In the world of Washington policymaking facts and figures are regularly thrown around to frame arguments in support of or against a particular policy. In the case of the Waxman-Markey energy tax, one such figure made a late-hour entry, gaining broad currency for its catchy tune and visual: the largest regulatory intervention in U.S. history, a plan expressly designed to “bankrupt” one-half of our nation’s energy supply and cause your energy prices to “necessarily skyrocket” (Barack Obama, January 2008), will actually increase your household energy prices by just $175 per year. Before you breathe a CO2-filled sigh of relief that your government is forcing you to shell out a mere $15 bucks more per month to save the planet, it’s worth taking a look at the fine print.
First, the drama. Shortly before the Waxman-Markey energy tax passed the House of Representatives, the Congressional Budget Office (CBO) released an analysis of one specific portion of the 1400-page bill. Responding to a specific information request from Representative Dave Camp (R-MI), the CBO found that the cap-and-trade section of the measure could cost American households $175 per year in 2020.
Based on this snippet, proponents of the scheme, including President Obama, repeatedly claimed that the Waxman-Markey bill would cost consumers a mere “postage stamp a day.” And while it is unlikely that we will ever know the bill’s exact overall hit to our pocketbooks, the claim that Waxman-Markey bill will only cost $175 per household withers under scrutiny.
As mentioned, the CBO very specifically estimated the cost of the cap-and-trade component of the bill at a very specific point in time—the year 2020. There are many other aspects critical to the overall proposal adding further costs to businesses and making households poorer, and the cap-and-trade restrictions become far more onerous after the year 2020. (We’ll come back to this point later on.) This was of course by political design, despite cloaking the bill in the ritual mantra of “we must act now.”
But the fact that the CBO study only looked at one section of the bill was lost in media reports on the bill. Time Magazine, for example, stated that “the bill would cost the average U.S. household $175 in higher energy costs” and a similar claim was made by the New York Times, stating that the provision might cost “just” $175 per year.
Ironically, the New York Times piece acknowledges, yet buries, one of these important points in its second paragraph:
Comprehensive climate legislation pending in the House would cost an average of about $175 per household every year, though the price tag would be even larger for wealthier Americans while the poorest can expect to get a small dividend, according to a Congressional Budget Office study released late Friday.
The CBO report studied only the cap-and-trade provisions of H.R. 2454, a major climate bill that Democratic leaders expect to bring to the floor early next month for a vote on final passage. [emphasis added]
Yes, the Times acknowledges in a later paragraph that the opening paragraph is simply not true, though few readers would catch the error-slash-admission. It is blatantly false to say that CBO claimed “[c]omprehensive climate legislation…would cost an average of about $175 per household.”
Unfortunately there are numerous other provisions in the Waxman-Markey bill which add to its burden on Americans, such as a mandate for government-approved renewable energy to produce up to 20 percent of our electricity, a requirement dictating a certain percentage of cars be flex-fuel vehicles, additional mandates for renewable fuels, new regulation of local building codes, new restrictions on the types of electric lighting Americans can use, and many other expensive provisions. These mandates all come with a cost that each and every American will bear in the form of higher energy prices, higher prices for goods and services, and potential lost jobs.
So we see that even taking the CBO analysis at face value reveals the media coverage—as typified in the New York Times article—as inaccurate, because they ignore the costs of Waxman-Markey that the CBO did not estimate.
Beyond this media distortion, the New York Times and other media outlets also botched the story by ignoring the timing. The CBO reported on the annual cost to households in the year 2020. Recall here that even Waxman-Markey supporters rushed to the podium to defend their votes by admitting the bill wouldn’t really kick in for more than a decade. The NYT article says:
Under the House bill, U.S. industries would be forced to reduce their emissions 17 percent below 2005 levels, a regulatory burden that would be accomplished by stemming demand for carbon-based energy through higher prices.
