August 2009

The National Taxpayers Union has fired the latest (and probably its last, as it has bigger fish to fry with health care and Waxman-Markey in Washington) salvo in its effort to convince the members of the Western Governors Association that it needs to uphold its promise of transparency and audit the secretive Western Climate Initiative.

To recap, in June NTU wrote to WGA then-chairman Jon Huntsman Jr., Republican governor of Utah (soon to be ambassador to China) expressing concern about the degree that WGA manages and controls WCI without apparent unanimous support of WGA’s member governors. Among other concerns, NTU questioned whether taxpayer dues in states that were not members of WCI ended up supporting it anyway, and why WGA took on such a large role with WCI when it apparently was not sanctioned by all the Western governors.

But rather than address the concerns of a respected taxpayer advocacy group seeking protection for its members in the West, WGA took umbrage at the inquiry. WCI project manager Patrick Cummins composed a scathing “how dare you”-type retort in which he accused NTU of “false accusations and innuendo” which “recklessly defame the reputation of WGA…our names and that of our citizens.” Cummins, a Kerry- and Obama-supporting global warming alarmist whose reputation and salary are apparently dependent on the success of WCI, persuaded the new WGA chairman (Democratic Governor of Montana, Brian Schweitzer) and vice-chairman (Republican Governor of Idaho, Butch Otter) to sign his missive. The remaining 17 WGA governors did not sign the letter.

Now NTU has responded to Cummins/WGA, recognizing that the WCI project manager’s feelings were hurt while still seeking answers about the alarmist-driven WCI:

WCI isn’t even mentioned on WGA’s “Climate Change” page… We contend that to an outside observer, these facts might indicate that either WGA does not wish to give the impression of associating itself with WCI, or that some WGA members are uncomfortable with discussing WCI….

The analysis NTU conducted of the financial records released by WGA staff shows clearly, in our view, that WGA staff spent an extraordinary amount of time promoting the agenda of the WCI. The records that you provided do NOT confirm whether WGA was completely “reimbursed” for that time, nor can they answer other legitimate questions raised by NTU’s analysis….

We raise these concerns not out of disrespect for the integrity of WGA, but rather our past experience with the interplay of funds in other organizations. As Governor Otter well knows, for example, the Conservation and Reinvestment Act he opposed while in Congress provided some $60 million in taxpayer funding each year to environmental groups supposedly for official activities and purposes only. Back then there was an obvious concern that organizations with left-leaning agendas could be playing fast and loose with taxpayer dollars….

NTU’s Pete Sepp closes the letter reiterating his organization’s mission: to assure that taxpayer dollars and interests are accounted for and transparent — principles echoed in the past by Governor Otter. “These principles were our only motivation in making our original inquiry and call for disclosure of WGA, an organization that receives public funds,” Sepp wrote. “Based on your reply, WGA does not seem interested in providing such disclosure proactively.”

Indeed, as long as the Western governors allow an alarmist-advocate-with-an-attitude like Cummins to be the shielder of their activities and a thuggish bullhorn to drive off inquirers, then their reputation will continue to slide.

I saw Val Kilmer’s new feature the other day. It’s called “The Chaos Experiment,” and it’s about a deranged scientists (Kilmer) who traps “six sexy strangers” (according to the plot synopsis on the back of the DVD) in a room and slowly turns up the heat to demonstrate the deleterious effects of global warming on the human condition. In a nutshell, the “six sexy strangers” get naked before they go crazy and start killing one another.

My girlfriend thought it was awful- she was put off by the nudity. That was the only part I enjoyed, in what was otherwise a real snoozer.

According to the invaluable Eco-razzi, “The Chaos Experiment” was released in only 2 theatres before going straight to video. Poor Val Kilmer. It’s been all downhill since “Tombstone.”

Then again, you reap what you sow. Movies with a message about global warming are either boring (c.f. “An Inconvenient Truth”) or stupid (c.f. “The Day After Tomorrow”). So Val, who produced this film, had his work cut out for himself. Lord knows he tried to spice things up, by centering the film on “six sexy strangers” who get naked, but even that couldn’t overcome the lameness of global warming alarmism as a plotline.

We’re getting closer to an Armageddon climate policy scenario. Last week ten Democratic Senators told the President that they will not support any global warming legislation that does not protect domestic industry with carbon tariffs. This is a big step toward an economically ruinous trade war.

At issue is the $45 trillion climate question: Who’s gonna pay to green the global economy? The combustion of hydrocarbon fuels-which accounts for 85% of the world’s primary energy-is the “cause” of the global warming “problem,” so the “solution” is to make hydrocarbon energy more expensive, to the tune of $45 trillion dollars, which is what the International Energy Agency estimates it would cost to fight rising temperatures.

China and India refuse to pay. They have bigger fish to fry, like the almost 2 billion people that don’t yet have access to electricity.

As such, if the U.S. and Europe act unilaterally, they would subject their energy intensive industries to a competitive disadvantage to countries that don’t act. Jobs and emissions would be outsourced to Asia.

It’s the Gordian Knot of climate policy: China and India refuse to act, but without their participation, it’s all pain and no gain for countries that do act.

