Postage Stamp Promise and Other ‘Too Good to Be True� Claims From the Cap-and-Trade Camp

Posted November 6, 2009 at 11:58am

Recent Senate hearings on the Kerry-Boxer cap-and-trade proposal brought economics back to the forefront of the climate debate. The bill�s sponsors began building their case, in part, on a recent analysis by the Environmental Protection Agency, which concluded that the legislation would cost an average U.S. household about $111 annually. That means overhauling our nation�s production and consumption of energy (no small feat) would allegedly cost less than a postage stamp a day.[IMGCAP(1)] This astonishing claim should call to mind the old adage, �If it sounds too good to be true, it probably is.� In the case of the EPA analysis, it almost certainly is.Its findings hinge on several dubious assumptions. The agency�s researchers assume that more than 100 new nuclear facilities will be in operation in 2030, in spite of the fact that no new facility has been built in the past 30 years. The analysis also assumes that the offset market operates honestly, effectively and efficiently � ignoring the wide-spread incidents of fraud and abuse in the existing EU market.The dubious conjectures don�t end there. The frequently cited stamp stat also assumes that emissions allowances will hold down prices, that cap-and- trade will spur innovation, that carbon capture and storage will be cost-effective, and that there will be large efficiency gains from building codes and low-carbon energy systems. It�s true that all economic models rely, to some degree, on assumptions. However, the EPA analysis takes it to an extreme, relying on assumptions that are often exaggerated or simply inadequate.Fortunately, a wealth of research on this critical issue already exists. The vast majority of studies over the past decade have determined that cap-and-trade systems are overly complex, subject to abuse and likely to cost the economy as much as $400 billion. Though the estimates vary, all show a negative economic impact. Reinforcing these bleak findings, one of the nation�s pre-eminent economists, William Nordhaus of Yale, has warned: �[T]he cap-and-trade approach is a poor choice of mechanism It is completely untested in the international context; it has been unable to attain anything close to universal participation; it loses precious fiscal revenues; it leads to volatile prices; and it is an invitation to rent-seeking. It is unlikely that even if (it is) strengthened, it can achieve its climate objectives in an efficient and effective manner. A harmonized international carbon tax is likely to be a more effective mechanism for responding to the threat of climate change.�Other U.S. thought leaders such as Harvard professor Richard Cooper and former Clinton economic adviser Robert Shapiro have echoed these concerns. Even comedic pundit Jon Stewart has levied similar criticisms against the Congressional cap-and-trade proposal.The weight of evidence is clear, compelling a growing number of people to acknowledge that cap-and-trade is an inferior approach for controlling greenhouse gas emissions. Yet on Capitol Hill, sound evidence is being ignored by advocates in an ideological pursuit. These politicians are betting our nation�s economic future on the unlikely chance that fossil fuel alternatives and new energy technology will magically appear and that a complex system will function flawlessly. That�s a gamble that should not be taken. Ultimately, consumers will bear the cost of political folly.Cap-and-trade advocates frequently claim that their proposals are a response to the failure of America to respond to the climate risk while other nations have taken action. But like the �too good to be true� postage stamp promise, the facts do not bear this claim out. Though the economic mix and demographics of different countries complicate comparisons between nations, there is one metric that is helpful, and that is carbon intensity � the amount of carbon produced to create a unit of economic wealth. If the U.S. was a laggard, reductions in carbon intensity in other nations should be greater than ours since the Kyoto Protocol was adopted in 1997. Yet the U.S. reduced its carbon intensity by an impressive 19 percent between 1997 and 2006, the latest year that the Energy Information Administration has published data. Europe, on the other hand, reduced its intensity by just 14 percent. Within Europe, none of the major countries did better than the United States. Some did worse.There�s a lesson here. With stakes so high, America should and can do better than cap-and-trade. Much better. For instance, a simple carbon tax would be five times more cost-effective than an emissions trading approach, according to research by well-respected think tank Resources for the Future. This revenue-neutral approach would set an effective price on carbon and curb greenhouse gas emissions, all while putting rebates back into the pockets of American consumers.Policymakers should broaden the climate policy debate to include serious consideration of these kinds of alternatives. Because in its current state, the Senate climate bill is not so much a postage stamp, but a billion-dollar boondoggle � payable c.o.d.William O�Keefe, chief executive officer of the George C. Marshall Institute, is president of Solutions Consulting Inc.