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Friday, July 3, 2009
A Cap and Trade Primer (Part Two)

Assuming the problem is real and the solution legitimate -- neither of which assumptions I accept -- will the House's cap and trade bill make a difference? How much will it cost? It proposes to regulate all manner of things, not just carbon emissions. And then there's the suppressed EPA report which questions the science behind it all . . .

Let us assume -- falsely, by my lights -- that anthropogenic (human-caused) global warming is happening, that it is potentially catastrophic, that the US can significantly decrease it with or without the rest of the world's cooperation, and that timing is currently a matter of desperation, because it's almost too late to save ourselves. Let's also assume that cap and trade is an appropriate way to address the problem, at least in principle. I addressed these and other assumptions in part one of this primer and noted my serious doubts about each of them.

My views aside, let us assume for a few moments that all these propositions are correct and look at an enormous bill the House just passed, H.R. 2454, the American Clean Energy and Security Act. The House passed it last Friday at about 7 p.m. local time. It is well over 1000 pages long, and a 300-page "manager's amendment" (changes agreed to by the bill's managers on both sides) was submitted just after 3:00 a.m. that morning, less than 16 hours before the vote.

Now it goes to the Senate, which will undoubtedly make some changes. If it passes there, a reconciliation committee of members from both houses of Congress will iron out the differences -- and maybe make some new innovations of their own -- and then identical bills will be presented for vote in each house. If it passes in both houses, the President either signs or vetos it -- presumably the former. (There probably aren't enough votes to override a veto, but it's not likely that he'll veto a large piece of his own agenda.)

Everything -- Including the Kitchen Sink

I haven't read carefully every word of the bill, but I've read enough to wonder, with House Minority Leader John Boehner, "Please, is there anything that we are not regulating in this bill?" It proposes to do far more than impose a cap and trade system.

There are pages and pages of new requirements to be imposed on local building codes nationwide. There are detailed specifications for the use and manufacture of light bulbs of various types. There are new regulations for electrical outlets, to ensure that a hybrid car can be recharged at any home. There are extensive new requirements for appraising a home's energy efficiency, which may require the retraining of every appraiser in the country. There are regulations about windows and doors and skylights and hot tobs, to name a few more.

That's only a partial list, but remember: every one of these requirements requires a bureaucracy to administer and enforce it, and bureaucracy costs money. Every one of these requirements imposes costs on someone else, whether local governments, private industry, or homeowners. And you know where all those costs will eventually end up; we who are consumers and taxpayers always pay in the end.

I haven't found the language in the bill that implements it, but Boehner mentioned an onerous new requirement, apparently newly added in the managers' amendment:

How are we going to do affordable housing when we are pushing up the cost of houses? . . . We have to have an energy rating for every home in America. In this bill, we require every home to have an energy rating. And if you are going to sell your house, guess what? You have to have a review, bring people in, have them check out your windows, your appliances, your hot water heater, your door, make sure that your house is energy efficient. And guess what if it isn’t? You have got to bring it up to standards before you can sell it. (Congressional Record, June 26, 2009, p. H7680, emphasis added)

The cost of selling a home will increase dramatically. The cost of the home itself will increase dramatically. Homeowners might have greater incentive to remodel . . . but I have seen language in the bill which requires similar inspections and evaluations before and after remodeling a home, too.

If all this passes, maybe we would all be wise to invest in makers, sellers, and installers of windows, doors, and appliances. It's hard to see how this won't drive a stake through the heart of the already-comatose housing market, but appliance, window, and door sales will likely increase, at least for a while.

Will It Work?

Remember, again, that we're assuming that the problem is what the climate change crowd claims it is, and that it can be solved (or at least significantly mitigated) by curtailing our carbon emissions. In this context one must ask, will this bill make a significant difference? Will it be worth the economic burden? There is general agreement among proponents that there will be an economic burden, despite promises that the legislation will create many new "green" jobs to counteract the inevitable massive job loss. Of course, there will be many new government jobs.

I am neither a believer in anthropogenic climate change nor a subject matter expert, so I'll refer to others for a moment here -- mostly to believers, actually, but first to The Heritage Foundation, a bastion of unbelieving subject matter experts.

Ben Lieberman, Senior Policy Analyst for Energy and Environment at The Heritage Foundation, recently said the following. (Note that "Waxman-Markey" refers to the same bill by the names of its major sponsors.)

Globally speaking, Waxman-Markey would have a trivial impact on future concentrations of greenhouse gases. The bill only binds the U.S., and the trends in the rest of the world show clearly that emissions are rising. China alone now out-emits the U.S., and it hasn't just inched ahead, it has raced ahead with emissions rising six times faster than ours. A similar story is true of other rapidly developing nations. The notion that if we bind ourselves first that China will be more inclined to follow our lead is most likely the opposite of the truth, the opposite of what usually happens in international negotiations. I should also add that, until the recent recession came along, many Western European and other nations that had signed on to the Kyoto Protocol global warming treaty had been seeing their emissions rise as well. Taking all this into account, climate scientist Chip Knappenberger of New Hope Environmental Services . . . calculates that Waxman-Markey would reduce the earth's future temperature by 0.1 to 0.2 degree C by 2100, an amount too small to even notice. And I have yet to see a decent refutation of the assertion that the temperature impact would be inconsequential.