In late June, the U.S. House of Representatives passed major climate legislation (the American Clean Energy and Security Act, a.k.a., the largest tax increase in world history) that includes “border adjustment” measures (i.e., tariffs) on carbon intensive goods from countries that do not have emissions controls in place.

Last week, ten Democratic Senators (Evan Bayh of Indiana; Sherrod Brown of Ohio; Robert C. Byrd and John D. Rockefeller IV of West Virginia; Bob Casey and Arlen Specter of Pennsylvania; Russ Feingold of Wisconsin; Al Franken of Minnesota; and Carl Levin and Debbie Stabenow of Michigan)-whose swing votes are crucial for the passage of any climate legislation through the upper chamber-sent a letter to President Barack Obama stating that, “it is important that such a bill include provisions to maintain a level playing field for American manufacturing.”

To that end, the Senators all endorsed the tariff proposed by the House bill.

That’s a big mistake. China has already intimated that a carbon tariff would be met in kind. A trade war would certainly ensue. China’s communist government depends on export driven growth, so perhaps it would decide to play the hardest of hardball and dump its vast reserves of U.S. debt. The results would be cataclysmic for global prosperity.

There’s a better way: No one should do anything.

As the Website explains and Reuters reports, the Western Climate Initiative will launch its cap-and-trade system among 11 member states and Canadian provinces on January 1, 2012 — less than 2 1/2 years from now. Yet last month Montana Gov. Brian Schweitzer, one of the seven states that are members of WCI, announced on “Real Time with Bill Maher” last month that he opposes cap-and-trade. Time is getting short for the governor to decide whether he will subject utilities, industries and consumers in his state to the huge energy tax increase that such a system would require, while accomplishing nothing to affect global temperatures?

Tick, tick, tick….withdrawal or participation?

How tremendously shallow of Florida Gov. Charlie Crist. Temperatures and public sentiment have cooled on global warming, while his political ambitions are now trained on the Senate, so what does he do? In a Schweitzer-like flip-flop, he hints that he’s having second thoughts on cap-and-trade. The Miami Herald reports:

Under mounting criticism from fellow Republicans, Crist looks ready to cancel his climate-change summit and is backing away from advocating a “cap-and-trade” energy policy.

At his well-publicized climate summit last summer, Crist pushed a number of energy plans to encourage renewable energy development and establish a cap-and-trade market that would penalize fossil-fuel use.

But Crist’s plans were shredded by the Republican Legislature and his cap-and-trade proposal has been bashed as a “tax” by his Republican U.S. Senate opponent, Marco Rubio, who has been ardently courting the GOP’s conservative wing.

“Well, it may be [a tax]. That may be accurate,” Crist, who recently signed an anti-tax pledge, said Thursday.

Indeed when it served what he thought were his best political interests, Crist was gung-ho in the fight to stop global warming. He keynoted his own climate change summit in 2007 and brought in Arnold Schwarzenegger (also spoke last year), Robert F. Kennedy, Jr., and Theodore Roosevelt IV to heighten his profile on the issue. He issued executive orders, created a “Climate Action Team,” and hired the advocacy group Center for Climate Strategies to steer the agenda. The alarmist media lapped it up and bestowed the love.

Now he’s trained on the Senate, as is Rubio, who is vacuuming up conservative support while Crist suffers with a tax-raising, stimulus-supporting image. Global warming is a boat anchor for Crist’s campaign now, and he’s starting to make excuses for why he might not host another climate summit, The Herald says:

Crist was even more tight-lipped about hosting another annual “Serve to Preserve Florida Summit on Global Climate Change,” which for two years attracted international media coverage and large, enthusiastic crowds to a downtown Miami hotel. Crist and California Gov. Arnold Schwarzenegger basked in the glow and vowed sweeping reforms to combat global warming.

Asked Thursday about the summit’s fate, Crist said he had not decided yet and cited the “cost” to potential sponsors.

Florida Power & Light, a major sponsor of last year’s summit, gave at least $26,600 to Crist’s record-setting, $4.3 million campaign account in the past three months.

Gag me.

Today’s excerpt from CEI’s film, Policy Peril: Why Global Warming Policies Are More Dangerous Than Global Warming Itself, is on cap-and-trade.  

What is cap and trade?

Cap-and-trade is Al Gore’s (and the environmental community’s) leading “solution” to the alleged “climate crisis”–the centerpiece, for example, of the Kyoto Protocol climate treaty.

There are many technical  issues in the design and implementation of a cap-and-trade program, but the basic idea is as follows. 

The government establishes a legal limit–a “cap”–on the total quantity of greenhouse gases that regulated (”covered”) entities may emit. Each covered entity must acquire one federally-created or -certified allowance (permit, ration coupon) for every ton of carbon dioxide-equivalent (CO2-e) greenhouse gases it emits. The total number of allowances allocated exactly equals the number of tons permissible under the cap. Thus, as the cap tightens, the supply of coupons shrinks, and emissions from covered entities decline.

An entity with high emission-reduction costs may simply decide to cut its energy use and economic output, but it may also buy surplus coupons from an entity with lower emission-reduction costs. The buying and selling of ration coupons is the “trade” part of cap-and-trade.

