers, 31 percent (101,338 megawatts) have flue gas desulfurization equipment (scrubbers), and 100 percent have particulate collectors.[x]
• The following graph compares the SO₂ and NO_x emissions from coal-fired power plants divided by the fuel consumed by these plants from 1970 to 2006. Between 1970 and 2006, SO₂ emissions in lbs per million Btu were reduced by almost 80 percent and NO_x emissions in lbs per million Btu were reduced by over 70 percent. Between 1970 and 2006, total SO₂ emissions were reduced by about 40 percent. Between 1980 and 2006, NO_x emissions were reduced by almost 50 percent.



• A study by the National Energy Technology Laboratory (NETL) compared the emission rates from pulverized coal plants and integrated gasification combined cycle plants based on the environmental regulations that would apply to plants built in 2010 using technology designs from several vendors, including General Electric Energy (GEE), ConocoPhillips (CoP), and Shell. These rates are provided in Table 1 for three criteria pollutants: sulfur dioxide, nitrogen oxides, and particulate matter (PM).[xi] The rates range from .0105 to .0848 lbs/million Btu for SO₂, .055 to .07 lbs/million Btu for NO_x, and .0071 to .013 lbs/million Btu for PM, depending on technology type. These emission rates are 43 to 93 percent lower than the current NSPS for SO₂, 36 to 50 percent lower than the current NSPS for NO_x, and 13 to 53 percent lower than the current NSPS for PM. Integrated gasification units have lower criteria pollutants than pulverized coal plants.

• According to NETL, for a new pulverized coal plant (subcritical) built in 2008, pollution controls reduce NO_x emissions 86 percent, SO₂ emissions by 98 percent, and PM by 99.8 percent when compared with a similar plant with no pollution controls. The target emission level for NO_x is 0.070 lb/MMBtu, for SO₂ is 0.085 lb/MMBtu, and for PM is 0.013 lb/MMBtu. Without control technologies, a subcritical coal plant would emit 0.5 lb/MMBtu of NO_x, 4.35 lb/MM Btu of SO₂, and 6.5 lb/MM Btu of PM.[xii] The figure below graphically depicts the criteria pollutants from a new controlled plant vs. a new uncontrolled plant.

Cost Factors in Emission Reductions

• According to the EIA, the costs of adding flue gas desulfurization (FGD) equipment to remove sulfur dioxide are, in 2006 dollars, $301/KW for a 300 MW plant, $230/KW for a 500 MW plant, and $190/KW for a 700 MW plant. The costs for selective catalytic reduction (SCR) equipment to remove nitrogen dioxides are $124/KW for a 300 MW plant, $108/KW for a 500 MW plant, and $98/KW for a 700 MW plant. The costs per megawatt of capacity decline with plant size.  FGD units are assumed to remove 95 percent of the SO₂ and SCR units are assumed to remove 90 percent of the NO_x.[xiii]
• The NETL study provides estimates of both the capital cost and the levelized cost of these technologies, which are given in Table 2 in 2007 dollars.[xiv] The levelized cost is the present value of the total cost of building and operating the plant over its economic life, converted to equal annual payments. The plant costs range from $1,549 to $1,977 per kilowatt for a 550 megawatt plant, with integrated gasification combined cycle technology having the higher costs. The 20-year levelized plant cost was computed using fuel prices from the Energy Information Administration’s Annual Energy Outlook 2007. The levelized plant costs range from 6.33 to 8.05 cents per kWh.

Source:  National Energy Technology Laboratory, Cost and Performance Baseline for Fossil Energy Plants, DOE/NETL-2007/1281,
http://www.netl.doe.gov/energy-analyses/pubs/Bituminous%20Baseline_Final%20Report.pdf

• NETL estimates that for a pulverized subcritical coal plant, the equipment to control NO_x, SO₂, and PM comprises $324/kW of the $1,549/kW plant cost (21 percent). At the request of IER, NETL estimated the cost of a subcritical pulverized coal plant without controls for criteria pollutants. The levelized cost of the new controlled plant is 6.4 cents per kWh and that of the new uncontrolled plant is 5.2 cents per kWh, 19 percent lower. A controlled plant has slightly lower output, less than 1 percent lower, and its capital costs are about 25 percent higher due to the cost of the control technologies.[xv]

Coal-fired electricity generation is far cleaner today than ever before. The popular misconception that our air quality is getting worse is wrong, as shown by EPA’s data.[xvi] Modern coal plants, and those retrofitted with modern technologies to reduce pollution, are a success story and are currently providing about 50% of our electricity. Undoubtedly, pollution emissions from coal-fired power plants will continue to fall as technology improves.

