On June 26, after a full-court press by President Obama and the Democratic leadership the Waxman-Markey cap and trade bill limped out of the U.S. House of Representatives on a 219 to 212 vote. In comments on the House floor that evening, Speaker Nancy Pelosi characterized the legislation as another economic stimulus package by saying, “remember these four words for what this legislation means: jobs, jobs, jobs, and jobs!” Hmm… Even the 44 members of her own Democratic Caucus who joined with Republicans in opposing the bill weren’t buying that one.
But, before I go too much further, perhaps I should first explain what the Waxman-Markey bill does. In a cap and trade market, the government establishes a ceiling on the level of emissions (pollutants) allowed. Then it auctions off permits for those emissions. This allows the government to control the overall level of emissions and also ensures that the largest polluters are the ones who bear the largest costs. Cap and trade mechanisms have proven very effective in dealing with certain pollutants, such as nitrous oxide. The Waxman-Markey bill attempts to use this mechanism to limit greenhouse gas emissions, primarily carbon dioxide.
The problem is that limiting carbon dioxide emissions really amounts to limiting energy consumption, and limiting energy consumption really amounts to limiting economic activity. In effect, the Waxman-Markey bill imposes a tax on energy and that tax is then passed on to consumers in the form of higher prices. Anyone who thinks that increase in energy prices will not have an adverse effect on the economy is either too young to have lived through the energy-driven Carter-era stagflation of the 1970s, or is blissfully ignorant of the laws of economics. Thankfully, it appears that only 19 percent of the population meets one or both of those criteria as, according to a recent Rasmussen poll, that is the dwindling proportion of brave souls who believe the Waxman-Markey bill will help the economy.
In fact, no one who has actually run the numbers has found that the Waxman-Markey bill will do anything other than impose a massive and insidiously hidden tax on American consumers. The only thing they disagree about is the size of the tax. According to CBO, Speaker Pelosi’s own research agency, that tax could be as small as $175 per household per year. Although by its own admission, CBO focused only on the program costs associated with the legislation and ignored the much larger “potential decrease in gross domestic product that could result from the cap.” A less sanguine analysis by the Heritage Institute estimated the tab to be $1,500 per household for energy costs alone, while an analysis by CRA International found that the legislation would reduce household purchasing power by about $1,000 per year. Not good news, particularly during the worst recession in recent memory.
Also, it is important to realize that in a global economy this government decreed escalation in energy prices will almost certainly cause jobs to migrate overseas. Energy-intensive manufacturers will be particularly hard hit and will have a strong incentive to move their operations to other countries, such as China, where energy prices are lower.
As of the fourth quarter of 2008, statewide in Virginia manufacturing still accounted for 7.3 percent of total employment and paid wages that were four percent above average. In the Greater Richmond area specifically, manufacturing accounted for 5.9 percent of total employment and paid wages that were 26 percent above average. If an uncompetitive increase in energy prices forced a major employer like Altria or DuPont to move its operations out of Richmond and overseas, the loss of those high wage jobs would have a devastating impact on the regional economy.
But you say, however high these costs may be they are simply the price we must pay to save the planet from the threat of global warming. Yet, even there, questions abound. First, it’s not clear that the reality of cap and trade corresponds to the hype. As part of its obligations under the Kyoto treaty, the EU imposed a cap and trade program on carbon dioxide emissions in 2005. The result? Emissions actually rose two percent in the first three years of the program. Second, even the “settled science” of global warming itself appears to be unraveling. For example, to support the administration’s environmental “endangerment” theme the EPA was recently forced to spike one of its own reports because it embarrassingly called into question many key assumptions upon which that theme is built.
In short, before we recklessly enact yet another 1,000 plus page bill that will have an untold impact on the U.S. economy and which no one appears to have actually read, perhaps we need to slow down a bit. Hopefully, just as the Founder’s envisioned, that’s exactly what the Senate will do.
A. Fletcher Mangum is Managing Partner of Mangum Economic Consulting, a Richmond based firm.