“Market-based” is a misnomer

Supposedly, cap-and-trade leads to an economically-”efficient” solution. Participants are motivated to innovate and search for cheap emission-reduction opportunities not only to minimize their own costs but also to generate surplus coupons they can sell in the carbon trading market.

Cap-and-trade is often called “market-based” because each business, spurred by the desire to minimize costs and (if possible) amass surplus coupons it can sell for a profit, determines where and how to cut its emissions. This is in contrast to “command-and-control” regulation in which a central authority prescribes the emission rates (e.g. lbs. of Co2 per Megawatt hour of electricity generated or sold) or energy efficiencies covered entities must achieve, or the fuel types (e.g. wind, solar, geothermal) or technologies (e.g. carbon capture and storage) they must use.

In practice, however, cap-and-trade legislation typically contains buckets of command-and-control provisions. For example, the Waxman-Markey cap-and-trade bill (about which more later) mandates electric generation from renewable sources and imposes tough new efficiency standards for buildings, appliances, transport systems, and industry.

More fundamentally, as my colleague Myron Ebell points out in his testimony on Waxman-Markey, cap-and-trade is not really “market-based.” Cap-and-trade “subordinates markets to central planning. It takes the most important economic decisions [e.g. what kinds of energy technologies will dominate the market and how much consumers will have to pay for energy] out of the hands of private individuals acting in the market and puts them in the hands of government.”

Far from being “based” on the market, cap-and-trade would effect a gigantic expansion of government power and control over markets. The “cap” in cap-and-trade creates a government-run rationing system for the carbon-based fuels that supply 85% of our energy. Our liberties are at risk, as Myron explains in his testimony:

If enacted, Title III [the cap-and-trade portion of Waxman-Markey] would be the single largest government intervention in the economy since the Second World War. That was the last time–and we hope it remains the last time–when people had to present ration coupons in order to buy gasoline (and many other products including cars, tires, sugar, coffee, meat, cheese, butter, and shoes). While the debate has focused on costs, far too little attention has been paid to the extent that political and economic freedoms would be lost or impinged upon under cap-and-trade. I urge the Committee and the House to consider seriously and deeply the threat to our liberties posed by putting government in charge of how much and what type of energy we can consume.

Today’s Policy Peril excerpt

In today’s Policy Peril film excerpt, Dr. David Kreutzer, an economist with the Heritage Foundation, discusses his team’s analysis of the Lieberman-Warner bill (S. 2191), the leading cap-and-trade bill of 2008. You can view today’s film clip here. To watch Policy Peril from start to finish, click here. Previous posts in this series are available immediately below.

  • Policy Peril: Looking for an antidote to An Inconvenient Truth? Your search is over
  • Policy Peril Segment 1: Heat Waves
  • Policy Peril Segment 2: Air Pollution
  • Policy Peril Segment 3: Hurricanes
  • Policy Peril Segment 4: Sea-Level Rise
  • Policy Peril Segment 5: Is the Science Debate “Over”?
  •  Enough preliminaries; here’ s the text of today’s film excerpt:

    Narrator: Okay, so the global warming scare is built on speculation and hype. Now let’s look at the other side of the equation–the policies being promoted to combat global warming. What are they, and what are the associated risks?

    Several bills in Congress call for deep emission cuts by 2050. The most prominent in 2008 was the Lieberman-Warner bill. It would require a 70% emissions cut.

    Dr. David Kreutzer (Heritage Foundation): When we analyzed the impact of the Lieberman-Warner bill, we found three things: Incomes go down, taxes go up, and jobs go away.

    Narrator: Lieberman-Warner would reduce cumulative U.S. GDP by $5 trillion during 2012 to 2030. Let’s put that in perspective. A typical hurricane striking a U.S. coastal community does about $5 billion in damage.

    In the portion of the film just after today’s clip, Dr. Kreutzer compares the economic damage from Lieberman-Warner to that caused by a typical landfalling hurricane:

    Dr. Kreutzer: Well, adjusting for increases in wealth over the next 20 years, that means that the damage done by Lieberman-Warner in economic terms is the equivalent of over 600 hurricanes. Now, normally we have slightly less than two hurricanes per year that make landfall. So this is orders-of-magnitude worse than the damage that would be done by these weather storms, the hurricanes. That’s a big hit to the economy.  


    Cap-and-trade is an energy tax

    The Heritage Foundation study of Lieberman-Warner is available here. The Heritage folks point out what should be obvious. Eighty-five percent of U.S. energy comes from carbon-based (greenhouse gas-emitting) fuels. Capping emissions therefore means capping (restricting) energy use and/or compelling suppliers and consumers to switch from lower-cost fossil fuels to more expensive “alternative” energy sources. 

    Cap-and-trade “works” (reduces emissions) by making carbon-based energy more costly for consumers. Peter Orszag, President Obama’s budget director, unequivocally affirmed this point in his April 24, 2008 Senate Finance Committee testimony (p. 3) when he was Director of the Congressional Budget Office (CBO):

    Under a cap-and-trade program, firms would not ultimately bear most of the costs of the allowances but instead would pass them along to their customers in the form of higher prices. Such price increases would stem from the restriction on emissions and would occur regardless of whether the government sold emission allowances or gave them away. Indeed, the price increases would be essential to the success of a cap-and-trade program because they would be the most important mechanism through which businesses and households would be encouraged to make investments and behavior changes that reduced CO2 emissions.

