Wednesday, June 24, 2009

Cap & Trade Costs and Wisconsin

***Update 6/26 8:25 PM. Waxman-Markey passes the House. See links below***

Whether you knew it or not, the US Congress is currently considering legislation intended to reduce green house gas emissions and slow global climate change. It is known as the Waxman-Markey bill and its major feature is a cap and trade program.

Cap and trade means the government sets limits on how much pollution industry is allowed to produce (this is the cap part). Credits equal to these limits are then issued to polluters (possibly for free, possibly at a cost, but that does not matter for our purposes). If some business decides it needs to emit more green house gasses than are allowed under the limits, it can do so by buying some of the credits of a business that is going to be under the emission limit (this is the trade part).

The fact of the matter is that you do not have to be a global warming denier to wonder whether or not this bill is a good idea. For one thing, its impact on global warming may be incredibly small. For another it may drastically drive up energy costs. Remember energy costs are more than just your utility bill - it takes energy to make and deliver all of the goods and services that we consume every day.

Recent analyses by the Congressional Budget Office and the Environmental Protection Agency have put these costs at a very reasonable $175 per household in the year 2020 (CBO estimate). This rather benign number has been trumpeted by supporters of Waxman-Markey as proof that we can improve the environment without crushing the average consumer with drastic price increases. Some worry that announcing the cost in a specific year masks the cost of the continuing effort that will be required long after 2020, so costs over the long term will be much higher.

More important to those of us in the industrial midwest are items like this from the EPA analysis [EA]:
Recent, but still unpublished, studies have explored regional differences in the distributional effects of many allowance allocation and revenue distribution options for carbon cap-and-trade policy (Burtraw et al. 2009, Hassett et al. 2007).

Regional differences result from differences in pre-existing policies, consumption levels, pricing of electricity, and the inputs used to produce energy goods (e.g. coal, natural gas).
So areas of the country that have energy infrastructure developed decades ago (like WI) may face regionally higher costs due to "pre-existing policies" and "the inputs used to produce energy goods (i.e. coal)". Whereas states that have seen their populations increase dramatically in the last twenty years or so, may have recently expanded their energy production allowing for the use of improved technology, making them better prepared to thrive under a low emissions regime. In other words, we may see the flow of carbon credits going from the south and west to the midwest and northeast.

A nationwide average cost of $175 may not seem like much, but what happens if this turns into $350 in Green Bay and $0 in Las Vegas? Transitioning from older and more polluting energy production will cost money. To pretend otherwise is foolish. Those that advocate for cap and trade argue that the benefits of stopping climate change will affect us all. It remains to be seen if they are willing to bear the costs as well.


Here's Dad29 with a map showing just who will pay and who will benefit from cap and trade.

Jim Manzi sums it up nicely (his emphasis): In short, Waxman-Markey would impose costs at least 10 times as large as its benefits, would not reduce the deficit, and doesn’t even really cap emissions.

Cap & Trade passes the House. Here's coverage from the WSJ & Open Congress. Kagen voted Yes, Petri voted No. Here's the roll call.

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