The proponents of renewable energy like to argue that renewables are cost-effective and create jobs, despite mountains of evidence to the contrary. One of the latest examples of this was a recent post put out under the auspices of Joe Romm’s “ClimateProgress” blog seeks to debunk the “myth” that government regulations increase electricity prices for consumers. The writer, Stephen Lacey, fails to make his case, relying either on calculations showing that the burden is merely shifted to taxpayers, or on “experience” that doesn’t really test the full brunt of the proposed regulations.

On top of all that, there is always the basic argument that we at IER make: If the folks at ThinkProgress really believe what they are saying—namely, that converting to windpower and reducing carbon dioxide emissions will save money and generate economic growth in addition to the alleged climate benefits—then why does the government need to force private industry to make these changes? Do businesspeople not want to make more money?

Wind Power Is Cost Effective?

In the first half of the post, Lacey takes on the “Minnesota Free Market Institute and the American Tradition Institute,” who had “released a joint report projecting that Minnesota’s Renewable Portfolio Standard (RPS) – 20% renewable electricity by 2025 – would cause rates to jump by up to 37% by that date.”

In order to try to rebut this projection, Lacey quoted from another story:

Xcel Energy, the state’s largest utility, has come up with a much smaller number: $0.003. That’s the difference Xcel forecasts between its projected per-kilowatt-hour energy price in 2025 under its proposed wind expansion plan compared to a hypothetical scenario in which it stopped adding new wind capacity after 2012.

Asked to comment on the Free Market Institute’s study, Xcel Energy spokesman Steve Roalstad said, “It doesn’t seem to be moving in that direction.” The cost of adding renewable energy sources, especially wind, continues to fall and has become very competitive with traditional generating sources, he said.

Lacey then quotes a different utility company from the same article:

Otter Tail Power, which serves about 130,000 customers in the Dakotas and western Minnesota, has had a similar experience. Todd Wahlund, Otter Tail’s vice president for renewable energy development, said the company would have added wind capacity regardless of Minnesota’s renewable standard. That’s because it’s been the most economical option.

“Absent these wind resource additions, an alternative resource would have been needed, and from our analysis, other options would have been higher cost,” Wahlund said.

To repeat our argument: If Lacey really believes these representatives from the power companies, then there is no need for government mandates. Let wind power prove its cost effectiveness in the open market.

As an aside, since when did progressive start believing self-serving statements from large businesses? These companies have every incentive to say in public statements that the cost of wind power is low.

Climate Progress’ interview with Tam Hunt, “a California lawyer focused on clean energy issues,” was a little closer to the truth. When asked whether mandates for renewables would raise rates for consumers, Hunt said:

Wind power has shown to be particularly cost effective for ratepayers with either a tax credit or a grant. And looking forward, while natural gas prices are low today, I think there’s a very real possibility that prices could rise substantially. Historically, natural gas fields have a high up-front profile, but decline very fast. So with renewables, you can provide a hedge for that fuel volatility. There’s a lot of hype over how these programs will raise rates, but we haven’t seen it and I don’t think we’ll see it.

Well yes, with a big enough tax credit or grant, you can make anything “particularly cost effective for ratepayers.” What people aren’t seeing in their utility bill, they are seeing in their tax bill.

In reality, it’s inaccurate to say “wind is good for consumers” or “wind is inefficient.” Such blanket statements are too broad. Even without government support, wind can serve a small but important niche to supplement other, more reliable forms of electrical generation. It’s also important to look at the levelized cost of new generating technologies, since the intermittent nature of wind can make it appear cheaper than it really is.

Rather than point to estimates of what might happen in the future, we can look at wind-heavy Denmark, which has the highest electricity rates in Europe.

Cap and Trade No Big Deal Either?

After arguing that mandates for wind power won’t hurt consumers, Lacey tackles cap and trade too:

The same goes for carbon cap and trade. The nation’s first carbon trading system, the 10-state Regional Greenhouse Gas Initiative (RGGI) in the Northeastern U.S., has been falsely labeled by groups like Americans for Prosperity as a “job killer” that will raise rates by up to 90%. Yes, you read that correctly: 90%.

