Magazine | August 10, 2009, Issue

What’s Wrong with Cap-And-Trade?


In June, the House of Representatives passed the American Clean Energy and Security Act, otherwise known as Waxman-Markey after the bill’s sponsors, Democrats Henry Waxman (of California) and Ed Markey (of Massachusetts). The legislation’s supporters say it would help to avert disastrous climate change by restricting the amount of carbon-based energy Americans use. These restrictions, plus a host of subsidies and incentives for renewable energy, are supposed to bridge America’s transition to a “new energy economy,” a future where office workers commute by electric cars and light rail from their eco-friendly residences to their jobs as clean-energy grant managers, and smiling union laborers hang up their hand-loomed organic-cotton coveralls after a hard day on the wind farm.

Here’s the future actually to expect under Waxman-Markey: The relationship between government and industry is deformed and utilities, petroleum interests, manufacturers, trucking companies, automakers, and airlines have become lobbying firms with commercial subsidiaries. They use their leverage in Washington to avoid paying the costs of the new regulations, and act as collection agents for a new form of energy tax imposed on ratepayers and consumers. The Environmental Protection Agency and Department of Energy have become part of everyone’s life, as all appliances must receive the government’s seal of approval and all buildings, including single-family homes, must meet new national energy-efficiency standards. Finally, trade with other nations, especially China, is endangered as we threaten them with tariffs unless they follow us into this hell.

After the House passed Waxman-Markey, my colleague Kevin D. Williamson and I compiled for National Review Online a list of the bill’s 50 most absurd features — corporate giveaways, agribusiness set-asides, sops to left-wing interest groups, etc. The terms of the bill may change when the Senate takes it up later this year. Some of these absurdities could be stripped to satisfy moderate Republicans such as John McCain, who wants to support an energy-rationing bill but can’t vote for one with this much pork; other absurdities could be added to buy off red-state Democrats such as Mary Landrieu, who can’t support job-killing emission caps unless energy-intensive industries are given the right mix of subsidies. But the most objectionable thing about Waxman-Markey is the bitter pill of hyper-regulation, not the welfare that’s been added to help the medicine go down. As the debate moves to the Senate, let’s distill those 50 absurdities down to four basic defects that place Waxman-Markey beyond redemption:

1. Cap-and-trade would deform the economy.

Waxman-Markey could be a bonanza for big business, mostly because 85 percent of the carbon-emission permits that emitters will be required to obtain will not be sold at auction but given away. The lobbying free-for-all that has already begun concerning these permits is a good indication of the waste and corruption to come under the new license raj: Businesses will seek profits from colluding with legislators and bureaucrats instead of serving consumers, and the richest businesses will play this game the most effectively.

Lobbying expenditures by energy concerns increased dramatically as debate over the legislation heated up. The oil-and-gas industry alone spent $44.5 million between January and March, a 50 percent increase over the same quarter of last year (and the industry had plenty of reason to lobby last year: A major issue in the presidential election was how best to tax away its profits). The industry is so worried about Waxman-Markey because the new emission caps would place domestic refineries at a disadvantage against their foreign competitors, such as India’s Reliance Industries. The lobbying assault won the U.S. industry free permits: 2 percent of the national total will go to domestic petroleum refineries, at no cost.

The bill also allows companies to buy medieval-style indulgences for their sins of emission. These are called “offsets” and involve one company’s paying another company or individual to emit less, or to perform a carbon-conserving activity, so that the first doesn’t have to cut its own emissions by as much. Since the government decides which arrangements qualify as offsets, this provision is a further invitation to fraud and abuse. For instance, the farm lobby scored some major victories by getting such activities as “improved manure management,” “reduced tillage/no-tillage,” and even “afforestation of marginal farmlands” (i.e., plant some trees around the house and get a subsidy for land the government may already be paying you not to farm) on the offset list because they will supposedly reduce greenhouse-gas emissions or remove carbon dioxide from the atmosphere.

In fact, most of these practices will do little or nothing to reduce greenhouse gases. Take “no till” planting, in which farmers forgo plowing and plant seeds directly into the soil: Two peer-reviewed scientific papers suggest that no-till does nothing to decrease carbon dioxide and may actually accelerate climate change by upping emissions of nitrous oxide, a much more powerful greenhouse gas. Other offsets will be awarded for forest-conservation programs that would have been undertaken anyway.

To the extent that companies meet Waxman-Markey’s carbon-reduction targets by purchasing questionable offsets instead of reducing their emissions or buying permits from firms that reduce theirs, the purpose of the law will be frustrated. And with so many offsets of dubious quality for sale, it could be decades before any significant reduction of greenhouse gases occurs. In fact, nearly all of Waxman-Markey’s carbon-reduction targets for industry through 2050 could be met with offsets alone. This means that small businesses and consumers will face huge new expenses that may fail to bring about any real change in greenhouse-gas levels.

Revenue the government receives from the 15 percent of permits that will be auctioned rather than given away is reportedly going to be used to compensate people for the ill effects of energy rationing. The bill creates a refundable energy-tax credit to compensate low-income taxpayers for reductions in their purchasing power. It will also establish a new welfare check in the form of an “Energy Refund Program” that will “give low-income households a monthly cash energy refund equal to the estimated loss in purchasing power resulting from this Act.” And it establishes a program to distribute “climate change adjustment assistance to adversely affected workers.”