Cap-and-Trade: “Acid Rain” versus Greenhouse Gases

The results of using a cap-and-trade system to fight “acid rain” have led some to argue that it is a model for efforts to reduce carbon dioxide emissions. But the analogy fails. Stark differences exist between the “acid rain” emission-reduction program and the challenge of reducing carbon dioxide, a natural byproduct of combustion, emitted by natural and man-made sources.

Carbon dioxide is emitted in the U.S. by hundreds of millions of sources, including every personal automobile, the appliances many of us use to cook our food and heat our homes, and the businesses upon which we depend for our livelihoods, to name a few. The “acid rain” emission reduction program was initially limited to 110 site-specific utility plants, and then later expanded to 445 plants.[xvii] In addition, carbon dioxide is a world-wide byproduct of combustion, whereas all criteria pollutants are local or regional. In other words, what the United States did for SO₂ and NO_x directly affected air quality here, while national action to limit carbon dioxide emissions will have little bearing on aggregate global emissions.

Furthermore, at the time of the SO₂ and NO_x reduction program, alternative low sulfur coal sources existed and utilities had available affordable and proven technologies to utilities to reduce their emissions. When Congress passed the Clean Air Act Amendments of 1990, therefore, coal-fired utilities could responsibly reduce emissions from their plants using various options that limited cost impacts to the consumer.

In addition, attempts to extrapolate the “acid rain” success story to the challenge of reducing carbon dioxide emissions fail to recognize the history of similar programs in other parts of the world. For example, the “Emissions Trading Scheme” of the European Union has been ineffective at reducing carbon dioxide emissions at the same time it has increased prices and harmed businesses and consumers.[xviii] Further, the EU program has enriched some companies and industries at the expense of consumers.

A recent study by Laurie Williams and Allen Zabel, career employees of the Environmental Protection Agency, makes these points about what the authors call the “Acid Rain Myth.”[xix] As the authors explain, that those who champion the use of cap-and-trade to address global warming ignore the crucial distinctions between the issues we faced in 1990 with acid rain and the issues we face today with global warming.

The following highlights Williams and Zabel’s study demonstrate that the experience of the acid rain program cannot and should not be compared to cap and trade for greenhouse gas emissions:

• “Most importantly, the success of the Acid Rain program did not depend on replacing the vast majority of our existing energy infrastructure with new infrastructure in a relatively short time. Nor did it depend on spurring major innovation. Rather, the Acid Rain program was successful as a mechanism to guide existing facilities to undertake a fuel switch to a readily available substitute, the low sulfur coal in Wyoming’s Powder River Basin.”
• “The goal of the Acid Rain program was to reduce sulfur dioxide emissions, while keeping the cost of energy from coal low. To be effective, climate change legislation must do the opposite; it must gradually increase the relative price of energy from coal and other fossil fuels to create the appropriate incentives for both conservation and the scale-up of clean energy.”
• “Further, the Acid Rain program did not allow any outside offsets and so provides no basis for the widespread assumption that an offset program will help with climate change. In addition, the success of the program was aided by the low, competitive price of low-sulfur coal.”
• “According to Professor Don Munton, author of ‘Dispelling the Myths of the Acid Rain Story’ the impact of the program has been overstated: The potential for a massive switch to low sulfur coal was no secret. Such coal was cheap and available, and it became cheaper and more available throughout the 1980s. Indeed, low-sulfur coal became very competitive with high-sulfur supplied well before the Clean Air Act became law.”

