Cap and pay - Congress should reject uncertain promise of emissions crackdown
By Rocky Mountain News
Wednesday, June 4, 2008
We are fairly confident that the Climate Security Act, being debated this week in the U.S. Senate, will have at most a negligible impact on global warming.
For one thing, U.S. lawmakers cannot prevent China, India and other developing nations from expanding their industrial economies (nor should they); these growing societies are likely to produce much more carbon-based energy in the next two decades than the projected savings by the United States.
Though the bill is unlikely to pass, the Democratic and Republican presidential front-runners remain enthusiastic about the cap-and-trade process that is its cornerstone. A similar bill is almost certain to reappear next year.
Cap and trade is a recipe for energy rationing, big time. Washington would set a limit on national greenhouse gas emissions beginning at 2005 levels in 2012 and then going down by 2 percent a year from the same '05 base until 2050.
Since electricity production, transportation and manufacturing account for 81 percent of U.S. greenhouse gas emissions, the bill would target those activities - in other words, the heart and soul of our economy. Power plants, fuel refineries and manufacturers would get allowances under the cap (a permit to pollute, if you will) each year. Those seeking to exceed their government- imposed limits could buy credits from other permit holders that have not.
Under the legislation, emissions allowances would be forced downward every year, even as energy demand is expected to rise. As a result, allowances will get more expensive.
The cost of anything produced with fossil fuels will go up. Economists at MIT estimate that by 2015 the Climate Security Act would raise the price of gas by 29 percent, electricity by 55 percent and natural gas by 15 percent. The Congressional Budget Office is not as pessimistic, but still it predicts that a 15 percent cut in greenhouse gas emissions (which would be mandated within a few years of passage) would boost the average household's energy bill by $1,300 a year.
But the truth is that these models - and others that predict virtually no economic impact, or much worse - are educated guesswork. All that can be said with certainty is that carbon-based energy costs will steadily rise; that, after all, is the idea.
These higher consumer costs would percolate through the economy since nearly everything requires energy to be produced. Washington also stands to land a sizable windfall - between $3.3 trillion and $7 trillion over the next four decades, according to bill sponsors. The feds would get the money auctioning emission allowances each year.
Not only will Washington do well in terms of revenue; regulators' powers will be vastly expanded. American families won't be so lucky, since Congress hasn't planned offsetting tax cuts to cushion individuals and businesses from the financial blow.
A revenue-neutral plan pairing legislation with broad-based tax cuts would at least make the bill more palatable. For that matter, most economists will tell you that a straight carbon tax (also offset, we'd hope, with tax cuts elsewhere) makes more sense than cap and trade because the tax is visible and involves smaller transaction costs; a cap-and-trade system would be incredibly complex and its effects largely obscure to the average American.
Someday the United States will transition from a fossil fuel economy, and the ground for it is being laid right now through major investments in research into alternative technologies. But the needed breakthroughs are best fostered by policies that encourage economic growth, not retard it.
Proponents of this legislation are asking Americans to accept a reduction in their living standards for decades, perhaps a significant one, in exchange for an uncertain payoff many decades in the future. That's hardly a bargain.
© Rocky Mountain News
WALL STREET JOURNAL
REVIEW & OUTLOOK
Cap and Spend
June 2, 2008; Page A16
As the Senate opens debate on its mammoth carbon regulation program this week, the phrase of the hour is "cap and trade." This sounds innocuous enough. But anyone who looks at the legislative details will quickly see that a better description is cap and spend. This is easily the largest income redistribution scheme since the income tax.
Sponsored by Joe Lieberman and John Warner, the bill would put a cap on carbon emissions that gets lowered every year. But to ease the pain and allow for economic adjustment, the bill would dole out "allowances" under the cap that would stand for the right to emit greenhouse gases. Senator Barbara Boxer has introduced a package of manager's amendments that mandates total carbon reductions of 66% by 2050, while earmarking the allowances.
When cap and trade has been used in the past, such as to reduce acid rain, the allowances were usually distributed for free. A major difference this time is that the allowances will be auctioned off to covered businesses, which means imposing an upfront tax before the trade half of cap and trade even begins. It also means a gigantic revenue windfall for Congress.
Ms. Boxer expects to scoop up auction revenues of some $3.32 trillion by 2050. Yes, that's trillion. Her friends in Congress are already salivating over this new pot of gold. The way Congress works, the most vicious floor fights won't be over whether this is a useful tax to create, but over who gets what portion of the spoils. In a conference call with reporters last Thursday, Massachusetts Senator John Kerry explained that he was disturbed by the effects of global warming on "crustaceans" and so would be pursuing changes to ensure that New England lobsters benefit from some of the loot.
Of course most of the money will go to human constituencies, especially those with the most political clout. In the Boxer plan, revenues are allocated down to the last dime over the next half-century. Thus $802 billion would go for "relief" for low-income taxpayers, to offset the higher cost of lighting homes or driving cars. Ms. Boxer will judge if you earn too much to qualify.
There's also $190 billion to fund training for "green-collar jobs," which are supposed to replace the jobs that will be lost in carbon-emitting industries. Another $288 billion would go to "wildlife adaptation," whatever that means, and another $237 billion to the states for the same goal. Some $342 billion would be spent on international aid, $171 billion for mass transit, and untold billions for alternative energy and research – and we're just starting.
Ms. Boxer would only auction about half of the carbon allowances; she reserves the rest for politically favored supplicants. These groups might be Indian tribes (big campaign donors!), or states rewarded for "taking the lead" on emissions reductions like Ms. Boxer's California. Those lucky winners would be able to sell those allowances for cash. The Senator estimates that the value of the handouts totals $3.42 trillion. For those keeping track, that's more than $6.7 trillion in revenue handouts so far.
The bill also tries to buy off businesses that might otherwise try to defeat the legislation. Thus carbon-heavy manufacturers like steel and cement will get $213 billion "to help them adjust," while fossil-fuel utilities will get $307 billion in "transition assistance." No less than $34 billion is headed to oil refiners. Given that all of these folks have powerful Senate friends, they will probably extract a larger ransom if cap and trade ever does become law.
If Congress is really going to impose this carbon tax in the name of saving mankind, the least it should do is forego all of this political largesse. In return for this new tax, Congress should cut taxes elsewhere to make the bill revenue neutral. A "tax swap" would offset the deadweight taxes that impede growth and reduce employment. All the more so because even the cap-and-trade friendly Environmental Protection Agency estimates that the bill would reduce GDP between $1 trillion and $2.8 trillion by 2050.
Most liberal economists favor using the money to reduce the payroll tax. That has the disadvantage politically of adding Social Security into the debate. A cleaner tax swap would compensate for the new tax on business by cutting taxes on investment – such as slashing the 35% U.S. corporate rate that is the second highest in the developed world. Then there's the 2001 and 2003 tax cuts, which are set to expire in 2010 and would raise the overall tax burden by $2.8 trillion over the next decade. Democrats who want to raise taxes on capital gains and dividends are proposing a double tax wallop by embracing Warner-Lieberman-Boxer.
All of this helps explain why so many in Congress are so enamored of "doing something" about global warming. They would lay claim to a vast new chunk of the private economy and enhance their own political power.