    Barack Obama put the point more bluntly in January 2008, when campaigning as a presidential candidate. He said:

    Under my plan of a cap-and-trade system, electricity rates would necessarily skyrocket . . . because I’m capping greenhouse gases, coal power plants, natural gas — you name it — whatever the plants were, whatever the industry was, they would have to retrofit their operations. That will cost money; they will pass that money on to consumers.   

    In short, cap-and-trade is an energy tax by another name. As Myron likes to say: “There are three things you need to know about cap-and-trade: It’s a tax, it’s a tax, it’s a tax.” And since energy is the lifeblood of modern economies, energy taxes or their regulatory equivalent unavoidably raise consumer prices, reduce economic output, and reduce employment.

    Energy tax impacts 

    The Heritage study estimated the following impacts from the cap-and-trade component of Lieberman-Warner:

    • Cumulative GDP losses are at least $1.7 trillion and could reach $4.8 trillion by 2030 (in inflation-adjusted 2006 dollars).
    • Single-year GDP losses hit at least $155 billion annually and could exceed $500 billion (in inflation-adjusted 2006 dollars).
    • Annual job losses exceed 500,000 before 2030 and could approach 1,000,000.
    • The average household will pay $467 more each year for its natural gas and eletricity (in inflation-adjusted 2006 dollars).

    A study by the National Association of Manufacturers and the American Council for Capital Formation came to similar conclusions. According to NAM/ACCF, Lieberman-Warner would:  

    • Raise natural gas prices for residential consumers by 26% to 36% in 2020, and 108% to 146% in 2030.
    • Raise electricity prices for residential consumers by 28% to 33% in 2020, and 101% to 129% in 2030.
    • Raise gasoline prices by 29% or $1.10 (based on prices prevailing as of June 2008).
    • Reduce GDP growth by $151 billion to $210 billion in 2020, and $631 to $669 billion in 2030 (in 2007 dollars).
    • Reduce net job creation by 1.2 million to 1.8 million in 2020, and 3 million to 4 million in 2030.

    Charles River Associates also projected heavy economic impacts. In their analysis, Lieberman-Warner would:

    • Reduce real annual household spending by an average of $800 to $1,300 in 2015.
    • Reduce GDP by $160 billion to $250 billion in 2015.
    • Produce net job losses of 1.5 million to 2.3 million in 2015.

    The frothings of right-wing paranoia, you say? Well, then EPA, too, must be part of the vast right-wing conspiracy. In EPA’s analysis , Lieberman-Warner would:

    • Increase gasoline prices by $0.53 a gallon in 2030.
    • Reduce U.S. GDP by $238 billion to $983 billion in 2030.
    • Increase electricity prices by 44% in 2030.

    All pain for no gain 

    All in all, not a pretty picture! Yet Lieberman-Warner would have no measurable impact on global temperatures for many decades, if ever. Assuming for a moment the correctness of the scientific basis for these policies, Lieberman-Warner would prevent 0.013ºC of global warming by 2050, Dr. Patrick Michaels estimates. Even if all industrialized countries adopt Lieberman-Warner, total global warming averted is 0.11ºC by 2050–too little for scientists to detect.

    With this abysmal cost-benefit ratio (trillions in costs for undetectable global warming reductions), it is small wonder that S. 2191 died in the Senate in June 2008. 

    Rube Goldberg Green

    But perhaps the main reason Lieberman-Warner fizzled is that the U.S. Chamber of Commerce exposed the bill as a Rube Goldberg scheme rife with mandates, regulation, and red tape. The Chamber’s Lieberman-Warner flow chart is one of those pictures worth a thousand words. Please take a moment to behold the infernal complexity of it all!

    The sausage factory known as the “legislative process” always mingles and mangles cap-and-trade with prescriptive mandates, special-interest carve outs, and bureaucratic empire building.

    Rent seeking

    Special-interest manipulation and gaming are an unavoidable affliction. Consider Europe’s emissions trading system (ETS), which was a bonanza for special interests during the first three years of its operation (2005 to 2007). In Europe’s Dirty Secret: Why the EU Emissions Trading Scheme isn’t working, the British think tank Open Europe details a host of abuses, including:

    • Governments over-allocated allowances to domestic firms (to reduce costs and create competitive advantage), collapsing credit prices from €33 to €0.20 per ton, “meaning that the system did not reduce emissions at all.”
    • Utilities got free allocations, passed the imaginary costs onto customers in the form of higher electric rates, and then sold the coupons they didn’t need — double dipping at the expense of industrial manufacturers and consumers.
    • Small institutions like hospitals did not get free coupons and ended up subsidzing well-connected energy companies.

    Dr. Kreutzer’s colleague Ben Lieberman (who also appears in Policy Peril) testified recently before the Senate Foreign Relations Committee on Europe’s experience with cap-and-trade. Ben’s take on the hearing is a knee-slapper:

    I was the only one on the panel who thought the problems in Europe were not fixed. The repesentative from Shell said that the original problem was the over-allocation of free allowances, which has since been corrected–and he then argued for more free allocations for refiners. A BASF representative also said the problem with free allocations had been fixed–and went on to say that the chemical industry needs more free allocations.