In short, the mechanisms available to reduce pollutants allowed for more generation of energy with less pollution. But this success cannot be extrapolated to the regulation and reduction of carbon dioxide, a much more challenging undertaking. None of the conditions existing at the time of the apparent success of the SO₂ and NO_x reduction program apply to carbon dioxide, and, in any case, unilateral action by the United States will have little impact upon global carbon dioxide concentrations. Indeed, the challenges presented by the control and regulation of carbon dioxide have no parallels in the history of emission regulation.

[xi] National Energy Technology Laboratory, Cost and Performance Baseline for Fossil Energy Plants, DOE/NETL-2007/1281,

http://www.netl.doe.gov/energy-analyses/pubs/Bituminous%20Baseline_Final%20Report.pdf

[xii] Ibid.

[xiii] Energy Information Administration, Assumptions to the Annual Energy Outlook 2008, Table 44, http://www.eia.doe.gov/oiaf/aeo/assumption/electricity.html

[xiv]Ibid.

[xv] Email from J. Kukielka ,NETL to M. Hutzler, IER, January 9, 2009.

[xvi] Environmental Protection Agency, Air Trends, http://www.epa.gov/airtrends/.

[xvii] Kenneth P. Green et. al, Climate Change: Caps vs. Taxes, American Enterprise Institute, (June 2007) http://www.aei.org/publications/filter.all,pubID.26286/pub_detail.asp

[xviii] See European Union, Emissions trading: 2007 verified emissions from EU ETS businesses, May 23, 2008, http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/787&format=HTML&aged=0&language=EN&guiLanguage=en

[xix] Keeping Our Eyes on the Wrong Ball, 2/21/09, http://www.carbonfees.org/home/Cap-and-TradeVsCarbonFees.pdf

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The Energy Information Administration (EIA) produces forecasts of energy supply and demand for the next 20 years using the National Energy Modeling System (NEMS)[1]. These forecasts are updated annually and published in the Annual Energy Outlook (AEO).[2] All sectors of the energy system are represented in NEMS, including the electric power generation, transmission, and distribution system.

To meet electricity demand, the EIA represents the existing generating plants, retires those that have come to the end of their economic life, and builds additional plants to meet projected demand from the residential, commercial, industrial, and transportation sectors. As a result, EIA must represent a slate of technologies, their capital and operating costs, their availability and capacity factors, the financial structure and subsidies, the time to construct the plant, the utilization of the plant, and expected future cost changes, including fuel input for fossil and nuclear plants.

To determine the most economic technology for the type of demand (base, intermediate, or peaking load) for which new capacity is needed, NEMS competes the technologies based on the economics of their levelized costs. Levelized costs represent the present value of the total cost of building and operating a generating plant over its financial life, converted to equal annual payments and amortized over expected annual generation from an assumed duty cycle.

The table below provides the average national levelized costs for the generating technologies represented in the AEO2010 reference case.[3] The values shown in the table do not include financial incentives such as state or federal tax credits, which impact the cost and the competitiveness of the technology. These incentives, however, are incorporated in the evaluation of the technologies in NEMS based on current laws and regulations in effect at the time of the modeling exercise, as well as regional differences in the cost and performance of the technology, such as labor rates and availability of wind or sun resources.

In the AEO2010 reference case, a 3-percentage point increase in the cost of capital is added when evaluating investments in greenhouse gas intensive technologies such as coal-fired power plants without carbon capture and sequestration (CCS) technology and coal-to-liquids plants. The 3-percentage point adjustment is similar to a $15 per ton carbon dioxide emissions fee when investing in a new coal plant without CCS technology. This adjustment represents the implicit hurdle being added to greenhouse gas intensive projects to account for the possibility that they may need to purchase allowances or invest in other greenhouse gas emission-reducing projects that offset their emissions in the future. Thus, the levelized capital costs of coal-fired plants without CCS are likely higher than most current coal project costs.

