By Martin Feldstein
The cap and trade legislation supported by the Obama administration is a stealth strategy for a massive long-term tax increase. It is a large tax on all American households, and the tax burden rises in future years without any need for further legislation. It will evolve into an enormous new source of tax revenue for the government.
A cap and trade system is supposed to reduce carbon dioxide (CO2) emissions by raising the price of CO2-intensive goods and services like gasoline, electricity, and a wide range of industrial products. This, in theory, will induce consumers to shift their spending to services and products that involve lower levels of CO2 emissions. It achieves these price increases by requiring firms that create CO2 in their production process, or sell goods like gasoline that create CO2 when used, to have a permit per ton of CO2 emission.
The Congressional Budget Office estimates that reducing the level of CO2 to 15 percent less than the total level of U.S. emissions in 2005 would require permit prices that would increase the cost of living of a typical household by $1,600 a year. To put that $1,600 carbon tax in perspective, a typical family of four with earnings of $50,000 now pays an income tax of about $3,000. The tax imposed by the cap and trade system is therefore equivalent to raising the family’s income tax by about 50 percent. (Some advocates of a cap and trade program argue that the cost to households could be much less than $1,600 if the government uses the tax revenue to finance transfers to low income households and tax cuts to others, but since there is no way to know how the future revenue would actually be used, the only number we have to consider is the $1,600 direct increase in the burden on households.)
The Waxman-Markey bill that recently passed the House Energy and Commerce Committee would cause an even greater initial rise in the cost of living by its requirement to cut CO2 emissions to 17 percent less than the 2005 level of emissions rather than the 15 percent reduction assumed in the CBO estimates. (European officials are, moreover, calling for the United States to agree to a much bigger initial cut--20 percent less than the U.S. emission level in 1990.)
As the legislated CO2 reduction increases automatically after 2020, the price of the permits would rise to further limit consumers’ demand for CO2-intensive goods and services. The Waxman-Markey legislation requires the CO2 level in 2050 to be an amazing 83 percent less than it was in 2005, and a study by the EPA estimates that the price of the permit would rise from about $20 a ton in 2020 to more than $75 a ton in 2050. The higher permit costs would be reflected in the prices that households would pay for CO2-intensive goods and services.
Rises in the cost of living would be greater for households that use more energy and CO2-intensive goods and services. The implied rate of the cap and trade carbon tax would therefore rise with income. In that way it would act like an income tax--reducing the reward for additional effort by putting a tax wedge between the individuals’ additional work effort and the resulting increase in their standard of living. But while it would collect more tax from higher income households, the cap and trade tax would be a relatively heavier burden on lower-income and middle-income households. The Congressional Budget Office estimates that spending on “carbon based energy” is 21.4 percent of income among households in the lowest income quintile but only 4.1 percent of income in the highest income quintile.
The rise in the prices of U.S. goods would make them less competitive. American firms would suffer in export markets and domestically in competition with goods imported from countries that do not impose such a high implicit tax on CO2 emissions. There would no doubt be pressure to impose tariffs on imports from other countries that have lower carbon costs. This might be welcomed by the unions that now seek to use foreign labor practices as an excuse for tariffs on imports, but countervailing tariffs based on carbon content would hurt American consumers and threaten our global trading system.
And, despite the high cost to American households and the economy, the proposed cap and trade plan would do little to deal with concerns about global warming. The proponents of enacting a U.S. cap and trade program at the present time “to show U.S. leadership” so that other countries will follow are naive to think that China and India will agree to major CO2 reductions without financial inducements. Read full story here.
By Ross McKitrick
Polls show that global warming has fallen to the bottom of the list of Americans’ worries. Meanwhile 170 Michigan professors signed a letter calling for tough climate legislation. I read the professors’ letter, and I have to say I’m with the people on this one.
Their letter would be more convincing if they weren’t so dismissive of the costs involved. They cite unnamed “recent studies” that claim emission cuts could create 150,000 jobs in Michigan. I put more stock in the analysis by the Energy Information Administration of last year’s Lieberman-Warner bill (which is similar to the Waxman-Markey bill now before Congress). The EIA pointed out that cutting carbon dioxide (CO2) emissions requires driving up energy prices, and this will shrink the economy. U.S. manufacturing would decline by 3% to 7%, depending on how lucky the United States is at developing alternative energy sources, and manufacturing employment will fall between 3% and 10% (p. 39). Of course the professors won’t lose their jobs, but they should still be concerned about these things.
It is true that if you could convince taxpayers in the other 49 states to subsidize new, money-losing green energy projects in Michigan, then you might gain some jobs. But when every other state is hoping to pull the same trick on you, it’s a zero-sum game. Actually it’s worse: Subsidies for green jobs end up reducing national employment, not increasing it.
I also found the letter’s scientific content unconvincing. Regional climate forecasting is very conjectural, and models often contradict each other. I suppose it is possible that all four trout species could disappear as a result of a few degrees of warming over 100 years, but if trout were that delicate, the annual arrival of summer would have wiped them out long ago.