    The Heritage Foundation analysis of Lieberman-Warner also found that it would transfer immense wealth from consumers to special interests. Later on in Policy Peril, Dr. Kreutzer comments:

    Dr. Kreutzer: The Lieberman-Warner bill also enacts a huge transfer from the consumers of energy to groups that are picked out–special interest groups that Congress would designate. So after America has lost $5 trillion in income, there will be another $5 trillion taken and transferred from energy consumers.


    Because even an idealized cap-and-trade program is the regulatory equivalent of an energy tax, its economic impact is regressive, meaning that it imposes a relatively greater burden on poor households, who spend a larger share of their income on energy and other basic necessities. The Congressional Budget Office (CBO) report, Tradeoffs in Allocating Allowances for CO2 Emissions (April 2007), is crystal clear on the point:

    Regardless of how allowances were distributed, most of the cost of meeting a cap on CO2 emissions would be borne by consumers, who would face persistently higher prices for products such as electricity and gasoline. Those price increases would be regressive in that poorer households would be a larger burden relative to their income than wealthier households would.

    Mirage of regulatory predictability

    Proponents spout a lot of happy chatter about how cap-and-trade will create a “predictable” regulatory framework for businesses, because Congress will specify in advance how much and how fast emissions must decline. But this claim ignores the enormous potential of cap-and-trade bills to spawn a new era of regulatory litigation, creating uncertainty and delays for business investment. Have a look again at the U.S. Chamber chart of Lieberman-Warner. The bill contains 300 regulations and mandates, each of which most go through the bureaucratic process illustrated in the center of the chart. Many of those rulemakings would likely be litigated. 

    Moreover, the “predictability” most important to business is cost predictability. Uncertainty regarding compliance costs makes it difficult for businesses to plan and attract capital for major projects. Key point: A cap produces cost uncertainty precisely to the extent that it achieves emissions certainty.

    That is, when the quantity of emissions is fixed by law, covered firms have to comply regardless of what it costs, and any number of factors outside the covered entity’s control — unseasonable weather, natural disasters, energy crises, business cycles — can affect cost.

    Proponents of greenhouse gas cap-and-trade schemes tout the Clean Air Act’s Acid Rain sulfur dioxide (SO2) emissions trading system as a model. But as  Ken Green, Stephen Hayward, and Kevin Hasset of the American Enterprise Institute point out:

    SO2 trading prices have varied from a low of $70 in per ton in 1996 to a high of $1500 per ton in late 2005. SO2 allowances have a monthly volatility of 10 percent and an annual volatility of 43 percent over the last decade.  

    The potential for cap-and-trade to generate allowance-price volatility — hence energy-price volatility — is vast. As Green, Hayward, and Hasset also note, in 1994, California’s South Coast Air Quality Management District (SCAQMD) launched RECLAIM (Regional Clean Air Incentives Market), an emissions trading program for SO2 and nitrogen oxides (NOx). SCAQMD estimated that SO2 and NOx would be reduced by 14 and 8 tons per day respectively, by 2003, at half the cost of prescriptive, command-and-control approaches. The authors comment:

    RECLAIM never came close to operating as predicted and was substantially abandoned by 2001. Between 1994 and 1999, NOx emissions fell only 3 percent, compared to a 13 percent reduction in the five years before RECLAIM. There was extreme price volatility aggravated by California’s electricity crisis of 2000. NOx permit prices ranged from $1,000 to $4,000 per ton between 1994 and 1999, but soared to an average price of $45,000 per ton in 2000, with some individual trades over $100,000 per ton. Such high prices were not sustainable, and SCAQMD removed electric utilities from RECLAIM in 2001.

    Waxman-Markey: impacts and offsets

    The big kahuna of cap-and-trade bills this year is the American Clean Energy and Security Act (ACES), H.R. 2454, commonly known as Waxman-Markey for its co-sponsors, House Energy and Commerce Chairman Henry Waxman (D-CA), and Energy & Environment Subcommittee Chairman Ed Markey (D-MA).

    On March 31, 2009, Waxman and Markey circulated a “discussion draft” of ACES. On May 13, 2009, Dr. Kreutzer and the Heritage team published their economic impact assessment of the cap-and-trade provisions. The discussion draft cap-and-trade program aimed to reduce greenhouse gas emissions from covered sources 20% below 2005 levels by 2020, 42% below by 2030, and 83% below by 2050. The Heritage analysis projected that, by 2035, the bill would:

    • Reduce cumulative GDP by $7.5 trillion.
    • Lower average annual employment by 844,000 jobs, reducing employment by 1.9 million jobs in peak years.
    • Raise electricity rates 90% after adjusting for inflation.
    • Raise inflation-adjusted gasoline prices by 74%.
    • Raise an average family of four’s yearly energy bill by $1,500.
    • Increase inflation-adjusted federal debt by 29%, or $33,400 additional debt per person.