The levelized cost for each technology is evaluated based on the capacity factor indicated, which generally corresponds to the maximum availability of each technology. However, some technologies, such as a conventional combined cycle turbine, that may look relatively expensive at its maximum capacity factor may be the most economic option when evaluated at a lower capacity factor associated with an intermediate load rather than base load facility.[4]

Simple combustion turbines (conventional or advanced technology) are typically used for peak load, and are thus evaluated at a 30 percent capacity factor. Intermittent renewable resources, e.g. wind and solar, are not operator controlled, but dependent on the weather or the sun shining. Since the availability of wind or solar is dependent of forces outside of the operator’s control, their levelized costs are not directly comparable to those for other technologies although the average annual capacity factor may be similar. Because intermittent technologies do not provide the same contribution to system reliability as technologies that are operator controlled and dispatched, they may require additional system investment as back-up power that are not included in the levelized costs shown below.

Levelized Cost of New Generating Technologies, 2016

($2008 per megawatt hour)

Source: Energy Information Administration, Annual Energy Outlook 2010, http://www.eia.doe.gov/oiaf/aeo/electricity_generation.html

[1] Energy Information Administration, NEMS documentation, http://www.eia.doe.gov/oiaf/aeo/overview/index.html

[2] Energy Information Administration, Annual Energy Outlook 2010, http://www.eia.doe.gov/oiaf/aeo/index.html

[3] Energy Information Administration, Annual Energy Outlook 2010, http://www.eia.doe.gov/oiaf/aeo/electricity_generation.html

[4] Base load plants are facilities that operate almost continuously, generally at annual utilization rates of 70 percent or higher. Intermediate load plants are facilities that operate less frequently than base load plants, generally at annual utilization rates between 25 and 70 percent. Peaking plants are facilities that only run when the demand for electricity is very high, generally at annual utilization rates less than 25 percent.

Despite advocates’ claims to the contrary, wind and solar continue to be the most expensive sources of electricity. The New York Times recently reported that “wind power is currently more than 50 percent more expensive than power generated from a traditional coal plant.” [1] Energy Secretary Stephen Chu told the New York Times that solar technology would have to get five times better to be competitive in today’s energy market.[2] In spite of these reports and admissions, the public relations campaign for wind and solar powered electricity marches on.

For decades, representatives and advocates of wind and solar have claimed that their technology was near a competitive tipping point—but just needed a bit more subsidies, set-asides, and government aid to succeed. But even after 30 years of massive subsidies, wind and solar continue to be more expensive and contribute only a small amount of electricity. In 2008, wind produced 1.3% of the electrical generation in America and solar produced a meager 0.02%.[3]

The quotations below highlight the errant predictions of near-term viability (with the predictions bolded for emphasis). These are just some of the examples of over 30 years of claims that wind and solar will soon be cost competitive.

Overly Optimistic Wind/Solar Claims

In 1983, Booz, Allen & Hamilton did a study for the Solar Energy Industries Association, American Wind Energy Association, and Renewable Energy Institute. It stated: “The private sector can be expected to develop improved solar and wind technologies which will begin to become competitive and self-supporting on a national level by the end of the decade [i.e. by 1990] if assisted by tax credits and augmented by federally sponsored R&D.”[4]

In 1986, Amory Lovins of the Rocky Mountain Institute lamented the untimely scale-back of tax breaks for renewable energy, since the competitive viability of wind and solar technologies was “one to three years away.”[5]

In 1990, two energy analysts at the Worldwatch Institute predicted an almost complete displacement of fossil fuels in the electric generation market within a couple decades [i.e. 2010]:

Within a few decades, a geographically diverse country such as the United States might get 30 percent of its electricity from sunshine, 20 percent from hydropower, 20 percent from wind power, 10 percent from biomass, 10 percent from geothermal energy, and 10 percent from natural-gas-fired cogeneration.[6]

Overly Optimistic Wind Power Claims

In 1986, a representative of the American Wind Energy Association testified:

The U.S. wind industry has … demonstrated reliability and performance levels that make them very competitive. It has come to the point that the California Energy Commission has predicted windpower will be that State’s lowest cost source of energy in the 1990s, beating out even large-scale hydro.

