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Congress Is Hiding Cap-and-Trade Energy Price Increases

Central fact of the cap-and-trade proposal is that it will increase the price of energy

Ronald Bailey
June 10, 2009

Last month, leading Congressional climateer, Rep. Henry Waxman (D-Calif.), chair of the House Energy and Commerce Committee, pushed out a sweeping 1000-page bill that aims to dramatically reshape how Americans will use energy in the 21st century. At the heart of the American Clean Energy and Security (ACES) Act is a cap-and-trade proposal for limiting the emissions of carbon dioxide by American industry and consumers. Carbon dioxide, produced by burning fossil fuels and chopping down forests, is building up in the atmosphere where it is thought be the chief cause of man-made global warming.

The ACES Act would establish an artificial carbon market by setting a limit on the amount of greenhouse gases that can be emitted each year. Beginning in 2012, a national cap—or total maximum CO2 emissions—would be set and then ratcheted downward annually. Under ACES, the U.S. would emit 17 percent less carbon dioxide in 2020 than it did in 2005, eventually falling to 83 percent less than emitted in 2005 by 2050.

Electric and gas utilities, cement plants, steel foundries, and other companies would be required to have one emissions permit for every ton of CO2 discharged from their smoke stacks. Under a cap-and-trade scheme, emissions permits can be allocated and/or auctioned up to the set cap. Once allocated, the market allows companies emitting less than their quota to sell their excess permits to emitters needing to buy extra to meet their cap. This process sets a price on each ton of carbon dioxide.

The central fact of the cap-and-trade proposal is that it will increase the price of energy. If energy prices don't go up, the goal of getting energy producers, manufacturers, and consumers to shift away from carbon generating fuels (coal, oil, and natural gas) toward low-carbon sources of energy (nuclear, solar, wind, conservation) will not be achieved.

Whatever else they are, the folks in Congress are not stupid when comes to protecting their electoral viability. They are painfully aware of the fact that, while Americans express support for regulations to reduce greenhouse gases, 77 percent in a recent ABC News/Washington Post poll declared themselves either "very concerned" or "concerned" that "federal regulation of greenhouse gases could substantially raise the price of things you have to pay for."

So in an attempt to ward off voter displeasure over higher energy prices brought about by Congressionally-mandated carbon rationing, the denizens on Capitol Hill have tacked on a number of Rube Goldbergesque policy obfuscations designed the mask the price increases. These include subsidies and tax breaks for retrofitting buildings to use less energy, setting energy conservation appliance standards, subsidies for higher mileage automobiles, and imposing a renewable fuel standard on utility companies, among many other things.

The chief technique that Congress is using to hide the mandated price increase in electricity and natural gas from voters is giving away free emissions permits to local electricity and gas distribution companies. In the ACES bill, some 30 percent of emissions permits are allocated free to local distribution companies who are supposed to sell the permits and then pass along the money to consumers as a lump sum rebate to offset their higher utility bills. Why a lump sum?

As Harvard University environmental economist Robert Stavins explains in his article on "The Wonderful Politics of Cap-and-Trade," the hope is that such rebates will compensate "consumers for increases in electricity prices, but without reducing incentives for energy conservation." Even if they are getting a rebate, higher monthly electric bills will still likely annoy voters. But let's assume that this scheme actually works as intended and blunts household displeasure about paying more for electricity and natural gas.

There's one big problem: The proposal merely shifts the price paid by consumers for energy from local utilities to other products and services. For example, Resources for the Future economists Rich Sweeney and Dallas Burtraw calculate that auctioning all of the carbon emissions permits would result in a price of $20.91 per metric ton. However, allocating 30 percent of the carbon dioxide emissions permits free to local utilities as proposed under the ACES bill would mean lower electricity prices, and lower prices would mean more consumption. The result is that there would 24 percent fewer emissions reductions in the electricity sector than would have been the case had all permits been auctioned.

The higher emissions in the electricity sector make it harder for other sectors of the economy—automobiles, construction, steel, cement, food processing, retail, agriculture—to stay below the national cap on carbon dioxide emissions. And this pushes up the demand for the remaining permits, which boosts their prices. Sweeney and Burtraw calculate that the requirement for increased emissions reductions in other sectors under a national cap would raise the allowance price to $26.90 per metric ton. The result, according to Sweeney and Burtraw, is that "this raises the costs of goods and services from these sectors."

So this plan to allocate "free" permits could well end up costing consumers even more than they "save" on their household electricity and natural gas bills. Fearing the electoral consequences of honesty, Congress is trying to hide the fact that they are increasing energy prices by distracting the American people with a torrent of rebates, subsidies, and tax incentives, along with plenty of happy talk about renewable energy and creating "green jobs." The result is that Congress has devised a complicated and inefficient scheme where distributing a "free" commodity actually makes products and services more expensive than it would otherwise have to be. That's truly "wonderful politics"!

Ronald Bailey is Reason magazine's science correspondent. This column first appeared at Reason.com.


Ronald Bailey is Science Correspondent


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