    A key uncertainty in estimating the economic impacts of a cap-and-trade program is the extent to which covered entities may meet their obligations by earning or purchasing “offsets.” An offset is a credit for greenhouse gas-reducing investments in economic sectors or geographic regions not subject to the cap. For example, offsets may be awarded for investing in tree plantations in developing countries (trees remove CO2 from the air).

    The Breakthrough Institute contends that the offset provisions in Waxman-Markey are so generous they all but eliminate any real constraint on U.S. domestic CO2 emissions until 2025 or 2030. Indeed, the bill authorizes up to 2 billion tons in offsets for domestic projects and 1.5 billion tons in offsets for international projects. (All of which, incidentally, is tacit admission that the costs of cap-and-trade can be severe and must in some way be mitigated or limited.)

    Other analysts note that offsets are highly susceptible to fraud and creative accounting. For example, a Chinese company might increase its emissions of hydrochloroflourocarbons (HCFCs), which are very potent synthetic greenhouse gases, just so offset-seeking U.S., European, and Japanese businesses can pay the Chinese company to reduce those emissions. Assuring the integrity of an offset is “challenging,” says the Government Accounting Office (GAO), ”because it involves measuring the reductions achieved through an offset project against a projected baseline of what would have occurred in its absence.” The House of Representatives had an offset program to achieve “carbon neutrality,” but abandoned it after finding out the program was paying farmers to do what they would do anyway (use tilling practices that keep the carbon buried in the soil).  Award enough dubious offsets, and the Waxman-Markey cap becomes a leaky sieve.

    On the other hand, the Heritage Foundation’s May 13, 2009 study argues that the bill, perhaps recognizing the potential for fraud, ”includes significant hurdles for those wishing to use offsets.” Heritage assumes in its analysis that offsets will alleviate the stringency of the caps by 15%.

    Charles River Associates (CRA), in a May 2009 study commissioned by the U.S. Black Chamber of Commerce, assumes full use of international offsets, notwithstanding well-known “difficulties in measuring, veryifying, and ensuring the permanence” of the emission reductions claimed for such projects. Under this assumption, total U.S. emissions from 2012 to 2050 to exceed the cap by about 30%–double the 15% assumed in the Heritage analysis.  Accordingly, the CRA study of Waxman-Markey, as introduced on May 15, 2009, projected smaller although still significant economic impacts. 

    Under the Waxman-Markey cap-and-trade program, CRA estimates:

    • Retail natural gas rates would increase by 10% in 2015, 16% in 2030, and 34% in 2050 relative to the baseline in the Energy Information Administration’s (EIA) Annual Energy Outlook 2009 (AEO09).
    • Retail electric rates would increase by 7.3% in 2015, 22% in 2030, and 45% in 2050 relative to the AEO09 baseline.
    • The per-gallon cost of gasoline would increase by 12 cents in 2015, 23 cents in 2030, and 59 cents in 2050 relative to baseline levels.
    • U.S. employment would decline by 2.3 million to 2.7 million jobs in each year of the policy through 2030 relative to baseline levels (even after accounting for “green job” creation).
    • Average wages would decline by $170 in 2015, $390 in 2030, and $960 in 2050 relative to basline levels.
    • Average household purchasing power would decline by $730 in 2015, $830 in 2030, and $940 in 2050 relative to baseline levels.
    • GDP in 2030 would be 1.1% or $350 billion lower than the baseline level.

    Rejected consumer protections

    Waxman and Markey introduced their bill in the House on May 15 and the House Energy and Commerce Committee appoved a marked-up (amended) text on June 5. It is quite revealing what amendments the Committee rejected.

    On largely party-line votes, Committee Democrats voted down:

    • Rep. Fred Upton’s (R-MI) amendment suspending the Act if the EPA Administrator determines that the U.S. unemployment rate has reached 15% as result of the Act.
    • Rep. Lee Terry’s (R-NB) amendment suspending the Act if the price of gasoline exceeds $5 a gallon.
    • Rep. Roy Blunt’s (R-MO) amendment suspending the Act if retail electricity prices increase by more than 10%.

    Waxman-Markey grows and grows

    Heritage Foundation’s analysis of Waxman-Markey as approved by the House Energy and Commerce Committee on June 5 is available here. To obtain enough votes needed for passage, Waxman and Markey and House Speaker Nancy Pelosi (D-CA) kept expanding the bill with more and more goodies for utilities and other affected interests. Between Committee approval on June 5 and placement on the House Calendar on June 19 the bill grew from 742 pages to about 1,200 pages. Then, at 3:00 a.m. the night before the House floor vote on June 26, the bill grew by almost 300 pages, finally weighing in at 1,427 pages. Most House members had no idea what they were voting on. Waxman-Markey as passed is so complicated that CBO needed 156 closely-printed pages just to summarize the bill’s provisions.