What the article doesn’t tell the reader is that the 17 percent cut is only an intermediate benchmark, a fraction of the actual mandate, which businesses must hit by the year 2020. By the year 2050, Waxman-Markey cap-and-trade regulations require total emissions to drop 83 percent below 2005 levels. That is (only partly) why the CBO figure is so misleading, because it studies the impact of Waxman-Markey before the true economic impacts really kick in, as admitted by none other than Waxman-Markey supporters themselves. Oddly, this material fact is nowhere mentioned in the article.
We have previously detailed the glaring substantive flaws with the CBO’s $175 figure. In short, the CBO counts all of the auction receipts and “free” allowance handouts as flowing back into households’ income, thus offsetting some of the gross costs of the cap-and-trade program. That sort of book-cooking rightfully earned a black eye thanks to Enron and others. The CBO’s own figures reveal that before throwing this pork back into the mix of the “average” household’s income, gross costs in 2020 would be $890 per household.
This is just the tip of the caveat’s iceberg. Even if we throw out the increased costs of all of the other elements of Waxman-Markey and just focus on cap-and-trade, and we just focus on the year 2020 with blinders about the later years when the bill’s mandates actually kick in (2021–2050), and we ignore the redistribution of wealth from consumers to politically-connected groups getting “allowance” handouts, it’s still not true that the CBO claims that the comprehensive bill carries only a net cost of $175 per household. There are still other basic and inescapable considerations the CBO estimate omitted. For example, footnote 3 on page 4 of the study says:
The resource cost does not indicate the potential decrease in gross domestic product (GDP) that could result from the cap. The reduction in GDP would also include indirect general equilibrium effects, such as changes in the labor supply resulting from reductions in real wages and potential reductions in the productivity of capital and labor.
Translated into English, what the above escape hatch means is that the CBO study only looks at the direct hit to the economy caused by the cap-and-trade program in Waxman-Markey, acknowledging that the total hit—including both direct and indirect mechanisms—will therefore be greater than the CBO’s estimate for 2020 alone.
For example, since the cap will by necessity drive up the price of gasoline, the CBO counts that as a direct resource cost of Waxman-Markey. However, with higher gasoline prices, some truckers who are already barely making ends meet may have to switch occupations. They could try selling their eighteen-wheeler to another trucker, but the whole industry would be shrinking due to the higher gas prices (with other knock-on effects of higher shipping costs). Thus total economic output would fall as previous truckers now worked in jobs at which they were less qualified, and because large numbers of trucks would stay idle. These indirect reductions in total GDP were not analyzed by the CBO, which admits as much when it says on page 8:
The measure of costs described above reflects the costs that would occur once the economy had adjusted to the change in the relative prices of goods and services. It does not include the costs that some current investors and workers in sectors of the economy that produce energy and energy-intensive goods and services would incur as the economy moved away from the use of fossil fuels. [emphasis added]
To say that the CBO estimate of a very specific section of the Waxman-Markey energy bill for a very specific timeframe is the total household impact of the Waxman-Markey bill is misleading. Yet even if we take the CBO report as gospel, the major media are still misreporting its findings. The “$175 per household” figure is not the cost of Waxman-Markey, but only of its cap-and-trade component. Further, the $175 figure refers exclusively to the year 2020, before the meat of the bill’s emission cutbacks occur, and it admits to ignoring all of the transition losses that will accrue to firms that are heavily dependent on carbon based energy. It isn’t that they aren’t real; it is simply that CBO ignored them. The $175 figure is unsupportable.
It is no surprise that proponents of the Waxman-Markey energy tax bill cling to the CBO projection while conveniently omitting the fact that the $175 annual household impact number only takes into consideration one portion of the entire bill’s impacts. You can expect these people to manipulate information to put their position in the best possible light.
The fact that the media are not doing their jobs by telling the whole story behind the CBO number is an entirely different matter. Most Americans have little idea just how much the Waxman-Markey energy tax will cost them, which does seem to be the objective of many of its proponents. It is up to journalists to present the facts about this issue in a straightforward manner so that American consumers will know that true costs of policies that deliberately increase the price of the energy we use to heat our homes, power our cars and run our businesses.