Magazine April 20, 2009, Issue

Robbing Bismarck to Pay Boston

Cap-and-trade is an interstate wealth-transfer program

On June 6, 2008, the U.S. Senate rejected a motion to end debate on the Lieberman-Warner Climate Security Act, which would have established a “cap and trade” (CAT) system to regulate greenhouse-gas emissions and set ambitious targets for emissions cuts. That same day, ten Democratic senators who opposed the bill — nine of whom had nonetheless voted in favor of cloture “to help their party save face,” as Time reported — sent a letter to Harry Reid, the Senate majority leader, and Barbara Boxer, chairman of the Senate Committee on Environment and Public Works, expressing their concerns.

In their letter, the ten lawmakers called CAT “perhaps the most significant endeavor undertaken by Congress in over 70 years.” They argued that the final legislation should include strong provisions to (among other things) reduce the costs of carbon-capping, spread the burdens “across states and regions,” safeguard American manufacturing jobs, protect working families, boost spending on energy technologies, and ensure the responsible use of CAT revenues.

All ten of those Democrats — Evan Bayh (Ind.), Sherrod Brown (Ohio), Carl Levin (Mich.), Blanche Lincoln (Ark.), Claire McCaskill (Mo.), Ben Nelson (Neb.), Mark Pryor (Ark.), Jay Rockefeller (W.Va.), Debbie Stabenow (Mich.), and Jim Webb (Va.) — are still in the Senate. The debate over Lieberman-Warner spurred them to form a “Gang of 16” along with six more of their Democratic colleagues. This group will be an important faction in the looming CAT battle. Its mere existence shows that anxiety over CAT transcends party lines. Indeed, whatever else Senate Democrats may agree on, they are far from united on President Obama’s climate agenda.

Obama is seeking to enact a CAT program under which the federal government would impose a hard cap on greenhouse-gas emissions and then auction off 100 percent of pollution allowances. These allowances would be bought and traded by companies based on their respective carbon footprints. The CAT system would begin in fiscal year 2012. Its goal, according to Obama’s budget blueprint, would be “to reduce greenhouse gas emissions approximately 14 percent below 2005 levels by 2020, and approximately 83 percent below 2005 levels by 2050.”

This would essentially require a nationwide economic transformation, with coal-dependent states and manufacturing areas facing especially steep challenges. In early March, Politico reported that the Gang of 16, headed by Senator Stabenow, “is reconvening to brainstorm ways to soften the blow of Obama’s proposed climate program on their states’ economies.” The gang includes Energy and Natural Resources Committee chairman Jeff Bingaman (N.M.), Robert Byrd (W.Va.), and the two senators from North Dakota, Kent Conrad and Byron Dorgan.

Small wonder. New Mexico, West Virginia, and North Dakota are all heavily reliant on carbon-heavy coal power for their electricity needs. According to preliminary data from the Energy Information Administration (EIA), coal accounted for roughly 48.5 percent of all U.S. electricity generation in 2008. But its share of the electricity mix varied widely from region to region and from state to state. Coal power provided 97.8 percent of total electricity in West Virginia, 94.5 percent in Indiana, 94.4 percent in Wyoming, 90.9 percent in North Dakota, 85 percent in Ohio, 80.9 percent in Missouri, and 73.5 percent in New Mexico, compared with 14.8 percent in Connecticut, 14 percent in New York, 6.9 percent in Oregon, 2.1 percent in Maine, 1.2 percent in California, 0 percent in Vermont, and 0 percent in Rhode Island.

Those numbers help explain why certain Democrats are so apprehensive about CAT. When it was suggested that Democratic leaders might use the budget-reconciliation process to prohibit a filibuster of climate legislation, 33 senators — 25 Republicans and 8 Democrats — sent a letter to Senate Budget Committee chairman Kent Conrad and GOP ranking member Judd Gregg to counsel against the maneuver.

“We oppose using the budget-reconciliation process to expedite passage of climate legislation,” they wrote. “Enactment of a cap-and-trade regime is likely to influence nearly every feature of the U.S. economy. Legislation so far-reaching should be fully vetted and given appropriate time for debate, something the budget-reconciliation process does not allow. Using this procedure would circumvent normal Senate practice and would be inconsistent with the administration’s stated goals of bipartisanship, cooperation, and openness.”