    On August 6, 2009, David Kreutzer and his Heritage Foundation colleagues (Karen Campbell, William Beach, Ben Lieberman, and Nicolas Loris) released their analysis of Waxman-Markey as passed. The results are not too different from their initial analysis of the Waxman-Markey discussion draft. Under Waxman-Markey as passed:

    • Impose a defacto energy tax on the U.S. economy costing $5.7 trillion during 2012-2035.
    • Cumulative GDP losses are $9.4 trillion between 2012 and 2035.
    • Single year GDP losses are $400 billion in 2025 and will ultimately exceed $700 billion.
    • Net job losses approach 1.9 million in 2012 and could approach 2.5 million in 2035.
    • A family of four on average will pay $839  more per year on energy-related utility costs.
    • Cumulative manufacturing output is $585 billion lower than the baseline amount by 2035 .
    • Gasoline prices will rise by 58% ($1.38 more per gallon) and residential electricity rates will rise by 90%.

    A report by the American Council for Capital Formation (ACCF) and the National Association of Manufacturers (NAM), using the National Energy Modeling System (NEMS) developed by the Energy Information Administration (EIA), arrives at similar results:

    • In 2030, inflation-adjusted GDP is reduced by 1.8% ($419 billion) under a low-cost scenario and by 2.4% ($571 billion) under a high cost scenario compared to the baseline forecast. For perspective, Social Security payments to retirees in 2008 totaled $612 billion.
    • Cumulative GDP losses during 2012-2030 range from $2.2 trillion under the low-cost case to $3.1 trillion under the high cost case.
    • In 2030, industrial output levels are reduced by between 5.3% and 6.5% under the low- and high-cost scenarios.
    • Even when “green jobs” are factored in, total U.S. employment averages 420,000 to 610,000 fewer jobs each year under the low- and high-cost scenarios than under the baseline forecast. By 2030, there are between 1,790,000 and 2,440,000 fewer jobs overall.
    • Electricity prices are 5% to 8% higher by 2020, and by 2030 electricity prices are between 31% and 50% higher.
    • In 2030, household income declines from $730 in the low-cost case to $1,248 in the high cost case.

    Postage stamp per day?

    You may have heard from supporters that Waxman-Markey would cost the average family only $175 per year in 2020, or about a postage stamp per day, according to analyses by the Congressional Budget Office (CBO) and the EPA. That’s a small price to pay, we’re told, to save the planet!

    The Heritage team’s rebuttal is worth quoting at length. Here’s their take on the EPA analysis:

    First, the EPA employs a technique from the financial world called “discounting” to reduce the value [of the Waxman-Markey economic impacts]. For example, the EPA estimates that the inflation-adjusted cost per household in 2050 will be $1,287. However, after this value is discounted to the present, the cost is $140 per household . . . If a househhold must pay $1,287 in 2050, the $140 represents the amount that household would have to pay into an interest-bearing account today so that hte interest would allow it to grow to $1,287 by 2050. Discounting can be a legitimate tool for cost-benefit and investment analysis where costs are paid and benefits are received at different times. Thus, both are discounted to the same point in time and compared. Without discounted environmental impacts for comparison, using the technique, here, does little except undercount the cost that families will actually pay in 2050.

    Second, the EPA measures consumption, not income. The broadest and best measure of cost if lost income–lost GDP. Consumption only comes after taxes and savings are deducted. Igoring lost savings and lost payments for government services underestimates sthe cost by about 40%.

    Third, the EPA measures cost per household. Households are not necessarily families. One person living alone counts as a household, as do three single people sharing an apartment. The EPA uses an average household size of 2.6 people. Converting from this EPA household size to a family of four adds more than 50% to the cost estimate.

    So, EPA’s $174 cost per household is actually above $2,700 (even after adjusting for inflation) when presented as lost income per family of four. That is not a postage stamp per day.

    Regarding the CBO analysis, the Heritage team writes:

    The CBO study, on the other hand, does not even attempt a comprehensive measure of lost income and it explicitly states so in footnote 3 of its report . . . The CBO’s methodology effectively measures the administrative costs of collecting and distributing the allowances rather than the full economic cost.

    Additional commentary by Dr. Kreutzer the CBO and EPA analyses is available here, here, and here.

    More pain for no gain

    A final observation: Even if you think global warming is a big problem, Waxman-Markey would have no discernible effect on global temperatures or sea level rise even if all industrialized nations adopt it. Paul C. Knappenberger, my colleague at the free-market energy blog, Masterresource.Org has written brilliantly and extensively on these matters (see herehere, here, here, and here).

    Divvying up the booty

    by Myron Ebell on August 7, 2009

    The Senate Finance Committee held a hearing Tuesday on how to divvy up the booty (that is, allocate the ration coupons) under a cap-and-trade system.  John Stephenson, testifying on behalf of the U. S. Government Accountability Office, noted the obvious: cap-and-trade works by increasing energy prices and that poor people feel the most pain because they spend a higher proportion of their incomes on energy than wealthier people.  Stephenson testified: “According to economic literature, in the absence of compensatory measures by the government, a cap-and-trade program could have a disproportionate impact on low-income households, since they generally spend a higher percentage of their income on energy and energy-intensive goods and services than do higher-income households.”

    On the subject of giving away the ration coupons to utilities and other emitters in order to minimize price increases, Stephenson was very clear: “Furthermore, attempts to keep energy prices low could increase the cost of the program to the economy. Rising prices for energy and energy-intensive goods are critical to the success of the program, because these ‘price signals’ create incentives for both covered entities and consumers to conserve energy, and thereby reduce emissions of greenhouse gases. To the extent that price signals are not preserved, fewer households and businesses will change their behavior in response to these signals. This could reduce the economic efficiency of a cap-and-trade program, since some of the less costly emissions reduction opportunities would be foregone.”

