Congress Must Defeat Clean Energy and Security Act

This article is excerpted from Mr. Myron Ebell’s April 22, 2009, testimony before the House Committee on Energy and Commerce on the draft of “American Clean Energy and Security Act sponsored by Democratic Representatives Henry Waxman (Calif.) and Edward Markey (Mass.)

Each and every title of the draft bill that is the subject of today’s hearing is fundamentally misguided. In the judgment of the Competitive Enterprise Institute (CEI), where I am director of energy and global warming policy, the American Clean Energy and Security Act cannot be improved enough to warrant enactment. It should not be introduced. If it is introduced, it should be defeated.

Cap-and-Trade Horror

Let me begin with the largest single item in the bill, the cap-and-trade regime that is roughly sketched out in Title III of the draft. Cap-and-trade has been widely sold as a “market-based approach” to reducing emissions.

This is terribly misleading. Cap-and-trade subordinates markets to central planning. It takes the most important economic decisions out of the hands of private individuals acting in the market and puts them in the hands of government.

The record of central planning in the 20th Century has not been judged a success, and most centrally planned economies collapsed towards the end of the last century. Perhaps the advocates of cap-and-trade can find some glimmer of hope in the persistence of Cuba and North Korea, which are both models of economies that have commendably low, indeed negligible, greenhouse gas emissions.

If enacted, Title III’s cap-and-trade regime would be the single largest government intervention in the economy and in people’s lives 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).

Threat to Liberty

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 a cap-and-trade regime.

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.

Economists have generally agreed that cap-and-trade cannot force reductions in greenhouse gas emissions as efficiently as would a carbon tax, but a great deal of ingenuity has been expended in trying to fashion a cap-and-trade regime which would closely approximate the effects of a tax. The fact is that cap-and-trade is an indirect, hidden, sneaky tax.

If Title III or something like it were enacted, it would probably be the biggest tax increase in the history of the world. Or as Sen. Benjamin Cardin [D.-Md.] recently remarked, cap-and-trade is “the most significant revenue-generating proposal of our time.” This can be disputed merely because there is no way of knowing how expensive it will be to cut emissions.

The initial evidence from the countries that ratified the Kyoto Protocol and thereby undertook solemn, binding (but unenforceable) commitments to reduce their emissions suggests that the costs are going to be extremely high.

For example, gasoline taxes in major European Union member nations are now three to four dollars a gallon. This translates roughly into $300-$400 per ton of carbon dioxide.

Yet, according to the European Environment Agency, greenhouse gas emissions in the transportation sector increased 26% in the EU-15 between the Kyoto baseline year of 1990 and 2006.

Many promoters of cap-and-trade have claimed that the costs will turn out to be much lower than mainstream economic models have predicted. A few have even claimed that cap-and-trade will be a net benefit to the economy. In reality, the costs of cap-and-trade to consumers will be much higher than the net loss of GDP predicted by the models.

As Fred Smith, President of CEI, discussed in his Feb. 13, 2007, testimony before the Senate Committee on Environment and Public Works, the deadweight loss to the economy (expressed in lower GDP) does not include cap-and-trade’s much larger wealth-transfer effects.

The fact is that for many advocates, the primary attraction of cap-and-trade appears not to be reducing emissions, but rather the promise of colossal transfers of wealth from consumers to big-business special interests and to government.

The European Union’s Emissions Trading Scheme is highly instructive on this point, as a major study by Open Europe, “Europe’s Dirty Secret: Why the EU Emissions Trading Scheme Isn’t Working,” shows in exhaustive detail. Emissions covered under the ETS have not declined, but electricity rates have increased significantly in most EU member countries and windfall profits have been realized by a number of companies.

The price of rationing coupons has fluctuated wildly, and fortunes have been made on speculation and possibly by manipulation. My colleague, Chris Horner, has tracked the flagrant con games and corruption that are occurring under the ETS. And that, I think, is why many member companies of the U.S. Climate Action Partnership support cap-and-trade legislation. They hope in one way or another to get rich at the expense of American consumers.

Who Would Profit?

The leading boosters for the Kyoto Protocol and for cap-and-trade in the U.S. business community were initially the late Kenneth Lay, chairman of the Enron Corp., and Henry Paulson, when he was chairman of Goldman Sachs. In recent years, the principal booster in the big-business community has been Mr. James Rogers, who is now chairman of Duke Energy. Not co-incidentally, I think, Mr. Rogers worked for Enron earlier in his career. There is simply a lot of money that could be made if the Congress would enact just the right sort of cap-and-trade.