We also need to look at how well carbon cap and trade has fared. Here Gabriel Calzada's analysis of Spain, which like the rest of Western Europe has had a cap-and-trade program in place since 2005, is extremely valuable. Spain, as with most of the rest of Western Europe, has higher unemployment and energy costs than America, and yet has seen its carbon dioxide emissions increasing anyway. In fact, European emissions have been rising more quickly than those in the U.S. That's right: Many nations with cap and trade have had faster rates of emissions growth than the U.S. has had without it.

In explaining his own opposition to this bill, my very own Congressman Jim Matheson, an avowed environmentalist and a believer in the "scientific consensus" mirage, said this on the House floor last Friday:

The two great energy issues our generation faces right now are domestic energy security and climate change. These issues deserve our active attention, and they deserve action. Unfortunately, the bill we are considering today does not appropriately address these issues.

Some continue to argue that climate change is not happening. In fact, scientific consensus has clearly been established that climate change is a very real, significant problem and we need to determine an effective way to reduce global greenhouse gas emissions. However, this legislation has problems.

The early-year carbon reduction targets assume an aggressive pace of new technological development that may be unachievable. These targets received little attention in the debates that have taken place on this bill.

I remain concerned that this energy bill will result in unfair regional wealth transfers. The one-size-fits-all renewable electricity standard is not the right approach to address climate change. It is an add-on without a purpose. Data shows that the renewable targets in this bill are only slightly better than business-as-usual. So why are we bothering to dictate these standards when we should encourage the 15 States that currently do not have renewable energy targets to find something workable for their communities?

The bill’s distribution of emission allowances also creates regional inequities. The "50-50" formula in the bill gives extra, unneeded allowances to utilities with lower fossil fuels resources, and less to utilities with greater reliance on fossil fuel resources. Those regions that receive excessive allowances would sell those allowances to other regions of the country that received less. . . .

There are also some changes made to the offsets section which are troubling to me. I have been supportive of the effort to build a strong, accountable offsets program and I am sorry to see that this bill allows USDA to try to establish a much looser, less effective program. This is short-sighted because unless offsets signify real, verifiable carbon reductions, they will be worthless. This is problematic because buying and using offsets is much cheaper for businesses than it is to buy allowances.

[Allowances constitute permission to produce a certain amount of carbon emissions. Offsets are somewhat like extra credit, allowing a company to compensate for excessive emissions by doing other "green" things.]

. . . Finally, the issue of energy independence calls for additional items that are not included in today's bill. In the long run, technological advances will provide new options to help this country gain a more secure, stable energy profile. In the interim, we need policies that keep all options on the table for the development and use of conventional energy sources. As a result of all of these concerns, I will vote against this legislation. However, I will continue to work on the important issues of climate change and energy independence. (Congressional Record, June 26, 2009, pp. H7655-H7656)

Matheson's own Web site links to this April Wall Street Journal article which mentions his opposition and discusses some of the wrangling on Capitol Hill.

Here's another opponent's view, that of Congressman Dennis Kucinich, a former Democratic presidential candidate, who thinks the bill will be ineffective because it is not draconian enough. He spoke immediately after Matheson on the House floor. You can read his complete speech in the Congressional Record; here is its beginning:

I rise in opposition to H.R. 2454, the American Clean Energy and Security Act of 2009. The reason is simple. It won't address the problem. In fact, it might make the problem worse.

It sets targets that are too weak, especially in the short term, and sets about meeting those targets through Enron-style accounting methods. It gives new life to one of the primary sources of the problem that should be on its way out -- coal -- by giving it record subsidies. And it is rounded out with massive corporate giveaways at taxpayer expense. There is $60 billion for a single technology which may or may not work, but which enables coal power plants to keep warming the planet at least another 20 years.

Worse, the bill locks us into a framework that will fail. Science tells us that immediately is not soon enough to begin repairing the planet. Waiting another decade or more will virtually guarantee catastrophic levels of warming. But the bill does not require any greenhouse gas reductions beyond current levels until 2030. (Congressional Record, June 26, 2009, p. H7656)

Finally, Branford Plumer at The New Republic writes the following under the title -- pardon my quoting his coarse language -- "Is A Half-Assed Climate Bill Worth Supporting? Probably." Note his mention of big, hideous warts on the bill, and note his fondness for "baby steps," as long as they stumble in the desired direction.

Among people who think we need strong, rapid action to curb greenhouse-gas emissions and avoid dangerous climate change -- and I'm one of them -- there's been a great deal of hand-wringing over whether or not to support the House climate and energy bill, which is now cruising on over to the Senate.

