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  • EPA’s New Analysis of Cap and Trade Same Old Faulty Logic

    The Environmental Protection Agency released its economic analysis of the Kerry-Lieberman cap and trade legislation, the latest cap and trade bill to be released in the Senate. The result was nearly the same as the EPA’s analysis of the Waxman-Markey cap and trade bill passed in the House of Representatives last year: postage stamp per day costs. Instead of $176 per household for Waxman-Markey, Kerry-Lieberman would cost households $146 by 2050. Unfortunately for Americans, nothing substantial in the EPA analysis has changed; it is still unreasonable, faulty, and fragile. The reality remains that cap and trade is a substantial energy tax that will cause trillions of dollars in economic damage and kill jobs.

    Inappropriate Use of Discounting

    Most misleading in the EPA analyses of cap and trade is the use of discounting. A discount rate is an interest rate used to find present value of an amount to be paid or received in the future. In other words, present value analysis answers the question: How much would I have to have today in order to meet my financial obligations or pay certain costs in the future? Discounting is a legitimate tool in finance and for cost-benefit calculations. But discounting can give a much distorted view of costs, as is done by those misrepresenting the EPA analysis. Here’s an example to help clarify:

    Imagine that a time machine takes analysts back to 1969 — a time when the average price of a new car was about $3,500. Once back in 1969, the exercise is to explain to Congress how much a new car will cost 40 years later in 2009. Having already lived to see 2009, we know the average price for a new car is about $23,000. But telling the Congress of 1969 that in 40 years cars will cost $23,000 would give an exaggerated notion of the cost increase, because inflation alone will have increased prices by a factor of 5.8. If inflation is taken into account, the price of a new car in 2009 is about $4,000 in 1969 dollars. This conveys the most meaningful measure of the cost.

    Taking this inflation-adjusted (1969 dollars) $4,000 price of the average new car in 2009 and discounting it in the EPA fashion would generate a present value in 1969 of $562. This is clearly much less than the cost of an average car in 2009, even after adjusting for inflation.

    What then is this $562? It is the amount when invested for 40 years, at an interest rate guaranteed to be 5 percent above inflation that would buy the $23,000 car. In other words, if a person in 1969 invested $562 at 9.72 percent interest (5 percent above inflation), letting the entire interest compound and paying no taxes, it would now amount to $23,000, enough to buy a new car.

    The same holds true for the EPA’s use of discounting. The discounted value is not the amount households will have to pay each year, even with discounting. In the most generous case, the present value is the amount that would have to be paid for one year, right now, if the present value for each of the 40 years were paid in one lump sum right now — that is, if the cost for all 40 years were paid at once. So no matter how it is sliced, there is no sense in which a postage stamp (or even one dollar) per day reflects the annual cost of the cap-and-trade legislation.

    Doesn’t Fully Measure Costs

    The EPA uses household figures and measures consumption changes only. First, a household is not necessarily a family. The average household size is 2.6 people. Adjusting household size to a family-of-four standard adds another 53 percent.

    Secondly, consumption changes are typically less than income changes, as families respond to income losses by saving less. When income drops, people prevent consumption from dropping by dipping into savings. In turn, lower savings reduces the ability of families to cope with other shocks and reduces their future income. Further, consumption comes from after-tax dollars, so losses in tax revenue do not show up in data on household consumption. The real economic cost is the loss of income. Change in national income, as measured by gross domestic product (GDP), is a better measure of the overall economic impact of a policy.

    In the end, Americans will be much poorer and the economy would be trillions of dollars weaker with climate change legislation in place than without it, as Heritage Foundation analyses of past cap-and-trade bills have shown.

    Generous Assumptions

    The EPA reports that “The APA is estimated to lead to a significant decline in electricity generation from non-CCS fossil fuels — a 23% decrease from 2010 levels by 2030 and an 81% decrease by 2050. This is in stark contrast to the expected steady increase in non-CCS fossil fuel electricity generation without the APA policy – a 22% increase by 2030 and a 56% increase by 2050.”

    To get there, the EPA includes generous assumptions, specifically on the use of carbon capture and sequestration (CCS), the use of offsets and the increase in nuclear power. With CCS, even after extraordinary technological and economic hurdles have been cleared, there are more political and environmental obstacles to storing 15 supertanker’s worth of liquid CO2 every day. The considerable regulatory and legal hurdles to CCS
    have been noted by the Congressional Budget Office:

    “Similarly, generators would be unlikely to adopt technologies for the capture of CO2 and its sequestration in the ground unless an extensive regulatory structure was put in place to address issues involving property rights, rights-of-way for pipelines, and liability for emissions that escape from the ground.”

