Jul 07 2009

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Destructive Creation

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An old dictum has it that every time the US Congress makes a joke, it’s a law, and every time they make a law, it’s a joke. Unfortunately, with the House passed Cap and Trade legislation, the joke is at the expense of the American people with very serious consequences.

Yellow Brick Road Environmentalism

On June 26th, the House of Representatives passed the 1,500 page American Clean Energy and Security Act of 2009. The innocuous sounding bill caps greenhouse gas (GHG) emissions in the United States progressively over the next forty years.  The bill is designed to reduce US GHG output by 85% below the 2005 level in 2050.

To reach this ambitious reduction goal, the bill monetizes the value of GHG emissions over the ensuing decades and restricts their availability by selling GHG permits to force polluters to use cleaner technologies.

In addition, the leviathan bill, through “a web of mandates, subsidies and regulation,”1 creates vast federal regulatory power to influence and shape the complex energy infrastructure spectrum within the US to conform to the GHG reduction goal.

The bill, a centerpiece for environmental activists for years, is ostensibly designed to address climate change, create new “green jobs” in America and put the US well on the road to energy independence.

President Obama hailed passed of the bill, stating, “It’s a bold and necessary step that holds the promise of creating new industries and millions of new jobs; decreasing our dangerous dependence on foreign oil; and strictly limiting the release of pollutants that threaten the health of families and communities and the planet itself.”2

The Reality

But a detailed review of the bill demonstrates that this is easily one of the worst pieces of legislation yet conceived by an American Congress, with an impact on the US economy and the American people that will be onerous, invasive, punitive and ultimately destructive. Rarely has legislation so thoroughly mocked and contradicted the justifications made on its behalf.  It is nothing short of a continuation of efforts by liberal Democrats “to cannibalize US capitalism.”3

Anticipating potential opposition, President Obama defaulted to his now well-worn, false choice rhetoric, “There are those who argue that the status quo is acceptable, those who would have us continue our dependence on foreign oil and our reliance on fossil fuels despite the risks to our security our economy and our planet.”4

Let us first plainly acknowledge here that, as with so many other dubious Democratic policy initiatives, the choice is not between doing nothing and/or pursuing the Democratic course. A clear majority of Americans support energy security, and while debate continues on global warming, there is bipartisan support for a cleaner environment.

The question here is what path will we follow to obtain these public policy objectives?

That the Democrats’ handiwork raises taxes and the costs of business, reduces economic growth, threatens American jobs, creates energy scarcity and unpredictability in energy markets, increasesreliance on foreign energy, not to mention the creation of an invasive regulatory morass that substitutes government fiat for private sector competition, is deeply disturbing.

But the irony here – and the most important feature of the legislation – is that for all this hardship and dislocation the bill imposes, it will not reduce global warming.

To understand these points, you need to understand US energy sources and utilization that the bill intends to tackle.

Energy Use in America

Energy is the circulatory system of the American economy; the vessels that fuel American prosperity and productivity.  Energy touches everything, and no part of our economy functions properly without it. Our ability to grow, innovate and remain competitive is directly tied to our access to affordable and plentiful energy.

Energy usage in the US economy can be divided into four sectors:

Industrial (32%) – facilities used for producing and processing goods.  This sector is dominated by manufacturing operations, but also includes agriculture and mining, as well as feedstocks fossil fuels used as raw materials for manufacturing.

Transportation (29%) – any equipment used to move people or materials, via land, water or air.  Cars, trains, planes, tractor trailers, boats, et.al.

Residential (21%) – private living quarters, including single family homes, apartments and mobile homes.

Commercial (18%) – service providing facilities including both government and private sector buildings such as offices, stores, restaurants, churches, hospitals and libraries.5

In sum, it touches every activity that we do for business or pleasure, from turning on a light switch, to a drive time commute, to running a factory or server farm, to powering a city.

The sources of energy are equally easy to quantify.  39% of our energy is derived from petroleum, 23% from natural gas, 23% from coal, 8% from nuclear and 7% from renewables.6 Critically and central to the bill, fully 85% of the energy that powers our economy comes from sources that produce GHG emissions.  It is these sources of power that the House plans to attack.

The Problems

Taxes: one of the central and thus far unresolved paradoxes of Cap and Trade enthusiasts is the proposition that price increases for polluters will serve as an incentive to move toward cleaner technology, while at the same time maintaining that the program will be cost neutral.

Let’s be clear. If enacted, Cap and Trade will be one of the biggest tax increases in American history, affecting every business and citizen. Estimates vary.

The White House and congressional Democrats took great relief in a Congressional Budget Office (CBO) projection that stated an average family would spend no more than $175 extra per year as a result of the bill. The Wall Street Journal dismantled the assumptions and caveats put in place by the CBO and came to a much different figure.