…

We are not quite there. We have hopes.[7]

Christopher Flavin of the Worldwatch Institute has been predicting competitive viability since the 1980s. In 1984 he wrote:

Tax credits have been essential to the economic viability of wind farms so far, but will not be needed within a few years.[8]

In 1985, he wrote:

Although wind farms still depend on tax credits, they are likely to be economical without this support within a few years.[9]

In 1986, he wrote:

Early evidence indicates that wind power will soon take its place as a decentralized power source that is economical in many areas…. Utility-sponsored studies show that the better windfarms can produce power at a cost of about 7¢ per kilowatt-hour, which is competitive with conventional power sources in the United States.[10]

Overly Optimistic Solar Power Claims

In 1976, solar advocate Barry Commoner stated:

Mixed solar/conventional installations could become the most economical alternative in most parts of the United States within the next few years.[11]

In 1987 the head of the Solar Energy Industries Association stated:

I think frankly, the—the consensus as far as I can see is after the year 2000, somewhere between 10 and 20 percent of our energy could come from solar technologies, quite easily.[12]

In 1988, Cynthia Shea of the Worldwatch Institute wrote:

In future decades, [photovoltaic technologies] may become standard equipment on new buildings, using the sunlight streaming through windows to generate electricity.[13]

Conclusion

Wind and solar should not be thought of as “infant industries” but as government-dependent industries that penalize consumers and/or taxpayers. “Buyer beware” should also apply to the purveyors of political energy. Self-interested consumer decisions in the energy marketplace should be respected—and false promises about inferior energies exposed—for good public policy outcomes.

[2] John Broder and Matthew Wald, “Big Science Role Is Seen in Global Warming Cure,” New York Times, February 11, 2009 (available at http://www.nytimes.com/2009/02/12/us/politics/12chu.html).

[3] Energy Information Administration, Net Generation by Energy Source: Total (All Sectors), Mar. 24, 2009, http://www.eia.doe.gov/cneaf/electricity/epm/table1_1.html; Energy Information Administration, Net Generation by Other Renewables: Total (All Sectors), Mar. 24, 2009, http://www.eia.doe.gov/cneaf/electricity/epm/table1_1_a.html.

[4] Renewable Energy Industry, Joint Hearing before the Subcommittees of the Committee on Energy and Commerce et al., House of Representatives, 98^th Cong., 1^st sess. (Washington, D.C.: Government Printing Office, 1983), p. 52.

[5] Lovins, in K. Wells, “As a National Goal, Renewable Energy Has An Uncertain Future.” Wall Street Journal, February 13, 1986, pp. 1, 19 at 19.

[6] Christopher Flavin and Nicholas Lenssen, Beyond the Petroleum Age: Designing a Solar Economy (Washington: Worldwatch Institute, 1990), p. 47.

[7] Statement of Michael L.S. Bergey, American Wind Energy Association in Renewable Energy Industries, Hearing before the Subcommittee on Energy Conservation and Power of the Committee on Energy and Commerce, House of Representatives, 99^th Cong., 2^nd sess. (Washington, D.C.: Government Printing Office, 1986), p. 129.

[8] Christopher Flavin, “Electricity’s Future: The Shift to Efficiency and Small-Scale Power,” Worldwatch Paper 61, Worldwatch Institute, November 1984, p. 35.

[9] Christopher Flavin and Cynthia Pollock, “Harnessing Renewable Energy,” in Worldwatch Institute, State of the World 1985 (New York: W. W. Norton, 1985), p. 197.

[10] Christopher Flavin, “Electricity for a Developing World: New Directions,” Worldwatch Paper 70, Worldwatch Institute, June 1986, p. 53.

[11] Barry Commoner, The Poverty of Power (New York: Alfred A. Knopf, 1976), p. 151.

[12] Scott Sklar, Solar Energy Industries Association. Quoted in Solar Power, Hearing before the Subcommittee on Energy and Power of the Committee on Energy and Commerce, House of Representatives, 100^th Cong., 1^st sess. (Washington, D.C.: Government Printing Office, 1987), p. 12.

[13] Cynthia Shea, “Renewable Energy: Today’s Contribution, Tomorrow’s Promise,” Worldwatch Paper 81, Worldwatch Institute, January 1988, p. 44.

The most popular way to regulate carbon dioxide emissions is through a cap and trade program. President Obama and many policymakers support some form of this regulatory policy. Cap and trade aims to cap emissions of carbon dioxide at a politically-determined level and then have the users and producers of oil, coal, and natural gas buy, sell, and trade their allowance to emit a given amount of carbon dioxide. Cap and trade will increase the price of oil, coal, and natural gas in an effort to force users to switch to other, less reliable, more expensive forms of energy.