    Anyway, it’s no surprise the costs are higher in the EPA’s model where CCS is delayed.
    The use of offsets is another highly contentious program that is subject to fraud and will produce dubious results. With offsets a coal plant operator can forego cutting CO2 emission and, instead, pay someone else to do so. For instance, a company could pay a logger not to cut down trees, or they could pay someone to grow trees since trees absorb carbon. Or a developing country can build a cleaner coal plant saying they were going to build a dirtier one while cashing a check from a developed country for the alleged carbon offset. Laurie Williams and Allan Zabel, two lawyers working for the EPA who oversaw California’s cap and trade and offsets programs, have serious doubts about the effectiveness of the offset provision. They make a similar case with forest owners:

    “[I]f the landowner wasn’t planning to cut his forest, he just received a bonus for doing what he would have done anyway. Even if he was planning to cut his forest and doesn’t, demand for wood isn’t reduced. A different forest will be cut. Either way, there is no net reduction in production of greenhouse gases. The result of this carbon “offset” is not a decrease but an increase — coal burning above the cap at the power plant.”

    Another sign of problems with domestic and international offsets is that the Kerry-Boxer bill devoted 90 pages to outlining the regulatory structure for certifying and handling offsets.

    Furthermore, trying to increase the production of nuclear energy in the United States, without proper regulatory and waste management reform, will stick us with only a handful of reactors—just the ones the government subsidizes through loan guarantees.  Although the nuclear title in Kerry-Lieberman is strong on regulatory reform, it does little to address waste management and includes a host of subsidies for nuclear. This doesn’t get us the nuclear renaissance assumed in the EPA economic analysis.

    No Green Stimulus, No Environmental Benefit, Minimal Oil Reduction

    Even the most generous scenario in this EPA report shows that costs will be forced on the economy—higher energy prices and lost income. For every year reported, household consumption drops compared to a world without Boxer-Kerry. This is a climate bill and, even according to the EPA, it will reduce economic activity. Spinning this as a job-creating, green stimulus bill is simply untrue. Regardless of whether the lower cost estimates are true, this bill provides negligible environmental benefit. Global temperature reduction from Kerry-Lieberman would be .077 degrees Fahrenheit by 2050 and 0.200 degrees by 2100. And despite the best attempt for politicians to marry the Gulf oil spill and cap and trade legislation, even the EPA analysis shows cap and trade will do very little to cut petroleum use (page 31). Yet, after President Obama’s speech in the Oval Office, former Vice President Al Gore said, “Placing a limit on global warming pollution and accelerating the deployment of clean energy technologies is the only truly effective long-term solution to this crisis.” Cap and trade is an effective solution to raise energy prices for years to come and choke our economy, but that’s about it.

    David Kreutzer, Senior Research Fellow in Energy Economics and Climate Change, co-authored this post.

    Posted in Energy [slideshow_deploy]

    18 Responses to EPA’s New Analysis of Cap and Trade Same Old Faulty Logic

    1. Billie says:

      This has to be put to rest in favor of truth, reality and freedom. Cap and trade is based on the opposite of all three, therefore an unlawful tax. Reprimand to the story tellers that have caused unnecessary burden to the people.

    2. Pingback: EPA’s New Analysis of Cap and Trade Same Old Faulty Logic | Plug The Bleeping Hole

    3. danny roberts says:

      Obama, playing politics with the oil spill in the gulf, having the audacity

      to push for cap and trade during the speech in the oval office in my opinion, was a shame.Then again the man has no shame!

    4. john kroone, mesa, a says:

      I need someone to explain to me why CO2 is considered a pollutant.

      To my knowledge, CO2 is a plant food and without CO2 in our atmosphere all plant life would die. Furthermore, Mother Nature is by far the largest producer of CO2 and man made production of CO2 is totally insignificant.

      All plant life also gives off huge quantities of O2 thereby maintaining the 190,000 PPM of oxygen in our atmosphere.

      The photosynthesis formula supporting the above is ;

      6CO2+6h2O +light = CAH12O6+6O2

      What the formula indicates is that the plant absorbs the carbon atom from the 6CO2 molecule and releases the 6O2 to the atmosphere.

      Furthermore, many greenhouses are injecting CO2 into their atmosphere to accelerate the plant growth.

      thx john

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    6. Randall Holland, Ari says:

      Cap and Trade is not going to help with global warming. It will only enrich those that can do the trading. It will adversely affect the poor and middle class the most.

      The only true solution to global warming is the elimination of the human species which will happen after we use all the resources the planet has to offer.

