Last week ago
today I received an email via my Congresswoman Virginia Foxx’s email distribution
list. The subject was “
Solving our energy crisis without destroying North Carolina jobs.”
The point of the piece is to argue against the cap-and-trade regulatory scheme
of the energy bill currently being debated in Congress. I find the Congresswoman’s
argument to be either factually incorrect or missing a couple of points on the
economics. In the paragraphs below I provide individual comments but one
striking thing about the entire piece is the lack of two words: climate change.
The whole purpose of implementing a cap-and-trade regulatory scheme is to
address the biggest environmental challenge facing the
U.S. and the
rest of world. Any discussion of the costs of cap-and-trade should be
contrasted with the benefits of cap-and-trade in order to get a complete
picture of the policy. Most economic analyses suggest that getting busy about
climate is a fairly good idea.
Foxx: The summer months are here and as families plan vacations, our country
continues to struggle with high energy costs. That is why I believe that the
cap and trade energy policies being bandied about Washington are irresponsible proposals that
will do more harm than good.
In a nutshell, this cap and trade
legislation puts a “cap” on the emissions of energy producers, and mandates
that producers buy permits from the government to allow energy-related
emissions. This process will, as
President Obama said last year, cause electricity rates to “necessarily
skyrocket.”
Me: Most of the permits will likely be
given away to producers initially. Over time the percentage of permits sold to
producers should increase. Either way, energy prices will rise due to the
increased scarcity of energy. But, that is the point of cap-and-trade. As
energy prices rise, energy consumers will use less energy and greenhouse gas
production will fall, mitigating the climate change problem.
Foxx: In my opinion, the real truth behind this so-called energy plan is that
will (1)* jack up the cost of
energy, (2) kill jobs, and (3) lead to more government intrusion in our
lives. (4) I think this cap and trade policy is really
just an $846 billion national energy tax that will hit nearly every American
family.
Me: A bit of higher energy prices is likely
a good thing. See my first point above. (2) Cap-and-trade might lead to an
increase in the number of jobs in the U.S. because energy demand will
focus more on labor-intensive green energy jobs. But as I’ve argued in the past
at my blog (see, for example, Green jobs are expensive),
listeners should cover their ears during any debate over environmental policy
that mentions the impact on jobs, either positive or negative. In an economy as
massive and diversified as the U.S.’s,
environmental policy, even one as pervasive as economy-wide cap-and-trade will
have little net impact on overall job growth. (3) A little bit of government
intrusion in our lives can be a good thing. In introductory economics most professors
teach a section on “market failure” during which we consider three or four
situations where government intervention in a market economy corrects problems
such as under-provision of public goods (e.g., national defense), negative
externality (e.g., environmental damage) and market power (e.g., price fixing).
(4) In this sense a tax is a government policy that raises prices and
discourages the activity being taxed. Contrary to current political opinion, all
taxes aren’t bad. Taxes that discourage harmful activities like smoking and drinking
alcohol to excess and business practices that create pollution are a good thing.
Taxes on work effort (income) are relatively bad (in terms of economic
efficiency, however, some might support income taxation due to its ease of
collection and equity considerations).
Regardless, government needs some revenue so it makes sense to increase
taxes on bad things and reduce taxes on good things. The permit auction feature
of cap-and-trade would raise government revenue.
Foxx: (1) This new national energy tax will be paid by anyone who turns on a
light switch or plugs in an appliance. (2) While many of the important details of this
national energy tax plan are still not publically known, studies have shown
that the plan will cost every American household hundreds or even thousands of
dollars a year in higher energy prices.
Me: (1) Right on; the new national
energy tax might encourage energy conservation! Increasing the cost of lighting
your house or leaving your computer on will cause people to think more about
when they do these things unnecessarily. (2) The latest research by the
Congressional Budget Office (CBO) shows that
the cost in 2020 will be about $175 per year per household. This might actually
sound low and you might wonder how a policy that costs less than a dollar a day
would have an impact. The cost is held low because some of the government
revenue generated by a permit auction could be redistributed to consumers in
the form of lower taxes or energy rebates. The higher energy prices would
encourage energy conservation and less pollution, the lower taxes and energy
rebates would allow people to spend money on other things, mitigating the
negative impact of higher energy prices.
Foxx: I am also disappointed in the fact that this proposed national energy
tax hits the poor the hardest. Experts agree that lower income individuals
spend a greater share of their income on energy consumption. So while every
American will be paying more for energy, low income households already living
on the edge of economic ruin will be hurt even more.
Me: The latest research by the CBO
shows that the poor will not be hit the hardest. In fact, the poor will be
financially better off after about 8 years of cap-and-trade. In 2020 the poor
will receive $40 per year per household as a result of energy price rebates.