These proposals are very, very costly and economically damaging. If enacted, last year’s flagship cap and trade proposal, the Lieberman-Warner bill, would increase the cost of gasoline by anywhere from 60 percent to 144 percent and increase the cost of electricity by 77 to 129 percent.

Up to four million Americans would lose their jobs under the program, which amounts to a $4,022 to $6,752 loss in disposable income per household. In return, we could have expected a 63 percent emissions cut. President Obama’s budget proposes to cut carbon dioxide emissions by 83 percent. If successful, it’s reasonable to conclude it would lead to even greater economic hardship than envisioned under Lieberman-Warner.

Other problems inherent in cap and trade exist, and they are manifold. What follows is a brief explanation of some of the most glaring:

Reasons why Cap and Trade is a Bad Idea:

1. The point of cap and trade is to increase the price of energy. Cap and trade is designed to increase the price of 85 percent of the energy we use in the United States. That is the point. For it to “work,” cap and trade needs to increase the price of oil, coal, and natural gas to force consumers to use more expensive forms of energy. President Obama’s OMB director, Peter Orszag, told Congress last year that “price increases would be essential to the success of a cap and trade program.”[1]

2. Cap and trade schemes for carbon dioxide have not worked to reduce emissions. Europe’s Emissions Trading Scheme (ETS) began in 2005. The first phase, from 2005 to2007, did not reduce carbon dioxide emissions. Instead, overall emissions increased 1.9 percent over that period.[2] The reason is simple: European politicians know that cap and trade is economically harmful and do not want these policies to cost more jobs, especially during these difficult economic times. German Chancellor Angela Merkel recently stated that she would not allow EU climate regulations to go forward that would “take decisions that would endanger jobs or investments in Germany.”[3]
3. Cap and trade will harm the poor. According to the Congressional Budget Office, the costs of reducing carbon dioxide emissions would disproportionally harm the poor. A mere 15 percent decrease in carbon dioxide emissions would cost the lowest-income Americans 3.3 percent of their income, but only 1.7 percent of the income of higher income households.[4] President Obama wants to decrease greenhouse gas emissions by 83 percent, not a mere 15 percent. This will entail much greater economic sacrifice among those who have the least to spare.

   

4. Cap and trade harms energy security. Some proponents of cap and trade claim that cap and trade will improve energy security. Unfortunately, this is exactly backwards—a cap and trade scheme will undermine and erode our nation’s energy security. When many people express concern about energy security, they are concerned about oil imported from foreign countries. They do not realize that domestically produced oil is our number one source of oil[5] and Canada is our number source of oil outside the U.S. During 2007, the last complete year for which data is available, only 17 percent of the oil we consumed came from the Middle East.[6]

   But cap and trade will assess a heavy penalty on Canadian oil. Much of the oil we get comes from its vast reserves of oil sands. Because it requires more energy to extract the resources from those sands than it does to produce oil in the Middle East, cap and trade will make Canadian oil more expensive than oil from the Middle East.

   Cap and trade, therefore, creates incentives to import more oil from the Middle East, not less. Cap and trade also penalizes domestic oil extraction from oil shale. In Colorado, Utah, and Wyoming, estimates suggest that 800 billion barrels of oil resources are ready to be produced.[7] For a sense of scale, that’s more than three times as much oil as Saudi Arabia has in its reserve. Also, the U.S. has the world’s largest coal reserves.[8] At current usage rates, we have 200-250 years of demonstrated coal reserves.[9] Coal-to-liquids could give the U.S. much larger reserves of petroleum fuels.

5. Cap and trade for sulfur dioxide emissions is not comparable to cap and trade for carbon dioxide. Proponents of cap and trade point to the sulfur dioxide program as an example of how easy and effective it would be to institute an economy-wide cap and trade program for CO2. But sulfur dioxide and carbon dioxide emissions are not comparable. When the sulfur dioxide program started, it targeted only 110 coal-fired power plants. Later, it was expanded to 445 power plants.[10] Greenhouse gas emissions are released from millions of sources, including electricity production, planes, trains, automobiles, ships, home furnaces, fertilizer production, farm animals, and millions of other sources, including humans. Regulating millions of different and individual sources of emissions is considerably different from regulating 445 plants.