    7. Dennis Georgia says:

      We think the econo9my stinks now, wait and see how it smell after this junk passes. This like the VAT tax will kill this country and its growth. Our dependance on fossil fuel is something that must be wroked into, not done all at once. This whole thing just smells like mor power and controll over us, another way to get us futher towards a socialist or communist style "guvment". The bad part about it all, I do not think anyone in congress has the COMMON sence to think this thing through, they all appear to be lead around by their noses, and are willing to do what ever the "supreme leader" declares needed. November can not get here soon enough, I just hope those that are elected have enough sence to realixe they work for us, not aganist us and only for themselves.

    8. Don Morton Ballwin,M says:

      There is no legitimate scientific evidence that CO2 causes global warming. This is purely a scam to make money. I cannot believe that the people we elect to represent us are of such low integrity and low character and possibly low intelligence to foster such a scam on us. Even if their presumption of CO2 is true, what about China or India and their rapidly expanding manufactoring economies that will not participate in this farce. The legitimate climatoligists in this country need to stand up and tell the American public the truth about yhis matter

    9. Ben C. Ann Arbor, MI says:

      This whole CO2 nonsense reminds my of Nightmare on Elmstreet when Freddy Kruger refuses to die. If the relgion of global warming continues we will revert back to feudalism, The CO2 zealots will be the "religion" which appoints the "king" to rule the world. The "king" will be the regulator agencies that determine what we can and cannot do. Unless we bring the truth to the light of day we will become slaves to feudalism. The 'haves" will be fine – the "have nots" (the rest of us) will be paupers.

    10. Pingback: Media Should Ask How “Cap and Trade” Ties in with Oil Spill -

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    12. Jeanne Stotler, Wood says:

      CO2 is exhaled by each and everyone of us. I learned in 3rd grade that you inhale O2 and exhale CO2, trees and plants absorb the CO2 and emit O2, so where is the pollutant?? This false science that is being forced on us is part of the propaganda being used to turn us into scocialist.

    13. Lynn Bryant DeSpain says:

      Taxes, like feces, are called by many names, but in the end, when one steps in it, it is still crap.

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    15. Alexander Soble, Was says:

      There has been widespread consensus among climate scientists for more than a decade that global warming is real. Humanity is releasing tens of billions of tons of CO2 into the Earth's atmosphere every year. The idea that radically altering the composition of the atmosphere will have no negative effects is ludicrous. So is the idea that because plants create CO2 during photosynthesis, any level of atmospheric CO2 will be safe. I urge you to research this issue for yourself and look into what the mainstream of climate scientists are saying — and have been saying — about CO2 and climate change. Very curious to see whether this comment will be published or whether the Heritage ideal of "a civil society where ideas and debate flourish" extends to multiple views about climate change.

    16. Alexander Soble, Was says:

      here has been widespread consensus among climate scientists for more than a decade that global warming is real. Humanity is releasing tens of billions of tons of CO2 into the Earth’s atmosphere every year. The idea that radically altering the composition of the atmosphere will have no negative effects is ludicrous. So is the idea that because plants create CO2 during photosynthesis, any level of atmospheric CO2 will be safe. I urge you to research this issue for yourself and look into what the mainstream of climate scientists are saying — and have been saying — about CO2 and climate change. Very curious to see whether this comment will be published or whether the Heritage ideal of “a civil society where ideas and debate flourish” stops at multiple views about climate change.

    17. TJ Power, Colorado says:

      Alexander,

      The whole premise of your argument is "what the mainstream of climate scientists are saying". I don't have a dog in this fight, but I am far from convinced that CO2 is the bad guy. I have read thousands of articles on both sides of the issue and have not come across one study that shows, without a doubt, that CO2 is the cause of climate change. There are many theories that espouse that to be so, but no study which can be repeated and independently reviewed to prove such a theory.

      Making policy based on an assumption/theory is ignorant and dishonest, at best. If, and when, we can show that CO2 is the cause of any sort of global warming, then we can discuss WHAT, if anything, could or should be done about it. It is very possible that the best course of action is nothing. Following actions like the proposed legislation obviously won't help ("Global temperature reduction from Kerry-Lieberman would be .077 degrees Fahrenheit by 2050 and 0.200 degrees by 2100.")

      Let's make sure scientists are following the scientific method and not being pressured into conclusions that are not verifiable. When a study is done and is reviewed by all interested parties and found to be legit, then, and only then, should we begin discussing the results.

    18. Pingback: Apple Market Valuation Hits A Quarter Of A Trillion Dollars (Eric Savitz/Tech Trader Daily) | High Speed Routers

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