    Alan D. Viard of the American Enterprise Institute explained exactly where the proceeds of free ration coupons would go: “Free allocation of cap-and-trade allowances to firms in unregulated markets is equivalent to imposing a carbon tax while using the revenue to make transfer payments to stockholders.”

    Nathaniel O. Keohane testified on behalf of the Environmental Defense Fund, a front group for big corporations hoping to get rich off cap-and-trade legislation.  He said that the Waxman-Markey bill as passed by the House is an excellent start that the Senate only needs to improve around the edges.  Yes, indeed, that’s why every big company and industry is now lining up at the Senate trough oinking for more free ration coupons.

    Don’t look now gang, but government — this time in the states — has another great trade-in-your-clunker program. It’s for refrigerators! The New York Times explains:

    Sam Sirkin, the program development manager of Jaco Environmental, a refrigerator and freezer recycler, said that his company now works with 45 utilities in 21 states, up from about 15 utilities in 10 states three years ago.

    The recent flurry of new programs in New England stems in part from the recent introducton of the Regional Greenhouse Gas Initiative, a Northeastern program that caps greenhouse gas emissions in an effort to combat climate change, as well as from energy efficiency initiatives in individual states, according to Mr. Sirkin.

    Utilities commonly estimate that homeowners can save up to $150 a year on their electricity bill by dumping their old refrigerator or freezer.

    Now according to the big-government types who love to justify these things, those savings would work out to approximately the cost of…a postage stamp a day. In other words, in the economy of the Leftists, insignificant and no big deal.

    So feel free to keep the Ole’ chillmaster hummin’ along. It don’t cost ya nothin’!

    The American Psychological Association’s “Task Force on the Interface Between Psychology and Global Climate Change” published its report this week:

    Many people are taking action in response to the risks of climate change, but many others are unaware of the problem, unsure of the facts or what to do, do not trust experts or believe their conclusions, think the problem is elsewhere, are fixed in their ways, believe that others should act, or believe that their actions will make no difference or are unimportant compared to those of others….Some or all of the structural barriers must be removed but this is not likely to be sufficient. Psychologists and other social scientists need to work on psychological barriers.

    Translation: If you’re a green skeptic, the APA thinks you need a shrink.

    The arrogance of this report is astounding. It presumes only one rational position in an incredibly complicated policy debate. CEI’s Marlo Lewis has a recent video discussing the science behind skepticism, but without even going into the details, let’s just recall the questions that have to come before action:

    1. What will be the extent and the effects of global warming?
    2. How much of that will be our fault?
    3. Of that portion, how much are we willing and able to abate?
    4. How much would that abatement cost?
    5. Is that cost lower than the additional damage the avoided warming would have caused?

    Every one of those questions is open, and while the APA is certainly entitled to its answers, the idea that no one in his right mind could disagree is absurd and counterproductive.

    The report makes a notable omission. More than a century and a half ago, Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds described humanity’s penchant for irrational crowd mentalities in movements like alchemy, the crusades, witch-hunts, and market bubbles. The same pattern has shown up again and again in popular panics: the nationalism of WWI, the crash of 1929, Nazism, Malthusian overpopulation scares in the 60’s, and fears of global cooling in the 70’s.

    Might today’s green movement be more mania than reason? No, surely not.

    The American Psychological Association’s “Task Force on the Interface Between Psychology and Global Climate Change” published its report this week:

    Many people are taking action in response to the risks of climate change, but many others are unaware of the problem, unsure of the facts or what to do, do not trust experts or believe their conclusions, think the problem is elsewhere, are fixed in their ways, believe that others should act, or believe that their actions will make no difference or are unimportant compared to those of others….Some or all of the structural barriers must be removed but this is not likely to be sufficient. Psychologists and other social scientists need to work on psychological barriers.

    Translation: If you’re a green skeptic, the APA thinks you need a shrink.

    The arrogance of this report is astounding. It presumes only one rational position in an incredibly complicated policy debate. CEI’s Marlo Lewis has a recent video discussing the science behind skepticism, but without even going into the details, let’s just recall the questions that have to come before action:

    1. What will be the extent and the effects of global warming?
    2. How much of that will be our fault?
    3. Of that portion, how much are we willing and able to abate?
    4. How much would that abatement cost?
    5. Is that cost lower than the additional damage the avoided warming would have caused?

    Every one of those questions is open, and while the APA is certainly entitled to its answers, the idea that no one in his right mind could disagree is absurd and counterproductive.

    The report makes a notable omission. More than a century and a half ago, Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds described humanity’s penchant for irrational crowd mentalities in movements like alchemy, the crusades, witch-hunts, and market bubbles. The same pattern has shown up again and again in popular panics: the nationalism of WWI, the crash of 1929, Nazism, Malthusian overpopulation scares in the 60’s, and fears of global cooling in the 70’s.

    Might today’s green movement be more mania than reason? No, surely not.