Here’s what this all adds up to: A mix of free allowances and offsets lets energy companies pass the costs of compliance with Waxman-Markey on to consumers. Those with low incomes and those who lose their jobs because of this policy will be compensated — to a degree. But a large majority of Americans will receive no such compensation as they pay the freight for Washington’s green dreams. The very inclusion of compensatory programs is a tacit admission that the bill’s critics are right about what it will do: raise rates and kill jobs.

2. The renewable-energy mandate would place additional burdens on ratepayers.

Waxman-Markey includes a provision that would require utility companies to get 20 percent of their power from either renewable energy sources or efficiency improvements by 2020. The Senate was unable to pass a smaller mandate in 2007, because some favored sources of renewable energy (wind power, for instance) just don’t work in certain regions of the country and bipartisan regional blocs wield a great deal of power in the Senate (although those blocs may be less powerful this time around, since their Democratic members will be under a great deal of pressure to pass the bill).

The renewable-source provision would force utilities to rely increasingly on expensive sources of energy like wind and solar — expensive because they are capital-intensive and located far from urban areas, requiring long transmission lines. It would also create a system of tradable credits similar to the ones for carbon mentioned above; utilities that cannot meet the standard would have to purchase credits from other utilities, with the cost being passed along to the ratepayer.

The standard excludes nuclear power and coal gasification even though they are cleaner than traditional coal-burning plants (nuclear power is emission-free). It also excludes abundant sources of hydropower in Canada. Again, the thing to remember is that Congress is less concerned with greening the environment than with greening the pockets of parochial interests.

3. Regulations on buildings, light bulbs, and appliances would strengthen government’s power to micromanage our lives.

Waxman-Markey has rules governing fluorescent lamps, incandescent lamps, intermediate base lamps, candelabra base lamps, outdoor luminaires, portable light fixtures, and on and on. The government started down this road by regulating light bulbs in the 2005 energy bill. Waxman-Markey tightens these regulations, meaning their unintended consequences — such as more expensive light bulbs that burn out quicker — will probably grow worse.

Waxman-Markey covers appliances and apparatus as well — clothes washers and dishwashers, portable electric spas, showerheads, faucets, televisions, and more. Appliances would be required to come with “carbon output” labels, and retailers would get bonus payments for selling those that are certified “best-in-class.” The bill sets up a payment schedule to reward the manufacturers of these best-in-class products: $75 for each dishwasher, $250 for each clothes washer, and so on.

The EPA would be required to establish environmental standards for residences, meaning a federally dictated, one-size-fits-all set of rules for greening every home in America. It would enforce compliance by withholding tradable emission allowances and other goodies from state governments until they crack down on slackers. Your state government will be able to audit your home and force you to come into compliance before you sell it or make any renovations that require a building permit. Once you’ve complied with the directive, the government might reimburse you, but for no more than half of your expenses.

The bill would affect commercial properties, too. In fact, all buildings would be governed by a “national energy efficiency building code” that would require a 50 percent reduction in energy use by 2018, followed by 5 percent reductions every three through 2030. No one disputes that these changes will be costly, but Waxman-Markey supporters argue that they will pay for themselves through lower energy bills. This argument holds up only if one assumes that energy prices will stay flat or fall over time; the carbon caps instituted elsewhere in this legislation make that prospect highly unlikely. Businesses and homeowners will pay twice — once to retrofit their roosts and again when the energy bill arrives.

4. The bill would force the U.S. to go protectionist or go home.

Waxman-Markey includes a provision that would require the president to levy tariffs against nations that have the good sense not to pass similar legislation. This provision is directed mainly at China, but it would also affect products such as oil from Canadian sands. Canadian officials have already said they will bring their refineries into compliance, which will make Canadian oil more expensive. That will have a big effect on gasoline prices; policymakers like to lecture the public about the need to reduce oil imports from countries with repressive governments, but the U.S. imports about as much oil from Canada as from Saudi Arabia and Venezuela combined.

Just like the provisions to help low-income people and workers in energy-intensive industries cope with the consequences of Waxman-Markey, the tariff provision is an admission that the bill’s critics are right. Consumers could evade the energy tax it imposes on them by purchasing products from countries like China that choose not to impose a similar tax — but then Waxman-Markey could not achieve its policy objective. The bill’s authors know they must forbid consumers to make the free economic arrangements by which they might avoid the bill’s costs.

Obama opposes this provision, but there’s no way that cap-and-trade can work without it; nothing else will prevent the (further) outsourcing of CO2-intensive economic activities such as manufacturing to countries that do not cap emissions. While the president is certainly a smooth talker, it is fanciful to hope that he can persuade the Chinese and Indian governments to follow us over this ledge. Their refusal, again, to agree to emission-reduction targets at the most recent G8 summit is a perfect example of how they are playing us for suckers. How can we know you are serious about curbing emissions, they said, until you pass your own emission caps? This kind of “you go first” brinkmanship is a set-up for a double cross, and Obama is rushing into it.

The Waxman-Markey bill as passed by the House is target-rich, with its billions of dollars in giveaways for manufacturers, automakers, universities, community organizers, and other groups friendly to Democrats. But it would be a mistake to hang too much of the opposition to the bill on this copious waste and welfare. The Senate may rearrange the deck chairs by removing some of these provisions, but as long as the final bill rations energy, taxes its users, and requires the government to bless our lifestyles, we should hope it sinks.

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