   Also, many low-cost sulfur dioxide control options existed when the program took effect.[11] This is not the case with carbon dioxide control technologies. There are no control technologies that are commercially available at commercially-competitive prices. One way to reduce sulfur dioxide emissions was to use “low-sulfur coal” but there is no “low-carbon dioxide coal.”[12]

   Indeed, the cost-effective way to reduce carbon dioxide emissions is to use less energy. But energy is the lifeblood of the economy. Energy allows us to do more work with less time and effort. As a result, there is a strong correlation between energy use and economic prosperity, as the chart below demonstrates:

   

6. A domestic cap and trade program, 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.[13] 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.[14] 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,[15] which makes unilateral efforts— such as a domestic cap and trade program—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.[16] 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.[17] Increases in worldwide carbon dioxide emissions are driven by developing economies, not the United States.

7. A domestic cap and trade program 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,[18] even though we have the world’s sixth largest proven natural gas reserves.[19] The high price of natural gas has significantly contributed to the loss of more than 3,000,000 manufacturing jobs since 2000.[20] Cap and trade 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 the individual. 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.

8. A cap that is set at the 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.[21] 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. Take for example former Vice President Al Gore’s 2007 proposal. It sought 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.[22]

[1] Peter R. Orszag, Implications of a Cap-and-Trade Program for Carbon Dioxide Emissions before the Committee on Finance United States Senate, Apr. 24, 2008, http://www.cbo.gov/ftpdocs/91xx/doc9134/04-24-Cap_Trade_Testimony.pdf.

[2] See European Union, Emissions trading: 2007 verified emissions from EU ETS businesses, May 23, 2008, http://europa.eu/rapid/pressReleasesAction.do?reference=IP/08/787&format=HTML&aged=0&language=EN&guiLanguage=en

[3] AFP, Merkel to Defend German Jobs Against Climate Deal, Dec. 8, 2008, http://www.google.com/hostednews/afp/article/ALeqM5g4WO_672V3miIHKWLT32C99ui-2g.

[4] Congressional Budget Office, Trade-Offs in Allocating Allowances for CO2 Emissions, Apr. 25, 2007, http://www.cbo.gov/ftpdocs/80xx/doc8027/04-25-Cap_Trade.pdf.

[5] See Energy Information Administration, Crude Oil Production, http://tonto.eia.doe.gov/dnav/pet/pet_crd_crpdn_adc_mbblpd_m.htm The U.S. produces around 5,000,000 barrels of oil per day. We import about 2,000,000 barrels of oil a day from Canada, out largest oil supplier. See Energy Information Administration, Crude Oil and Total Petroleum Imports top 15 Countries, http://www.eia.doe.gov/pub/oil_gas/petroleum/data_publications/company_level_imports/current/import.html.

[6] See Energy Information Administration, Annual Energy Review 2007.

[7] Task Force of Strategic Unconventional Fuels, Development of America’s Strategic Unconventional Fuel Resources p. 5, Sept. 2006, http://www.fossil.energy.gov/programs/reserves/npr/publications/sec369h_report_epact.pdf.

[8] Energy Information Administration, Coal Reserves, Feb. 2008, http://www.eia.doe.gov/neic/infosheets/coalreserves.html.

[9] Energy Information Administration, Coal—A Fossil Fuel, July 2008, http://www.eia.doe.gov/kids/energyfacts/sources/non-renewable/coal.html.

[10] Kenneth P. Green et. al, Climate Change: Caps vs. Taxes, American Enterprise Institute, (June 2007) http://www.aei.org/publications/filter.all,pubID.26286/pub_detail.asp

[11] Id.

[12] Id.

[13] 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.

[14] 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.

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

[16] 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.

[17] 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.

[18] 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.

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

[20] See Testimony of Paul N. Cicio.

[21] 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.

[22] Id. at 20.

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.