The conservative Heritage foundation, using an analysis of the economy as a whole with and without cap and trade, estimated that the bill would cost $1,870 for a family of four by 2020.   Martin Feldstein, a Harvard economist and former Chair of the Council of Economic Advisors put the tax at $1,600.7 Other estimates go as high as $7,000, when the full effects of the restrictions take hold after 2020, presumably long after the authors of the bill are out of Congress.

For your skeptics out there, if Republican views don’t impress, perhaps President Obama’s will.  Candidate Obama weighed in on this cost debate in an interview with the San Francisco Chronicle in January 2008, “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, they would have to retrofit their operations.  That will cost money, and they will pass that [cost] on to consumers [emphasis added].”

And unlike the Administration’s plan to milk the rich through income tax increases, the burden of this bill falls in the sweet spot of the population that Democrats to champion.

Manufacturing states will be hit harder than states that rely on services. Coal producing states will have a higher cost to bear than states that rely on hydro or natural gas. And low-income Americans, who devote more of their disposable income to energy, have more to lose than higher income Americans.

Given that this is so much guess work at this stage, let’s look to experience. Britain’s Taxpayer Alliance estimates the average family in the UK is paying nearly $1,300 a year in green taxes for carbon cutting programs in effect only for a few years.8

In sum, from POTUS on down, there is evidence that Cap and Trade means that Americans will have less to spend from their after tax income, by correspondingly paying more for basic essentials from transportation to food to home power.

Lost Economic Growth & Jobs: energy is the fuel of economic growth. US energy usage is down as a result of the recession, but fresh life in the economy, particularly the hard hit manufacturing sector, will see a geometrical increase in energy usage. The two go hand in hand.

However, fresh levies on the Industrial and Commercial sectors as a result of Cap and Trade will force businesses to curb expansions – and employment – or move operations and jobs overseas to escape the punitive taxes for increased energy.

The Heritage Foundation estimated $7.4 trillion in “lost” GDP by 2035, with a loss of over 1 million jobs. If a conservative think tank is unconvincing, a footnote to the CBO analysis stated, “The resource cost does not indicate the potential decrease in gross domestic product that could result from the cap.”

As the Wall Street Journal points out, “the hit to GDP is the real threat in this bill. The whole point of cap and trade is to hike the price of electricity and gas so that Americans will use less. These higher prices will show up not just in the electricity bills or at the gas station, but in every manufactured goods from food to cars. Consumer will cut back on spending, which in turn will cut back on production, which means fewer jobs created or higher unemployment.”9

Also, consider economic growth from another angle. In 2007, the US emitted 7,256.9 million metric tons of carbon dioxide equivalent in an economy with a Gross Domestic Product of $13.84 trillion.  If the Cap and Trade bill is enacted and successful, US GHG emissions would fall to 1,088.5 million metric tons of carbon dioxide equivalent by 2050.  This is the same GHG output as Russia today, which has a GDP of $1.29 trillion.

A riddle for the White House: How do you fit $13 trillion economy (and presumably growing) into 1 million tons of carbon dioxide equivalent without stunting economic growth?

Scarcity and Unpredictability: Scarcity relates to usage. Currently the only way to meet increased requirements is through GHG emitting sources.  Remember the California “brown outs”?  The requests by regulators across the country for consumers to use less air conditioning and electricity at peak hours during summer?  This was before Cap and Trade.

Now, there is little if any incentive for private industry to expand production of the only short-term capacity available, only to face higher taxes. Obama made the point himself in the Chronicle article, “If somebody wants to build a coal fired plant they can.  It‘s just that it will bankrupt them because they are going to be charged a huge sum for all that greenhouse gas that’s being emitted.”Consider that the US power grid is older, patchwork, overworked and now facing the prospect of little additional online power to meet growing demand.

And this is why, in part, far from lifting the burden of foreign sources of energy, Cap and Trade increases it.  Without additional refining capability in the US, American companies will seek additional imports of refined petrol to meet their needs without having to pay an additional tax for domestic refinement.

Much has been made of the new Green Economy that Cap and Trade will usher in. But at this point, that economy is a pipe dream with promising technologies that are either in early days of development, untested or unready for mass deployment to have a meaningful effect as a substitute energy source for the economy. These technologies and other would still be heavily reliant on large subsidies from the federal government, face serve technical problems and produce energy only intermittently.

Free market economists are fond of referring to “creative destruction”; where entrepreneurs change the economic dynamics through new products and technologies that challenge more mature companies.  In the end, though jobs are lost, there is a net gain in jobs and growth as innovation continues to create new opportunity.