The warts on the House bill are big and hideous: The renewable-electricity standard would require utilities to do little more than what existing state laws already require. The short-term targets for reducing emissions (nominally 17 percent below 1990 levels by 2020) fall well short of what the IPCC recommends to avert a climate fiasco (try 25 to 40 percent). The carbon cap-and-trade program relies on potentially shabby offsets that could weaken the targets further and will now face even less scrutiny thanks to a last-minute deal Collin Peterson struck on behalf of farmers. And it's quite likely the Senate will produce an even more diluted bill.

. . . Baby steps are important! . . .

One critical point to recognize is that this bill is only a first step. Looking back through history, every single piece of major environmental legislation in the United States evolved in fits and starts. . . .

Now, mind you, we could also see things careen in very much the other direction. It's possible for Congress to design a climate bill so malignant that electricity rates quickly spike, polluters buy up shady offsets by the truckload, and Goldman Sachs makes a fortune manipulating the carbon-trading market. In that case, public support for action on climate change would evaporate. Now, I don't think the House climate bill will lead us to that fate, and neither do the EPA and CBO analyses, but it's a definite concern.

So even on the environmental left there is doubt that this bill will significantly affect the problem they're convinced exists. But some of them are happy to support this bill as the useful prelude to much more radical legislation in the future.

What Will It Cost?

Two truisms suggest themselves to my mind when I consider the question, What will it cost? Nobody really knows and a lot more than they think.

The cap and trade bill's proponents cite Congressional Budget Office estimates that the average annual cost of this bill to an American household will be $175. Opponents believe the CBO study was too narrow and cite numbers ten times larger and more.

Here, again, is The Heritage Foundation's Ben Lieberman:

According to the analysis we conducted at The Heritage Foundation, . . . the higher energy costs kick in as soon as the bill's provisions take effect in 2012. For a household of four, energy costs go up $436 that year, and they eventually reach $1,241 in 2035 and average $829 annually over that span. Electricity costs go up 90 percent by 2035, gasoline by 58 percent, and natural gas by 55 percent by 2035. The cumulative higher energy costs for a family of four by then will be nearly $20,000.

But direct energy costs are only part of the consumer impact. Nearly everything goes up, since higher energy costs raise production costs. If you look at the total cost of Waxman-Markey, it works out to an average of $2,979 annually from 2012-2035 for a household of four. By 2035 alone, the total cost is over $4,600.

Beyond the cost impact on individuals and households, Waxman-Markey also affects employment, and especially employment in the manufacturing sector. We estimate job losses averaging 1,145,000 at any given time from 2012-2035. And note that those are net job losses, after the much-hyped green jobs are taken into account. Some of the lost jobs will be destroyed entirely, while others will be outsourced to nations like China and India that have repeatedly stated that they'll never hamper their own economic growth with energy-cost boosting global warming measures like Waxman-Markey.

Since farming is energy intensive, that sector will be particularly hard-hit. Higher gasoline and diesel fuel costs, higher electricity costs, and higher natural gas-derived fertilizer costs all erode farm profits, which are expected to drop by 28 percent in 2012 and average 57 percent lower through 2035. As with American manufacturers, Waxman-Markey also puts American farmers at a global disadvantage, as other food-exporting nations would have no comparable energy-price raising measures in place.

Overall, Waxman-Markey reduces gross domestic product by an average of $393 billion annually between 2012 and 2035, and cumulatively by $9.4 trillion. In other words, the nation will be $9.4 trillion poorer with Waxman-Markey than without it.

It should also be noted that the costs are not distributed evenly. Low-income households spend a disproportionate share of their incomes on energy, and thus would be hit harder than average by Waxman-Markey. Of course, the bill has provisions to give back some revenues to low-income households, but it is likely that these rebates will amount only to some portion of each dollar that was taken away from them in the first place in the form of higher energy costs and higher costs for other goods and services. Waxman-Markey also disproportionately burdens those states, especially in the Midwest and South, that still have a substantial number of manufacturing jobs to lose, as well as those that rely more heavily than others on coal for electric generation. In addition, because the bill raises energy costs, it hurts rural America much more than urban America. Rural Americans, farmers and non-farmers, spend an average of 58 percent more on energy as a percentage of income than their urban counterparts, and those costs would go up. (Emphasis added.)

In Conclusion

All of this applies to the bill as passed by the House of Representatives; there's really no telling what the Senate will produce, if anything. For the moment, here's how I see it: A bill that probably won't significantly affect a problem which probably doesn't exist will almost certainly wreak havoc on an already-troubled economy. It will create enormous, complex new bureaucracies in a government that is already bloated and spendthrift on an astronomical scale.

But maybe that's not what it's all about, anyway. The Democrats want money, a lot more money, for their new programs, especially their takeover of the health care industry. This bill will get them that; at least so it appears.

Finally, here are a couple of additional readings, in case you're looking for something to get your conservative blood pumping. First, David (not Rush) Limbaugh summarizes the issue and says, "Enough already. Throw the bums out." Second, a story has started to trickle out over the last week or so that EPA officials recently suppressed a substantial internal report questioning the science behind the climate change panic. Reportedly, they even threatened the author's career, and his boss's, if he did not bury it.

Stay tuned. The battle has only begun.

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