That brings me to what I consider the most disturbing thing about the Waxman-Markey draft. The official summary released by the committee states that “The global-warming provisions in the discussion draft are modeled closely on the recommendations of the U S. Climate Action Partnership (USCAP), a coalition of electric utilities, oil companies, chemical companies, automobile manufacturers, other manufacturers and energy companies, and environmental organizations.”

Largest Transfer of Wealth

It should be noted that most of the environmental organizations that belong to USCAP largely serve as front groups for big-business interests. Thus, the authors of the draft bill have invited the beneficiaries of what could turn out to be the biggest transfer of wealth from consumers to special interests in American history to write the rules for this legalized plunder. This is outrageous. It is like asking the foxes to design the chicken coop.

For those who persist in claiming that cap-and-trade will not raise energy prices for consumers very much, let me quote two more-realistic observers. Peter Orszag, who is now head of the White House Office of Management and Budget, testified on April 24, 2008, when he was director of the Congressional Budget Office. He said: “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.… Indeed, the price increases would be essential to the success of a cap-and-trade program….”

I would add only that the price increases would not be a one-time event under cap-and-trade, but would happen every year as the number of ration coupons available was reduced.

And this is what then-Sen. now-President Barack Obama said in a Jan. 17, 2008, interview: “Under my plan of a cap-and-trade system, electricity rates would necessarily skyrocket.”

As for Titles I and II, I will make only two observations: While it is not at all clear that the primary purpose of the bill is to reduce greenhouse gas emissions, if that is indeed the purpose of the bill, then the specific mandates and standards in Titles I and II would be counter-productive to the working of the cap-and-trade regime created in Title III. As many economists have pointed out, a cap-and-trade regime works much more efficiently to reduce emissions if there aren’t a lot of other mandates and standards that obstruct and complicate the efforts by covered entities to seek out the lowest-cost reductions.

Thus, instead of coupling cap-and-trade with even more specific mandates and standards, it would be much more rational to repeal all the existing specific mandates and standards, such as the Corporate Average Fuel Economy standards or the bio-fuel mandates.

My second observation on Title I is that it is all well and good to mandate a renewable energy requirement for electric utilities or a low-carbon fuel standard for transportation fuels. It is quite another thing to actually meet those mandates.

Non-Existent Technology

As a February 23 story by Jim Tankersley in the Los Angeles Times reported, the only thing standing between green energy and reality are a series of major technological breakthroughs. The entire bill is, as my colleague Marlo Lewis often puts it, an exercise in putting the regulatory cart before the technological horse. The American Clean Energy and Security Act would be, as another colleague, Iain Murray, has observed, a perpetual anti-stimulus program if enacted. Most of the policies in the bill are being tried in the European Union and are failing.

Greenhouse gas emissions have been increasing at a faster percentage rate in most EU-15 member nations than in the United States. At the same time, a great deal of money is being spent on producing renewable energy and on energy-efficiency measures.

The EU undertook these expensive projects with the understanding that they would be expensive. But at the time, the EU was experiencing solid economic growth. Their calculation was that they could afford more expensive wind and solar energy and that efficiency measures would eventually pay for themselves.

As a recent study by Dr. Gabriel Calzada, an economics professor at King Juan Carlos University in Madrid, has concluded, the costs of new green energy are enormous and are no longer affordable during the current severe economic downturn.

Myth of California Success

But what about California? Gov. Arnold Schwarzenegger and some prominent members of Congress from California have touted California’s energy and global-warming policies as a successful model for the nation to follow.

A CEI paper by Tom Tanton, a leading expert on California’s energy policy, demonstrates the falsity of these claims in detail. California’s economy is in free fall and high energy prices are one of the causes.

It is true that per capita carbon dioxide emissions have remained flat in California for many years, but that result has been achieved by driving energy-intensive industries out of California. For example, only a small fraction of the vehicles sold in California every year are now produced in California. They are produced in states with lower energy prices and higher per capita carbon emissions.

The fact is that the only demonstrated method for cutting emissions significantly is economic collapse. As Czech President Vaclav Klaus has remarked, he knows how to cut emissions. They did it when communism was overthrown in Czechoslovakia.

Promoting Trade Collapse

Although I doubt that Titles I, II, and III would deliver the kind of cost-effective emissions reductions that the bill’s advocates claim is their goal, I do think that Title IV offers some hope for drastic emissions cuts. Provisions in Title IV would almost certainly provoke a trade war and cripple international trade. That is a recipe for the global economic collapse that could quite easily meet the fanciful targets for emissions reductions advocated, for example, by former Vice President Al Gore.

Mr. Ebell is director of Energy and Global Warming Policy at the Competitive Enterprise Institute.