The reality? To date, the rate impacts of RGGI have been so miniscule, it’s been very difficult to separate them from other costs in the system…

Lacey is probably right that the rate impacts of RGGI have been small, but he’s right for the wrong reasons. RGGI is probably not having a large impact on electricity prices because RGGI is not having an impact on the electricity market, other than raising millions of dollars in taxes.

RGGI’s website describes RGGI as “the first market-based regulatory program in the United States to reduce greenhouse gas emissions. Ten Northeastern and Mid-Atlantic states have capped and will reduce CO2 emissions from the power sector 10 percent by 2018.” [emphasis added]

The reality is that carbon dioxide emissions reductions in the RGGI states have already far exceeded RGGI’s goals. In fact, carbon dioxide emissions from power plants are down by more than 30 percent—three times more than RGGI’s goals. But the emissions are not down because of RGGI, but because of a weak economy, the shale gas boom, and cooler summers lately. In fact, E&E News reported, “the consultancy ICF International has told RGGI members that their system isn’t contributing to lowering emissions in the Northeast, nor would it ever.” Because RGGI isn’t contributing to lowering emissions, we shouldn’t be surprised that it  hasn’t led to dramatically higher electricity prices.

Lacey also makes the mistake of arguing that RGGI is creating jobs, apparently out of thin air. He writes that, “Rather than kill jobs and hurt ratepayer’s pocketbooks, the program has boosted economic activity: In Connecticut, 2,500 direct jobs were created through energy efficiency programs helped by RGGI; in New Hampshire, 2009 investments in efficiency helped train an additional 170 workers…”

This type of facile economic reasoning has been debunked for literally centuries and still some people fall for the fallacious reasoning. The money for the energy efficiency programs came from ratepayers. RGGI might not have dramatically increased electricity rates, but it did lead to increased electricity rates and those increases went into a fund which spends money on energy efficiency programs. Lacey is point to the spending from the fund as creating jobs, while failing to note all of the jobs that would have been created in other fields by ratepayers if they had been able to keep their money.

It’s also worth reminding our friends at Climate Progress that the whole point of the “market-based” cap and trade program is to raise prices and make consumers alter their behavior. As a well-known progressive famously put it in January 2008:

Conclusion

This recent Climate Progress blog post repeats the familiar pattern: Advocates for government intervention into the energy markets claim that certain disaster will occur if we allow the free market to run its natural course. Yet when critics warn that these interventions will cost jobs and raise costs, the interventionists respond that these things will actually help businesses. If this is true, why the government mandates, subsidies, and preferential tax treatment?

If the advocates of intervention want to argue that private business is ignoring the “externalities” of climate change, and that conventional measures of income, GDP, and job growth will have to be sacrificed for the more important long-term goal of averting climate damage, that is a respectable argument. We would still disagree with the conclusions, but at least such an argument at least makes sense.

Yet the climate alarmists are not willing to admit the true impact of their proposals, because they know most Americans would not support them. Therefore they pretend that businesses are for some reason lobbying against regulations that would make them more money.

Daniel Simmons contributed to this post.

President Obama hailed the appointment of Mr. Bryson as being key to helping the United States’ clean energy industry—and there is no doubt that he will be a staunch ally in that regard. Mr. Bryson, a former utility executive, was a co-founder of the Natural Resources Defense Council, an environmental advocacy group that has lobbied vigorously for regulations on carbon dioxide emisssions and for renewable energy subsidies. Since September 2010, Mr. Bryson has been chairman of BrightSource Energy Inc., a solar power plant developer and recent beneficiary of a $1.6 billion loan guarantee—funded by the U.S. government with stimulus money—to build a massive solar complex in the Mojave Desert.

It is also troubling to note that Mr. Bryson’s confirmation would make him the top official at an agency that includes the National Oceanic and Atmospheric Administration—the U.S. regulator responsible for oversight and protection of the U.S.’ oceans and atmosphere. A former member of the United Nations’ advisory group on climate change, Mr. Bryson notably referred to the Democratic climate change bill passed by the House in 2009—also known as Waxman-Markey—as being “moderate” in its approach, even though a study by the American Council for Capital Formation (ACCF) and the National Association of Manufacturers (NAM) found that implementing Waxman-Markey would result in economic losses up to $571 billion by 2030, and up to 2.4 million lost jobs. Furthermore, under the cap-and-trade program, gasoline prices were forecasted to increase 20 to 26 percent, residential electricity prices by 31 to 50 percent, residential natural gas prices by 56 to 74 percent, and coal prices to electric utilities increase a whopping 565 to 755 percent in 2030. And yet, for Mr. Bryson, this doesn’t push the envelope far enough.