Foxx: President Obama has indicated that he too knows this plan will result
in much higher energy prices. While still a candidate for president, then
Senator Obama said that under his cap and trade proposal utility rates would
“necessarily skyrocket,” and he said that those costs would be passed along to
consumers.
Me: The only way to get consumers to
cut back on energy consumption that leads to harmful climate change is for
energy prices to rise. This is a good thing. (Also, I think that then Senator
Obama was exaggerating when he used the word “skyrocket”).
Foxx: I’m afraid that the impact of this national energy tax will not only be
seen in home utility bills or at the pump.
Various estimates suggest that anywhere from 1.8 million to 7 million
Americans could lose their jobs as a result of this plan. During this severe economic downturn we
cannot afford to sacrifice millions more American jobs.
Me: Most discussions of cap-and-trade
use 2012 as the start date, about a full year after most economists believe the
U.S.
economy will begin growing again. Also, a loss of jobs due to environmental
policy is highly unlikely. The last time that environmental policy intruded in
individual lives in such a massive way was during the 1970s. Opponents of the
Clean Air Act and Clean Water Act argued that these policies would destroy jobs
and this didn’t happen. As I’ve said already, it is a good idea to ignore
opponents of environmental policy who argue that it will destroy jobs (and, to
be fair, cover your ears when proponents of environmental policy argue that it
will create jobs).
Foxx: (1) The President is promoting the ‘green jobs’ that may be created by his
proposal, but any new jobs created will fall far short of replacing the
millions of jobs lost to what I find to be a reckless energy policy. (2) We have no greater example of the
devastation a national energy tax can have on an economy than in Spain. After
years of promoting “green jobs” Spain
has the highest unemployment rate in Europe,
standing at a whopping 17.5 percent.
Me: (1) As I’ve said above a couple of
times, … blah, blah, blah, … jobs. (2) The large U.S. economy is very different from
the small Spanish economy. I doubt if we can learn all that much from the
Spanish experience.
Foxx: This national energy tax claims to be an environmentally friendly
plan. But I’m very concerned that it may
force many employers to relocate manufacturing plants overseas to countries
with far less stringent environmental regulations.
A national energy tax will essentially ship
American manufacturing jobs overseas while also shipping industrial emissions
to another part of the world. North Carolina’s
hard-hit manufacturing sector will have a difficult time surviving yet another
round of unfair laws that place them at a competitive disadvantage with
overseas manufacturers.
Me: “Carbon leakage” is a serious
challenge for the environmental part of cap-and-trade. If China, India
and other industrializing countries increase carbon emissions then the
sacrifice made by the U.S.
to reduce emissions will be offset. This is why it is so important for the U.S. to be a
global leader in climate change policy. If the rest of the world implements a
carbon cap and joins the permit market set up by cap-and-trade in the U.S. and
Europe then there is no place for U.S. manufacturing plants to relocate to.
Also, the argument that carbon leakage will result in fewer net U.S. jobs
should be ignored (see above).
Foxx: We can promote clean air and clean water without destroying millions of
jobs and shipping pollution overseas. I
am committed to solving our energy crisis.
By using American-made energy and technological innovation, and by
harnessing all our energy resources, from clean nuclear and biofuels to
hydropower and wind, we can find a better way to achieve energy independence
that doesn’t destroy our economy and kill American jobs.
Me: There really isn’t a good way of
promoting clean air and water without raising the prices of consumer products
that cause air and water pollution (and climate change). Nuclear, biofuels and
wind energy production all cost more than coal and oil. In order to harness
these resources government must provide subsidies to reduce their cost of
production. Except perhaps psychologically, it doesn’t really matter whether
consumers are hit with higher prices or higher taxes that fund the subsidy
(note that an increased deficit leads to higher taxes imposed upon future
generations), a cost is a cost. If we are to address environmental problems we
need to realize that clean air and water and climate change mitigation requires
an unavoidable cost. As we say in introductory economics: “there is no such
thing as a free lunch.”
In conclusion,
the cap-and-trade regulatory scheme currently being discussed in Congress is
perhaps the best way (in terms of the economics and politics) that the U.S. can
address the serious challenge of climate change. A cap-and-trade policy: (1)
can be used to reduce greenhouse gases by legally capping their emissions, (2)
can achieve emissions reductions at a lower cost than government mandates (e.g.,
renewable portfolio standards) by allowing business firms to cut back pollution
in ways that they see fit and by allowing trading of permits, (3) encourages
technological innovation and switching to clean energy such as wind and solar
with price incentives and (4) is politically feasible relative to other
policies favored by economists (i.e., a carbon tax).
*Numbering
added by the author to Congresswoman Foxx’s arguments.