But Cap and Trade is “creative destruction” for liberals.  They seek to destroy the GHG emitting economic sectors through government fiat without an analysis of future, expanded energy needs or a transition to newer, maturing cleaner technologies.

Consider that if Obama had been President before the advent of the mass-produced car, he and his congressional allies may have prematurely restricted the buggy whip industry as an incentive to cope with global warming (horse flatulence no doubt being a public enemy more than a century ago).

If the lack of reliable supply wasn’t enough, Section 724 of the Cap and Trade bill should give pause. Here we learn how permits will be traded. Essentially, there is no restriction. The “evil” Wall Street financiers whom Democrats hold responsible for creating the financial crisis last autumn will be fully capable of creating the market for carbon permits with all the uncertainty that this holds. It may explain the votes of eight northeastern Republicans with ties to Wall Street who voted in favor of the Cap and Trade Measure.

As David Sokol of Mid-America Energy Holdings wrote in the New York Times, “At its core utilities are a highly regulated industry to ensure price stability for consumers. By imposing an unregulated trading program on a highly regulated industry that must make enormous long term and least-cost capital decisions to reduce emissions, it turns American industry over to the EPA, giving the agency the authority to change the rules on allowances every five years.  This will play havoc with the stability of supply to businesses and consumers as government and not the private market decide on targets and supply.

Increased Reliance on Foreign Energy: the irony of the Cap and Trade bill is the enormous domestic resources it ignores.  The US has 237 billion short tons of coal, fully 27% of all global reserves. It also has 237 billion cubic feet of natural gas reserves and 21 billion barrels of oil reserves, both on and off shore.10

Yes, this is GHG emitting, but any responsible plan for America’s energy future will necessarily require a transition period where we shift focus to our domestic sources of energy as we move collectively toward cleaner technologies. But the Obama administration is hostile to any additional development of these resources.

The President has proposed removing all tax incentives to produce oil and gas, slapping a 13% excise tax on all energy derived from the Gulf of Mexico and increasing the corporate tax rate by 3% on all companies that process or oil and gas.  Interior Secretary Ken Salazar has cancelled 77 oil and gas leases that had been issued in Utah. He halted plans to lease the oil shale region in five states after a Shell oil study concluded that there are 1-2 trillion recoverable barrels of oil there.  Further, Obama has thrown out a Bush administration rule covering mountaintop coal mining as “legally defective.”11

Refusal to invest in the ample domestic supply, punitively tax existing plant and rely on untested and expensive clean technologies means that only foreign sources of energy are open to fill the gap, increasing the outflow of American dollars to foreign nations, impacting our balance of trade and increased borrowing needs, currently under tremendous pressure by the ten year Obama budget that is project to borrow $9 trillion.

Invasive Regulatory Power: Cap and Trade takes one more step toward the creation of a genuine Big Brother. According to The Washington Post“…the bill also contains regulations on everything from light bulb standards to the specs on hot tubs.” Nothing is too small for mention, including efficiencies in water coolers and home heaters.

The bill gives the federal government power over local building codes.  It requires that by 2012, codes must require that new buildings be 30% more efficient than they would have been under current regulations. It rises to 50% in 2016.  If localities don’t draft a local code, the Energy Department will draft a national code.  This is all an alarming expansion of federal power to a traditionally state concern.12

And let’s not forget about the new federal CAFÉ standards forced on those US owned auto corporations, to design and build cars that nobody knows if anyone will buy.

As noted earlier, the bill also contains egregious provisions that slap tariffs on goods from countries that do not have similar caps on GHG emissions, no doubt an indirect attempt to level the playing field for lost US growth and jobs by nations unencumbered by intrusion.

But consider for a moment the case of China.  The Chinese hold more than 30% of US debt. Under the Obama plan, we are going to need to borrow more. In fact, he may need to borrow an amount equivalent to the entire existing US public debt accumulated since the nation’s founding.  Who is going to buy that debt?  We are certainly hopeful that the Chinese, with their staggering national reserves will continue to pony up, despite the alarming increased influence this gives the Chinese government in all matters of US economic and foreign policy.

The American advantage with the Chinese is that we are their largest export market.  If Americans stop buying, China has a significant economic problem of its own. This debt vs. exports paradigm is the Mutually Assured Destruction of the 21st century.

But China has expressed no interest in joining an international protocol to limit GHG emissions that will compromise its continued growth. So, if the US starts slapping tariffs on Chinese goods, we lose the little leverage we have with the Chinese, to no good purpose.  The provision is senseless protectionism contrary to what has now become the national security interests of the US.