Indeed, Mr. Bryson’s long history of environmental advocacy and his ties to the subsidy-dependent green industry seem to be principal reasons for his appointment as Commerce Secretary. “In the years ahead, a key to achieving our export goal will be promoting clean energy in America. It’s how we’ll reduce our dependence on foreign oil,” President Obama said in his nomination announcement. ”John understands this better than virtually anybody,” he went on, “Throughout a distinguished career in which he’s led nonprofits, government agencies and large companies, he’s been a fierce proponent of alternative energy.”

President Obama’s belief that clean energy investments will offset our dependence on foreign oil in the short-term is misplaced, given that oil is used predominantly as a transportation fuel and produces less than 1 percent of U.S. electricity. This scenario would only be feasible were many of the United States’ 250 million passenger vehicles to be changed over to electric models, and only if the United States switched from using coal to produce 45 percent of its electricity to mostly alternative energy sources. Ultimately, the wisdom of this goal is questionable given that generating electricity from wind and solar is substantially more expensive than burning coal—more than triple the cost, in the case of photovoltaic solar.

Lastly, the idea that massive subsidies for alternative energy will significantly benefit the U.S. economy is disingenuous, as promised “green jobs” continue not to materialize. In any event, alternative energy promotion should not be the focal point of Commerce’s mission, nor a factor in the selection of its top official. Mr. Bryson should be thoroughly vetted by Congress to ensure that his background and experience are appropriate for the position of our nation’s chief economic advocate, and as the top official in charge of its regulating its oceans and atmosphere.

Alan Blinder, Professor of Economics at Princeton University

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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

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

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

The midterm election results have given activists a two-year timeout to rethink, regroup, and come up with a new strategy for pushing the government to tackle climate change. That new strategy should abandon Wall Street’s preferred cap-and-trade method in favor of some type of carbon tax that returns money to households, movement leaders are now saying.

They find themselves in this new difficult position because absolutely nothing will happen in Congress once Republicans regain control of the House next year and expand their numbers in the Senate. And the election and the emergence of the tea party movement mean previous climate change bills are now history and gridlock will be the order of the day in Washington, at least until the next midterm vote in 2012.

That’s the message four congressmen and pro-climate action experts gave to an audience still reeling from the election results of three weeks ago, which saw climate change skeptics do well while some proponents of curbing greenhouse gases were voted out of office.

Those who believe that a cap-and-trade program would prove economically destructive—while doing little if anything to benefit future generations in terms of climate—should not assume that a carbon tax will be politically impossible in the future.

For one thing, government at all levels will likely continue to suffer recurring fiscal crises over the next several years. The Social Security system is already sending out more in benefits checks, than it is collecting from workers. If unemployment remains high, the Social Security system might never return to the black. Starved for revenue, and threatening major cuts in entitlements, the government might cast a carbon tax as a “win-win” for the public.

Furthermore, the battle over cap-and-trade may have erroneously led even free-market economists to believe that an explicit carbon tax carried few disadvantages. For example, critics of cap-and-trade focused (justifiably so) on the fact that it would redistribute wealth into the pockets of wealthy insiders. Since an explicit carbon tax would have visible revenue streams, some analysts might conclude that it is an “efficient” way to deal with climate change and budget deficits at the same time.

A Real-World Carbon Tax Will Be Economically Destructive

Even though it doesn’t give the same opportunity for backdoor subsidies as cap-and-trade did, a carbon tax is still very dangerous. In a 2009 peer-reviewed article in The Independent Review, I analyzed one of the leading models of the global economy and climate. The model was developed by William Nordhaus, who is a proponent of carbon taxes.

