The Corner

Cap ‘n Trade Update

Yesterday, I testified to the Senate Environment & Public Works Committee on the international aspects of the Cap-n-trade bill, known as Kerry-Boxer. You can see my written testimony here and my oral testimony should be up soon on as well.

I had two main points. The first, one that was comprehensively ignored by the Democrats on the Committee and the other witnesses, is that the only big example we have for a cap and trade program for greenhouse gases, the European Union Emissions Trading Scheme (ETS), has been an expensive failure. Indeed, the vast cost — already far more than “a postage stamp a day” for European households — has been confirmed in a new report by my colleagues at the Taxpayers’ Alliance in London.

The ETS, the report finds, cost the EU economies as much as $171 billion in 2008. The cost to individual households in the U.K. was about $200. Moreover, climate change policies now account for 14 percent of the average household’s electricity bill and 21 percent of the average industrial electricity bill.

EU emissions did drop a negligible 1.5 percent in 2008. Being charitable, let’s assume that all of that emissions drop can be ascribed to the ETS. If so, then to achieve the 20 percent reduction target the EU has for 2020, simple extrapolation suggests that will cost the EU a staggering $2.28 trillion that year (and the accumulated costs would be even more massive). In fact, the cost could be way higher than that, because we tend to make the more affordable cuts first; deeper cuts will naturally cost more per unit.

Only Senator Inhofe asked me about this. Senator Boxer dismissed these objections with a wave of the hand, despite analyses from the Heritage Foundation and National Association of Manufacturers showing similar staggering costs to the U.S. (even the Brookings Institution found massive costs).

Of course, the $171 billion did not purchase these emissions reductions. As Prins et al say,

In the economic crisis of 2008-09 there have been sharp reductions in industrial production. Germany and Japan, the leading exporters of high-quality industrial goods, have experienced particularly sharp falls: in the Japanese case, a 34% drop in output in 2009. One unintended contingent consequence of the recession has been to reduce emissions including CO2 emissions. But the operative word is ‘unintended’. It is uncontroversial that governments in many (but not all) major economies seek to cut their carbon emissions by large percentages. The question is how to do so deliberately. Efforts over nearly two decades to reduce emissions have thus far borne no fruit.

Meanwhile, great things were said by my fellow panelists about the success of other European attempts to encourage renewable energy. Let’s take as an example the German “feed-in tariff,” which guarantees a market and profit for renewable energy. This has been going in one form or another since 1991, so I think we have enough data to assess whether it has been a success or not. The current subsidy for wind power amounts to 300 percent more than the cost of conventional electricity. This has indeed led to reductions in the cost of wind power but, even after twenty years of such investment, it is still a vastly inefficient way of generating electricity and even of reducing CO2. The “abatement cost” works out at about $80 a ton of CO2, twice the price of the ceiling cost of a permit to emit a ton of CO2 under the ETS. As for solar, well, 20 years of subsidies has led to an abatement cost of — wait for it — $1,050 a ton.

In short, renewables subsidies don’t give you tech breakthroughs, don’t cause other people to follow your lead, and don’t save you money, even if your prime goal is reducing CO2 — there are other, more affordable ways to do it. The German experience of 20 years proves that.

I’ll go into more detail about my other main point (China and other developing countries) in my next post.