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.