Nonetheless, Nordhaus showed that once we leave the textbook world of “optimal” carbon taxes implemented faithfully across the world, then the case for such government intervention becomes far weaker. For example, Nordhaus’ model reveals that if only half of the world’s emissions are subject to the “optimal” tax regime, then the economic sacrifice necessary to achieve a given environmental objective will be 250 percent higher.

Even worse, if the politicians impose too stringent a limit—i.e. set the carbon tax too high—then the economic costs far outweigh the environmental gains, and this is true even in the model. For the most extreme example, Nordhaus’ model shows that an “optimal” tax would yield the world net benefits of about $3 trillion. (The economy would forfeit $2 trillion in output because of the tax, but the reduced emissions would avert $5 trillion in climate change damages.)

But instead of the theoretically optimum tax, what if the government instead implemented a carbon tax to achieve Al Gore’s proposal of a 90 percent emissions reduction? In that case, the world would suffer net costs of $21 trillion. Yes, $12 trillion of climate change damages would be averted, but this would be swamped by about $34 trillion in economic costs due to the draconian carbon tax necessary to achieve such a huge curtailment in emissions.

Conclusion

Even though cap-and-trade may be dead for the foreseeable future, its proponents are apparently regrouping in order to push through an explicit carbon tax. But even a leading model developed by a proponent of carbon taxes, shows that an aggressive tax poses far greater risks to humans than a warming climate.

“Any dime-store pundit can tell you this election was about jobs and the economy, but any politician who fails to appreciate the role that reliable, affordable energy can and must play in growing and strengthening both – well, let’s just say he probably shouldn’t sign anything longer than a two-year lease.

“You name the issue: From cap-and-trade, to EPA’s criminalization of coal, to the White House’s decision to impose an offshore moratorium based on rank politics instead of sound science – every one of these phenomena have contributed to the difficult and protracted economic circumstances in which we find ourselves today.

“You name the individual race: If at first glance it doesn’t appear as if energy played a prominent part in determining its outcome, ask yourself what that district’s unemployment rate would be if even a modest portion of America’s massive, yet largely idle energy resource base was allowed to be accessed, produced, and delivered by and for the American people. Then ask yourself how many incumbents typically get voted out of office when next to none of their constituents are out of work.

“Tonight certainly appears to be a good night for Republicans – but whether any of that translates into real, substantive action in delivering on the promise and potential of America’s energy future remains to be seen. We won’t know that for some time, but here’s what we do know: The American people have spoken, elections have consequences, and those who stood on the wrong side of the public on the twin issues of energy and the economy don’t have to look far for reasons they lost.”

Unless you have been living under a rock lately, you are probably aware that the Republicans are poised to take over the House of Representatives and might even capture the Senate at the start of the 112^th Congress. Regardless of the outcome on Election Day, one thing is clear – the GOP will have a say in shaping federal energy policy for the remainder of President Obama’s first term.

Some suggest the situation will improve if the “all-of-the-above” Republicans increase their clout in Washington. Recent developments, however, suggest that any improvements will be more modest and marginal than dramatic and helpful. It seems that some in the GOP still don’t quite understand what is happening out there in the real world—particularly among their supporters.

Indiana Governor Mitch Daniels, the darling du jour of the fiscal conservative set, thinks it is “fully justifiable” to punish American consumers for the fiscal sins of our elected leaders with a tax on oil imports. This is probably not the best way to launch an economic recovery or a long-shot presidential primary bid.

And in spite of his tireless pursuits this past year, Republican Senator Lindsay Graham (along with Democrat Sens. Kerry and Lieberman) failed to deliver a hybrid cap-and-trade/gas tax bill known as K-G-L for his New York acquaintances. As a consolation prize for this failed bid, Senate Majority Leader Harry Reid has green-lighted precious floor time during the Lame Duck session for a renewable energy mandate – if proponents can show they have the sixty votes.

Enter Senator Sam Brownback.

The Kansas Republican is very busy these days, simultaneously running for governor and corralling GOP votes for the renewable mandate. Though it is slow going, he can count among his recruits Maine Senator Susan Collins, co-author of…wait for it…a carbon tax. Brownback has placed another GOP’r, Senator Chuck Grassley, in the maybe category, “if you add ethanol to it,” says the Senator from the Sunflower State.