As for the litany of potential damages from recent warming trends, I browsed some of the longest weather station histories for Michigan, such as Grand Rapids, Cheboygan and others. There are some trends, but after 1920 they are pretty small, especially considering the known warming bias in long-term climate data from regions undergoing urbanization.
The professors claim that these small trends could, among other things, destroy Michigan agriculture. Let’s give farmers a bit more credit. If farmers could not adapt to weather variability, agriculture in Michigan would have disappeared by the 1930s.
Even if the long list of problems could be blamed on CO2 emissions, the professors failed to mention that the small cuts envisioned under the proposed regulations would not change anything. The differences would be minuscule at the global scale, which is where they matter.
Next: Looking at the data on carbon dioxide and temperatures.
Ross McKitrick is a professor of economics at the University of Guelph, in Ontario, where he focuses on environmental economics. Read post here.
See follow-up post in the Detroit Free Press on Check This Data here. See his response to Senator Dingell after testimony in congress here. See that testimony here.
By Patrick J. Michaels, National Review Online
Climate bureaucrats from 180 countries came together in Bonn, Germany, to craft yet another proposal to replace the UN’s failed Kyoto Protocol on global warming. Whatever comes out of the meeting will be up for formal adoption at an even bigger meeting in Copenhagen next December.
Remember Kyoto? It would have required us to reduce our national emissions of carbon dioxide to 7 percent below 1990 levels. Europe, Canada, and pretty much the rest of the developed world had similar “obligations.” Kyoto failed because, simply put, it was too costly, both politically and economically. It would have had no detectable effect on global warming, anyway - “preventing” about seven-hundredths of a degree Celsius by 2050. The Earth’s surface temperature bounces around about twice that amount naturally from year-to-year, so it would have been impossible to determine Kyoto’s “benefit.”
What’s the response of the U.N. and the Obama administration to this failure? The meeting in Bonn proposes even more drastic cuts in emissions. The legislation currently being discussed in the House of Representatives, and supported by the president, would reduce U.S. emissions to 83 percent below 2005 levels. If implemented, this would allow the average American in 2050 to emit only as much carbon dioxide as the average American emitted in 1867. That target is right in the middle of the range being discussed in Bonn.
No one has any idea how this would be accomplished. The president supports the Waxman-Markey “cap and trade” bill - aptly renamed the Obama Energy Tax in this space, since it would amount to the largest tax increase ever instituted by any government in history. Entities that emit carbon dioxide - power plants, GM (Government Motors), you when you drive your car - will be required to reduce emissions by 83 percent over the next 40 years. Those who can’t do this will have to purchase a permit from someone or something that did.
This will make anything using, produced from, or transported via fossil fuels prohibitively expensive. How costly? The last time gas went up to $4 a gallon, the nation’s consumption dropped by about 4 percent. What does the price have to be to cut it by 83 percent? No one really knows, but it will surely be extremely high.
All this will have minimal effect on global warming. Using standard scientific models (such as they are), we can estimate that, if every nation in the world that has obligations under the current Kyoto Protocol begins to reduce emissions soon and reaches the 83 percent target by 2050, the amount of warming prevented by then is a mere 0.08 degrees Celsius by 2050 and 0.22 degrees by 2100, compared with what the United Nations calls “business-as-usual.”
Business not “as usual” won’t be very much business at all, at least in the U.S., where the average per capita emissions would have to drop to where they were after the Civil War. In response, businesses will migrate to where cheap energy is available, such as India and China. Both countries have made it quite clear that they simply will not go along with the emissions reductions being talked about in Bonn and Washington. The political pressure to develop their economies is orders of magnitude stronger than any pressure to hinder that development with artificially expensive energy.
Nor are China and India reluctant to exploit the new administration’s frequently stated desire to “work with the international community” (read: the U.N.) on climate change. So, Beijing and New Delhi are ratcheting up the stakes even farther. China, for example, may agree “in principle” to some vague reductions in emissions at some future time, but only if the developed nations of the world agree to send a check for 1 percent of their GDP annually as payment.
For all its new internationalist intentions, even the many environmental radicals in the Obama administration will recognize the perils of a policy that would lead to another round of de-industrialization in the U.S. while paying competitors to bury our economy. And they have one escape hatch: the U.S. Senate.
Absent some extreme climatic change, there is no way that the Senate is going to go along with the House or with Obama on the issue of drastic cuts in emissions. Consequently, negotiators in Bonn will say that everything that the U.S. does is contingent upon what the Senate will do.
The smartest policy for the new “internationalist” administration would be to support the massive emissions reductions proposed in the House legislation, and to delay consideration by the Senate until after the Copenhagen meeting, where it is sure to die. Obama can burnish his international environmental credentials, please those within his own administration, and avoid further destruction of the economy. See post here.
Patrick J. Michaels is a senior fellow at the Cato Institute and author of Climate of Extremes: Global Warming Science They Don’t Want You to Know