Thursday, May 14, 2009

Waiting to Exhale

Obama and the Democrats in Congress must be hyperventilating

Emissions exchange, more commonly known as Cap and Trade, is a scheme where a government sets limits on a substance (the Cap) and issues allowances to entities that permit the entity to emit a specific amount of the substance. That entity may either use the allowance or exchange, for profit, all or part of the allowance (the Trade) to a second entity that may then use the allowance as it sees fit. That second entity may elect to either cash-in the allowance to cover those emissions that exceed the Cap, or speculatively hold and trade the allowance to another entity. A handful of emitted substances (e.g. nitrogen oxides, methane, carbon monoxide) are normally considered to be the pollutants covered in a Cap and Trade system.

You’re quite familiar with carbon dioxide (CO2). Let’s start with an experiment. Breath in. Hold it. Now breath out.

What you just inhaled is 78.08% nitrogen, 20.95% oxygen, 0.93% argon, 0.038% carbon dioxide, and trace amounts of other gases. When we exhale we’ve used about 4% of the oxygen and increased the CO2 by about the same amount. CO2 is a common substance and is nothing more than the inevitable byproduct of combustion. Fires make it, and so do living animals in the normal course of their conversion of food to energy. In mid-April the Environmental Protection Agency issued a ruling that considered CO2 to be a pollutant. The addition of CO2 to the list of commonly considered pollutants has set off a firestorm.

The non-partisan Congressional Budget Office (CBO) reviewed the EPA ruling. The CBO questions the underlying methodology used by the EPA used to add CO2 to the listing of pollutants (the GHGs mentioned below):

“In the absence of a strong statement of the standards being applied in this decision, there is a concern that EPA is making a finding based on (1) "harm" from substances that have no demonstrated direct health effects, such as respiratory or toxic effects, (2) available scientific data that purports to conclusively establish the nature and extent of the adverse public health and welfare impacts are almost exclusively from non-EPA sources, and (3) applying a dramatically expanded precautionary principle. If EPA goes forward with a finding of endangerment for all 6 GHGs, it could be establishing a relaxed and expansive new standard for endangerment. Subsequently, EPA would be petitioned to find endangerment and regulate many other “pollutants" for the sake of the precautionary principle (e.g., electromagnetic fields, perchlorates, endocrine disruptors, and noise).”

Also note that the CBO explicitly warns that adding this common substance, CO2, opens Pandora’s box. Other common irritants (e.g. noise) might be considered a pollutant. We might agree with this when we are at a stop light with the blasting stereo of the car next to us.

EPA would have the authority to fine “polluters”. Radical, activist environmental groups would be able to sue the government if the EPA failed to regulate a pollutant or a polluter. Bizarre lawsuits would be the norm. Perhaps an environmental group based in California would sue an Ohio manufacturer because icecaps are melting (let’s forget for a minute whether or not the icecaps are melting) in Alaska. These frivolous lawsuits would take years of litigation to resolve.

The CBO also warns of a significant cost impact to consumers, and all businesses across the country:

Making the decision to regulate CO2 under the CAA for the first time is likely to have serious economic consequences for regulated entities throughout the U.S. economy, including small businesses and small communities. Should EPA later extend this finding to stationary sources, small businesses and institutions would be subject to costly regulatory programs such as New Source Review.”

(Emphasis mine, CBO analysis of Cap and Trade, .pdf download here)

Currently snaking its way through Congress, the Waxman-Markey proposal for Cap and Trade is the front-runner for government action. Waxman-Markey uses the EPA guidelines for its listing of pollutants and sets an arbitrary 15% reduction of the “greenhouse gases” by 2020. The CBO also analyzed the potential costs of Cap and Trade in this type of proposal:

“The price increases caused by a cap-and-trade program would impose additional costs on households. For example, without incorporating any benefits to households from lessening climate change, CBO estimates that the price increases resulting from a 15 percent cut in CO2 emissions could cost the average household roughly $1,600 (in 2006 dollars), ranging from nearly $700 in additional costs for the average household in the lowest one-fifth (quintile) of all households arrayed by income, to about $2,200 for the average household in the highest quintile.”

The Heritage Foundation performed a more detailed analysis of the many effects of a Cap and Trade proposal:

  1. Reduce aggregate gross domestic product (GDP) by $7.4 trillion,
  2. Destroy 844,000 jobs on average, with peak years seeing unemployment rise by over 1,900,000 jobs,
  3. Raise electricity rates 90 percent after adjusting for inflation,
  4. Raise inflation-adjusted gasoline prices by 74 percent,
  5. Raise residential natural gas prices by 55 percent,
  6. Raise an average family's annual energy bill by $1,500, and
  7. Increase inflation-adjusted federal debt by 29 percent, or $33,400 additional federal debt per person, again after adjusting for inflation.

If the Waxman-Markey proposal was only a Cap and Trade proposal for greenhouse gases, it would be bad enough. Additional provisions contained in Waxman-Markey are sufficient reasons to be highly critical of this proposal. In addition to Cap and Trade, Waxman-Markey introduces a new renewable electricity standard, a new low carbon fuel standard, and an appliance efficiency mandate that will be extremely difficult for manufacturers to meet with currently available technology. Cap and Trade really just becomes one more way for the Federal government to interject itself into another aspect of the US economy and the life of Americans.

So who is most harmed by this unprecedented control of the economy? You know as well as I that any business compliance costs will be passed along to the consumer. These consumers are people who drive, people who light their homes. People who use ovens, refrigerators, computers, lawnmowers, fireplaces. Virtually every element of our lives becomes within reach of intrusive government.

Cap and Trade is nothing more than a thinly veiled tax on every American and a heavy=handed power grab by the poobahs in DC to control our lives. It is the most regressive of taxes, falling disproportionately on lower income individuals. It expands the nanny state that allows the Federal government to control many of the aspects of your life.

Take a deep breath. Then call Congress.

Update 5/15/09 12:20 AM: Yet another reason to say no to Cap and Trade, inconclusive data on global warming. (h/t: @stix1972)

Update 5/15/09 8:00 AM: If you do not believe me, her is what Democrat Charlie Rangel, Chairman, House Ways and Means Committee, was quoted in the Thursday evening Congress Daily as saying:

"Whether you call it a tax, everyone agrees that it's going to increase the cost to the consumer," said Rangel. "At the end of the day ... if there's nothing there to repay [consumers] for their financial expenditures, it might be difficult to fight Republicans who call this a tax."

Update 5/15/09 10:00 AM: Indiana Says 'No Thanks' to Cap and Trade

Update 5/20/09 9:45 AM: Over at National Review, Jim Manzi provides the best cost-benefit analysis I have seen to date on Cap and Trade.

Update 6/1/09 9:25 AM: Martin Feldstein agrees.



jenniferw said...

This is immoral! There is no other word for it. God help us.

Anonymous said...

Hi Cincinnatus,
Good explanation of cap & trade. I'll tweet it. Wish the GOP would make a big noise about how painful cap & trade will be to poor people, those struggling to pay for utilities & gasoline.
Must get to work!!!