Global Warming: for all of these sacrifices – lost jobs, GNP, dislocation, quality of life – you think that the primary goal of the bill would at least be met, but it is not. In 2050, after exacting implantation of all 1,500 pages of the bill, US temperatures are estimated to fall by .09 degrees Fahrenheit; a point that is not disputed by advocates of the bill.

This plan for the US comes against a backdrop where China’s total GHG emissions continue to increase. Since 2000 China’s emissions have increased 50% more than the rest of the word combined, and continue to grow.  China has been cool to any suggestion that its economic growth be stymied by climate change requirements of advanced nations.

For its part, an Indian Minster has said, “it is morally wrong for us to agree to reduce (CO2 emissions) when 40% of Indians don’t have electricity.

The harsh reality of the climate change debate is that without a reduction from China and India, there is nothing climatologically gained from any restrictions on US emissions.  Martin Feldstein notes that US emissions count for 25% global GHG emissions, soon to be overtaken by China in 2010, and will continue to fall relative to other emerging powers such as China and India.  Globally, the US effort would be virtually unnoticeable.


“Crisis” has dominated the Obama administration from its founding, and not entirely to its disadvantage.

The $787 billion Stimulus bill was conceived in secret and passed on a virtual Party line vote with the text of the mammoth legislation released only hours before the vote.  Nobody had any idea what was in it.

But we had to do something.

The results so far?  On February 17th, the President said that the bill would create or save 3.5 million jobs.13 Since the bill’s passage, unemployment has, in fact, increased by 2.2 million, from 8.1% to 9.5% today.14 Gross Domestic Product contracted by 5.5% in the first quarter.15 If you extrapolate from the continued job losses through the second quarter of 2009, GDP will again decline.

Consider the auto industry. With the Big Three in crisis, the Obama administration boldly used authority that is at best unclear, to stage a government takeover of 2/3rds of the industry. In the process, it imposed daunting requirements on everything from car design to executive compensation, while vilifying investors and trampling on contract due process to the benefit of politically favored interests.

Among the President’s first actions in office was to order the closure of Gitmo and invalidate seven years of legal precedent for the detention and interrogation of terrorists. Again, something that wasurgently required. In the intervening months, the Administration has backpedaled and nuanced itself on this original decision to the harm of its credibility with both conservatives and liberals.

Cap and Trade follows this trend.  “We have to do something.”

The Washington Post reported that “The president faces time pressure from the European allies, who want the US to approve limits on greenhouse gas emissions before a December climate summit in Copenhagen.” Obama himself has said that he wants to take a signed bill with him to Europe to tout his commitment to addressing climate change.

How can such consequence be artificially forced upon the country simply to make the Europeans happy, particularly when all countries present realize that without the Indians and Chinese, there is no impact?

It is empty cheer leading and hollow self congratulation.

It is time for clearer heads and practical minds to stand up and speak directly to this cost-benefit “Obomination.”  Hopefully we will find such leadership in the Senate that next takes up this legislation.

This is not renaming a post office here. What Obama and the Democrats are proposing represents a fundamental realignment of the US private sector to meet government environmental fiats, without actually achieving its fundamental goal.

It is a bill, in search of a policy, in search of a purpose. Its side effects are toxic.

And objecting to this legislation does not make opponents less responsible stewards of the environment or less committed to energy security. It simply suggests that there is a more prudent way to get there.  For instance, a national cap over the next 40 years and tax credits for creation and adoption of cleaner technology will allow the market to dictate the best solutions.

But we must recognize that ultimately, this test will be generational.

We need the energy resources at our disposal now to create genuine energy security.  That means responsibly drilling for oil and natural gas and building new nuclear reactors as well as dedicating resources to advanced renewables.  It means creating a credible plan to move from fossil fuels to cleaner, renewable technologies, for whatever your position on climate change, fossil fuels are not inexhaustible. As the renewables technologies mature, we wind down GHG emitting systems in a coherent, rational manner, consistent with our energy needs and the pace of deployment of new technologies.

That is responsible environmental stewardship consistent with the best interests of the American people to provide for their continued prosperity. It is what a responsible Congress owes the American people.

1. Washington Post, Editorial July 5,. 2009

2. White House Press Release 6-26-09

3. David Bruckner, Professor, Columbia University

4. White House Press Release 6-26-09

5. US Department of Energy, Energy Information Administration

6. Ibid

7. Martin Feldstein, Washington Post, 6-1-09

8. Wall Street Journal, Cap and Tax Fiction, 6-26-09

9. Ibid

10. US Department of Energy, Energy Information Agency

11. Weekly Standard,  6-15-09

12. Washington Post 6-7-09

13. White House Press Release – 2-17-09

14. Department of Labor, Bureau of Labor Statistics

15. Department of Commerce, Bureau of Economic Analysis


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