The eight Senate Democrats who signed this letter were Bayh, Byrd, Bob Casey (Pa.), Mary Landrieu (La.), Levin, Lincoln, Nelson, and Pryor. Conrad himself, a member of the Stabenow-led Gang of 16, has said that reconciliation was not intended to accelerate “fundamental reform legislation.” As we went to press, it appeared that the Senate budget resolution would not contain reconciliation instructions on CAT.

Yet Republicans fear that Democrats will attempt to insert those instructions in a House-Senate conference committee. “This whole deal is a sham,” says a senior GOP Senate aide, who fully expects that Democrats will eventually use reconciliation to fast-track a climate bill and make it filibuster-proof. If so, they would need only 50 votes (with Vice President Biden serving as the tiebreaker) to pass the legislation. “It would be hard but not impossible to get 50,” says the Republican aide.

In his primetime news conference on March 24, President Obama declared that climate legislation “has to take into account regional differences” and “has to protect consumers from huge spikes in electricity prices.” Easier said than done. The costs of CAT would indeed be high, and they would fall disproportionately on middle- and lower-income Americans.

As the Congressional Budget Office (CBO) has noted, “Regardless of how the 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 bear a larger burden relative to their income than wealthier households would.”

More specifically, the CBO has calculated that “the price rises resulting from a 15 percent cut in CO2 emissions would cost the average household in the lowest one-fifth (quintile) of the income distribution about 3.3 percent of its average income,” while it would cost the average household in the top income quintile only “1.7 percent of its average income.” The corresponding figures for the other three income quintiles (from the second-lowest to the second-highest) would be 2.9 percent, 2.8 percent, and 2.7 percent.

In 2008, the American Council for Capital Formation and the National Association of Manufacturers commissioned a study of the Lieberman-Warner bill, performed by Science Applications International Corporation using the EIA’s National Energy Modeling System. It estimated that the costs of compliance with Lieberman-Warner would increase electricity prices for residential consumers by “28 percent to 33 percent in 2020, and 101 percent to 129 percent in 2030.” It also concluded that the measure would reduce GDP by “$151 billion to $210 billion in 2020 and $631 billion to $669 billion in 2030 (in 2007 dollars)” and would result in job losses of “1.2 million to 1.8 million in 2020 and 3 million to 4 million by 2030.” On the family level, the study found that Lieberman-Warner would reduce average household income by between $739 and $2,927 in 2020 and “between $4,022 and $6,752 in 2030 (in 2007 dollars).”

Obama’s budget projects that his CAT regime would generate some $80 billion in annual revenues — roughly $646 billion total from 2012 to 2019 — most of which would be used to fund the “Making Work Pay” tax credit. According to the Wall Street Journal, White House economic adviser Jason Furman has privately said that CAT could yield revenues “two to three times” greater than the official estimate of $646 billion. Meanwhile, Energy Secretary Steven Chu has hinted that the Obama administration may slap tariffs on carbon-intensive imports from countries that don’t price CO2 emissions.

The final bill inevitably will be a Byzantine mix of regulations and loopholes that lobbyists and private companies will seek to exploit. A slew of research has demonstrated that carbon-capping will jack up energy prices and place significant strains on household income. In a January 2008 interview with the San Francisco Chronicle, Obama himself admitted that “electricity rates would necessarily skyrocket” under his CAT program. “We know that GDP will fall, and we know that consumption will fall,” says Clemson University economist Sergey Mityakov, co-author of a recent paper on the economics of carbon mitigation.

Plenty of prominent Senate Democrats have voiced concerns about either the Obama plan specifically or carbon-capping generally. “I think it’s unlikely we will pass a cap-and-trade bill with 100 percent auction,” Senator Bingaman said on March 5. Senator Bayh has pointed to the regional implications of carbon-capping: “If you don’t do it in the right kind of way,” he told MSNBC host Chris Matthews on March 25, “you’re taking money from carbon-intensive states like Ohio, Michigan, Indiana, Pennsylvania, [and] West Virginia, and redistributing it to California [and] New York. That’s just a very hard sell to our people at a time when they’re hurting. And you also run the risk of taking jobs away and not actually solving global warming.”

In a March 23 blog post on The New Republic’s website, Brookings Institution scholar William Galston predicted that “cap-and-trade legislation won’t pass anytime soon — certainly not this year, and probably not next year either.” Whether it does pass in 2009 will depend more on Senate Democrats than on Senate Republicans.

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