No to be out staged, Senator Lamar Alexander is making his energy priorities for the 112^th Congress clear. In a recent Politico article, Lamar says he hasn’t “come to a conclusion yet on how to deal with a cap on utilities,” but he most certainly favors the concept. In the same article, Collins restates her case for a carbon tax, while Senator Scott “41” Brown, calls Collins’ approach “a smart idea.”

And while it is a laudable policy goal, let’s not forget that – above all else – the stated purpose of Energy Committee Ranking Republican turned “write-in” Senator Lisa M-u-r-k-o-w-s-k-i’s drive to prevent the EPA from mandating greenhouse gas rules is to preserve Congress’ prerogative to regulate carbon.

At this point, many of you are probably thinking these criticisms are a bit unfair. After all, we’re mostly talking about the Senate. Surely the House Republicans will be much more reasonable.

Think again.

Congressman James Sensenbrenner from Wisconsin, who is currently the ranking Republican on something called the Select Committee on Energy Independence and Global Warming, argued strongly that the Select Committee should not be dissolved in the 112th Congress (with him serving as chairman, naturally). Speaker Pelosi as payoff to her pal, Rep. Ed Markey, invented this committee. It has no legislative authority; it has no oversight jurisdiction; it duplicates the work of at least three other committees; it is “feathers on a fish,” according to Rep. John Dingell, the dean of the House. The fact that Sensenbrenner, regardless of his rationale, is unable or unwilling to look beyond his own parochial interests and call for an end to this charade of a committee is a discouraging sign.

Similarly, Congresswoman McMorris Rodgers from Washington, who as vice Chair of the Conference is a member of the House Republican leadership, recently praised the Council of Environmental Quality (CEQ) for issuing guidance differentiating greenhouse gas emissions originating from fossil fuels and those from biofuels (like ethanol). It might be helpful to remember that previously EPA had the temerity to note that when you include land use effects, corn-based ethanol actually results in higher greenhouse gas emissions than conventional gasoline over its entire lifecycle.

Such a detail, it seems, could not even slow down the normally reliable McMorris Rodgers, who commended “CEQ for its decision, while also encouraging them to work with other federal agencies – especially the Environmental Protection Agency, which continues to not differentiate between biogenic emission sources and those from fossil fuels – in developing a sensible, consistent, scientifically-based policy that recognizes the carbon-neutrality of biogenic sources.”

For those who have trouble translating Washington-speak into plain English, let me provide an assist. The White House wants federal agencies to pretend that the production and use of ethanol and other biofuels do not result in increased greenhouse gas emissions, irrespective of the facts. By praising this decision, Congresswoman McMorris Rodgers has alerted CEQ that at least some Republicans will be willing accomplices in this political subterfuge.

I am sure that some will say that these are mere aberrations, but a longer sweep of time suggests otherwise. When the Republicans are in charge, energy policy does not necessarily get more rational. It was the Republicans who imposed the Executive moratorium on offshore energy and refused to lift the Congressional moratorium when they controlled Congress. It was a Republican president (guess which one) who signed the ethanol mandate into law. It was that same Republican president who showered the wind lobby with all kinds of taxpayer goodies. A Republican lawmaker was the most significant advocate for phasing out fluorescent light bulbs. And Republicans led the parade for federal price controls on gasoline.

So there you have it – a tax on oil imports, cap-and-trade, a gasoline tax, a renewable energy mandate, a carbon tax, moratoria on oil and gas exploration and production, utility price caps, price controls, and yet another ethanol mandate – all supported by members of the Grand Old Party.

The lesson, for those paying attention, is clear. When it comes to energy policy, the Republicans, while perhaps not as hazardous as their counterparts, deserve to be watched closely.

