The Cap and Tax Fiction
Democrats off-loading economics to pass climate change bill.
WSJ.com
House Speaker
Nancy Pelosi has put cap-and-trade legislation on a forced march through the
House, and the bill may get a full vote as early as Friday. It looks as if the
Democrats will have to destroy the discipline of economics to get it done.
Despite House
Energy and Commerce Chairman Henry Waxman's many payoffs to Members, rural and
Blue Dog Democrats remain wary of voting for a bill that will impose crushing
costs on their home-district businesses and consumers. The leadership's solution
to this problem is to simply claim the bill defies the laws of economics.
Their gambit
got a boost this week, when the Congressional Budget Office did an analysis of
what has come to be known as the Waxman-Markey bill. According to the CBO, the
climate legislation would cost the average household only $175 a year by 2020.
Edward Markey, Mr. Waxman's co-author, instantly set to crowing that the cost of
upending the entire energy economy would be no more than a postage stamp a day
for the average household. Amazing. A closer look at the CBO analysis finds that
it contains so many caveats as to render it useless.
![[Review & Outlook]](../../photogallery/photo26003/waxman.bmp)
Associated
Press
Henry Waxman
For starters,
the CBO estimate is a one-year snapshot of taxes that will extend to infinity.
Under a cap-and-trade system, government sets a cap on the total amount of
carbon that can be emitted nationally; companies then buy or sell permits to
emit CO2. The cap gets cranked down over time to reduce total carbon emissions.
To get support
for his bill, Mr. Waxman was forced to water down the cap in early years to
please rural Democrats, and then severely ratchet it up in later years to please
liberal Democrats. The CBO's analysis looks solely at the year 2020, before most
of the tough restrictions kick in. As the cap is tightened and companies are
stripped of initial opportunities to "offset" their emissions, the price of
permits will skyrocket beyond the CBO estimate of $28 per ton of carbon. The
corporate costs of buying these expensive permits will be passed to consumers.
The biggest
doozy in the CBO analysis was its extraordinary decision to look only at the
day-to-day costs of operating a trading program, rather than the wider
consequences energy restriction would have on the economy. The CBO acknowledges
this in a footnote: "The resource cost does not indicate the potential decrease
in gross domestic product (GDP) that could result from the cap."
The hit to GDP
is the real threat in this bill. The whole point of cap and trade is to hike the
price of electricity and gas so that Americans will use less. These higher
prices will show up not just in electricity bills or at the gas station but in
every manufactured good, from food to cars. Consumers will cut back on spending,
which in turn will cut back on production, which results in fewer jobs created
or higher unemployment. Some companies will instead move their operations
overseas, with the same result.
When the
Heritage Foundation did its analysis of Waxman-Markey, it broadly compared the
economy with and without the carbon tax. Under this more comprehensive scenario,
it found Waxman-Markey would cost the economy $161 billion in 2020, which is
$1,870 for a family of four. As the bill's restrictions kick in, that number
rises to $6,800 for a family of four by 2035.
Note also that
the CBO analysis is an average for the country as a whole. It doesn't take into
account the fact that certain regions and populations will be more severely hit
than others -- manufacturing states more than service states; coal producing
states more than states that rely on hydro or natural gas. Low-income Americans,
who devote more of their disposable income to energy, have more to lose than
high-income families.
Even as
Democrats have promised that this cap-and-trade legislation won't pinch wallets,
behind the scenes they've acknowledged the energy price tsunami that is coming.
During the brief few days in which the bill was debated in the House Energy
Committee, Republicans offered three amendments: one to suspend the program if
gas hit $5 a gallon; one to suspend the program if electricity prices rose 10%
over 2009; and one to suspend the program if unemployment rates hit 15%.
Democrats defeated all of them.
The reality is
that cost estimates for climate legislation are as unreliable as the models
predicting climate change. What comes out of the computer is a function of what
politicians type in. A better indicator might be what other countries are
already experiencing.
Americans
should know that those Members who vote for this climate bill are voting for
what is likely to be the biggest tax in American history. Even Democrats can't
repeal that reality.