Obama’s Major Energy Policy Goals

President Obama wants to reduce our over-reliance on fossil fuels, and he has made that his top priority for 2011. He wants to achieve that goal by reducing greenhouse gases and promoting renewable energy. The Obama administration’s preference is a cap-and-trade bill and a renewable electricity mandate. A cap-and-trade bill will put a limit on emissions of greenhouse gases and allow companies to trade credits so that those who can comply at lower cost would sell credits to other companies who would use them towards meeting their reductions. Many such bills have been proposed, and, in fact, the House of Representatives passed one this spring, though it was stalled in the senate. Included in some of those proposals was a renewable electricity standard that requires electric generating companies to produce a required amount of electricity from renewable sources of energy by a certain date or purchase credits from other companies that find it easier to comply.

If legislation doesn’t work, the Obama Administration has already set in motion a regulatory scheme to regulate greenhouse gases. The Environmental Protection Agency (EPA) is ready to control greenhouse gas emissions through the Clean Air Act. Beginning January 2011, the EPA will require facilities that need to obtain New Source Review permits for other pollutants based on the Clean Air Act to include greenhouse gases in those permits if they increase their emissions of those gases by at least 75,000 tons of carbon dioxide equivalent per year. Six months later, beginning July 1, 2011, the rule will be extended to additional facilities. The rule is “tailored” to be primarily aimed at power plants, refineries, and large industrial establishments, exempting smaller establishments such as farms, schools, and restaurants. According to EPA, the rule will encompass facilities that are responsible for 70 percent of the greenhouse gases from stationary sources.[ii] Although EPA wants to finalize the rule before January 2, 2010, there are a number of legal challenges to the rule, and it is anticipated that there will be legal delays.

How Is China Dealing With These Issues?

China has for a long time stated that they would not agree to fixed targets for greenhouse gas emissions reductions, but instead, they would reduce greenhouse gas intensity. Greenhouse gas intensity is the amount of greenhouse gas emissions per unit of Gross Domestic Product (GDP). Last year, China pledged it would cut the intensity of its carbon (the largest component of greenhouse gases) by 40 to 45 percent by 2020 from its 2005 level.[iii] One way to lower it is to increase energy efficiency and reduce energy intensity, the amount of energy used per unit of GDP. In 2005, China’s 11^th Five Year Economic Plan included a goal of reducing energy intensity by 20 percent between 2005 and 2010, which they most likely have exceeded, according to forecasts from the Energy Information Administration.[iv] The United States has been reducing its energy intensity for decades, having reduced it by over 40 percent between 1980 and 2008.[v]

China is willing to become more energy efficient as long as it does not hurt its economy. Reducing greenhouse gas emissions requires increasing the cost of fossil fuel-burning technologies through technology modifications that are not yet commercial or through the substitution of more expensive technology, which may also result in making some perfectly good existing technologies obsolete. The extra costs are passed onto consumers through their purchase of goods from manufacturing companies, power plants, and industrial facilities. Firms that cannot handle the increased cost based on their competition, at home and overseas, will either go under or move offshore where energy costs are more affordable.

China’s Energy Path

China is building renewable technologies, particularly hydropower and wind power, but it is also building coal-fired and nuclear power plants. In 2009, China built about 13 gigawatts of wind turbines, 3 gigawatts more than the United States, but they also built almost four times more total capacity than the United States, with the other technologies being mainly hydropower and coal. So while wind turbines represented about 55 percent of all of the new capacity built in the United States in 2009, it represented less than 20 percent of China’s new capacity.

The Chinese government has a target of building 300 gigawatts of hydroelectric capacity by 2020. That is almost four times the hydroelectric capacity the United States has currently or expects to have by 2020. China’s Three Gorges Dam project, which many at one time thought was not doable because of its engineering complexity, was completed in 2008 and now China plans to increase the capacity at that facility to 22.4 gigawatts by 2012, an additional 4.2 gigawatts. China also has projects on the Jinsha and Yalong rivers, scheduled to be completed within the next 5 years.[vi]

China has a goal, not a mandate, to produce 15 percent of its energy from non-hydroelectric renewables by 2020.[vii] China’s wind construction program has been aided by the Clean Development Mechanism of the United Nations, where wealthy countries can earn credits for greenhouse gas reductions by funding qualified renewable projects in developing countries. China was the main beneficiary of the U.N.’s program for many years.[viii] In fact, about 30 percent of their wind capacity is not operational because it is not connected to their electric grid.[ix]

China is the world’s largest consumer of coal, using more than three times the amount of coal that the United States uses. In 2009, China’s steel industry, which is fueled mainly by coal, increased by an estimated 13 percent. While China’s coal reserves are the third largest in the world, behind those of the United States and Russia, its production is not sufficient to meet its growing demand, and it must import coal from overseas and inland from Mongolia and Russia. To make coal imports more cost competitive, China removed its coal import tariffs, is planning to build strategic coal stocks to protect against volatility in coal import availability and prices, and is obtaining an influx of dry bulk carriers to lower the cost of freight shipments.[x] It surely does not look like China will be giving up consuming coal, the fossil fuel with the greatest carbon emissions, any time soon.

China currently has 24 nuclear plants under construction and more starting construction soon.[xi] Four AP 1000 reactors are under construction at 2 different sites: Haiyang and Sanmen.[xii] These are the same reactors that the U.S. Nuclear Regulatory Commission (NRC) has ruled need additional analysis, testing, or design modifications of the shield building in order to ensure compliance with NRC requirements before they can be constructed in the United States.[xiii] China expects to achieve a total nuclear capacity of 80 gigawatts by 2020, and 200 gigawatts by 2030,[xiv] double the total nuclear capacity of the United States.

China has become the world’s largest market for new vehicle sales, surpassing that of the United States. In 2009, light-duty vehicle sales reached 13.6 million in China, 3.3 million more than in the United States. Car sales in China grew by 50 percent in 2009, aided by government subsidies and incentives for small car purchasers and buyers in rural areas.[xv] To fuel its expanding fleet of vehicles, China needs to have an adequate supply of oil imports, because its own oil reserves represent only 1.5 percent of the world’s total.[xvi] To do that, it has invested widely in foreign countries with oil potential. China has spent nearly $200 billion on oil deals during the past few years, joining with more than 19 countries—including Russia, Turkmenistan, Kuwait, Yemen, Libya, Angola, Venezuela, and Brazil—and paying for exploration, production, and infrastructure construction, as well as extending “loans for energy.”[xvii]China lends money to countries to build power plants, highways, and other projects that will be repaid in the future with crude oil. Most recently, state-owned Sinopec (China Petroleum & Chemical Corporation) invested $7.1 billion in Brazil’s Repsol, giving China a 40 percent stake in that business and access to Brazilian offshore sub-salt oil fields.[xviii]

Conclusion

China’s economy is booming, even while much of the rest of the world is finding it difficult to recover from the global recession. China knows it needs affordable energy to continue its economic growth, so it is not mandating renewable standards nor is it in favor of cap-and-trade programs to reduce greenhouse gas emissions. Rather, it is ensuring oil supplies through its “energy for loans” program, has removed import tariffs on coal and plans to stockpile it as a hedge on availability and price, is setting goals for constructing all sorts of power plants to ensure an adequate electricity supply, and like us, is reducing its energy intensity. We might want to follow China’s lead in pursuing all forms of energy rather than promoting policies that will limit the most affordable energy sources, reducing our ability to compete globally.

[i] The Washington Post, Policy on energy could change, September 29, 2010

[ii] The New York Times, EPA Issues Final ‘Tailoring’ Rule for Greenhouse Gas Emissions, May 13, 2010, http://www.nytimes.com/gwire/2010/05/13/13greenwire-epa-issues-final-tailoring-rule-for-greenhouse-32021.html

[iii] U.N. Climate Head: World Must Find Common Ground, Oct. 4, 2010, http://www.cbsnews.com/stories/2010/10/04/tech/main6925140.shtml

[iv] Energy Information Administration, International Energy Outlook 2010, http://www.eia.doe.gov/oiaf/ieo/index.html

[v] Energy Information Administration, Annual Energy Outlook 2010, Figure 39, http://www.eia.doe.gov/oiaf/aeo/demand.html

[vi] Energy Information Administration, International Energy Outlook 2010, http://www.eia.doe.gov/oiaf/ieo/index.html

[vii] USA Today, “China Pushes Solar, Wind Power Development”, http://www.usatoday.com/money/industries/energy/environment/2009-11-17-chinasolar17_CV_N.htm

[viii]CNN, U.N. halts funds to China wind farms, December 2, 2009, http://edition.cnn.com/2009/BUSINESS/12/01/un.china.wind.ft/index.html

[ix] Energy Information Administration, International Energy outlook 2010, http://www.eia.doe.gov/oiaf/ieo/index.html

[x] Energy Information Administration, International Energy Outlook 2010, http://www.eia.doe.gov/oiaf/ieo/index.html

[xi] World Nuclear Power Association, Nuclear Power in China, August 20, 2010, www.world-nuclear.org/info/inf63.html

[xii] Westinghouse News Releases, “Westinghouse and the Shaw Group Celebrate First Concrete Pour at Haiyang Nuclear Site in China”, September 29, 2009, http://westinghousenuclear.mediaroom.com/index.php?s=43&item=200

[xiii] Westinghouse Statement Regarding NRC News Release on AP1000 Shield Building, http://westinghousenuclear.mediaroom.com/index.php?s=43&item=203

[xiv] World Nuclear Power Association, Nuclear Power in China, August 20, 2010, www.world-nuclear.org/info/inf63.html

[xv] Energy Information Administration, International Energy Outlook 2010, http://www.eia.doe.gov/oiaf/ieo/index.html

[xvi] Ibid.

[xvii] Politico, To compete with China, U.S. must tap natural gas, April 13, 2010, http://www.politico.com/news/stories/0410/35689.html#ixzz0kyYru8gb

[xviii] Money Morning, China Continues Game-Changing Energy Moves with Sinopec’s $7 Billion Brazil Buy, October 4, 2010, http://moneymorning.com/2010/10/04/sinopec/

Last week, Reuters published, “Soaring Chinese Economy at Odds with Climate Goals” and today CBS News ran this article, “U.N. Climate Head: World Must Find Common Ground”—the thrust of both pieces is simple: China needs to get with the program.

Right now, China emits a quarter of the world’s Co2 and emissions have doubled since 2000. Not surprisingly, China’s energy consumption has also doubled and this past year surpassed the United States as the world’s largest energy consumer.

These numbers help explain the undeniable link between energy consumption and prosperity. Since 2000, China’sGDP has quadrupled and as a result, China has a developing middle class.

This relationship between energy and prosperity has given rise to the following tension for policy makers: do we help the China’s worst off by encouraging growth or do we promote carbon dioxide emission reduction at any cost?

Reuters summed this tension by saying:

“Policy makers recognize it is difficult to say what is a “fair” emissions target for China, which is rapidly pulling its huge population out of poverty.”

Do we help bring people out of poverty through affordable and reliable energy or do we help institutionalize poverty with global regulations?

China (and India) will continue to oppose carbon dioxide emission caps that reduce the quality of life of their citizens. This is the same reason U.S. citizens reject cap-and-trade—because it is a tax on energy and energy is the capacity to do work. If Congress is serious about bringing down unemployment, they will give Americans access to affordable and reliable energy.

At the Earth Summit in 1992, President George H.W. Bush stated, “The American way of life is non-negotiable” in response to calls for curbing U.S. energy consumption and reducing carbon emissions.  However, some states kept the dream of reducing energy consumption alive.

New Jersey was one of those dreamers, and in 2008 its government imposed a statewide cap-and-trade system modeled after the Kyoto Protocol. Today the people of New Jersey pay 14.8 cents per kWh – the 7^th highest electricity rate in the U.S.  As it turns out, the American way of life is non-negotiable because the natural laws of economic prosperity, similar to gravity, cannot be suspended or changed with political power.

American Spectator author Kevin Mooney provides a thoughtful account of New Jersey’s energy regulatory problems and the ensuing economic hardships. In the article, “A Capper for Christie” he explains that if New Jersey can repeal their cap-and-trade system, there is hope for the rest of the states who have imposed artificially high energy costs, such as California.

Mooney goes on to say:

“New Jersey is part of the oldest, most restrictive and most entrenched regional greenhouse gas initiative nationwide…. that’s why the Garden State is so strategically critical going forward.”

As Hayek once famously said, “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design,” and if New Jersey wants to live up to their motto, it would behoove their state government to keep this axiom in mind.