Cap-and-Trade Delusions

Proponents need to stop pretending cap-and-trade will cost nothing and create tons of jobs.

"The Waxman-Markey bill will create jobs by spurring investment in renewables and efficiency." So declared the liberal Center for American Progress as it announced support for the new cap-and-trade climate change bill introduced in Congress last week.

Clocking in at nearly 1000 pages, the American Clean Energy and Security Act—or Waxman-Markey after its sponsors Rep. Henry Waxman (D-Calif.) and Rep. Edward Markey (D-Mass.)—proposes to reduce U.S. greenhouse gas emissions by 20 percent below their 2005 level by 2020, by 42 percent by 2030, and by 83 percent by 2050. In addition, the bill requires that electricity retailers meet 20 percent of their load by 2020 using either renewable sources of electricity or conservation. To achieve these goals, the U.S. will have to spend money on clean energy technologies which are far more expensive than conventional energy technologies.

All rhetoric aside, mandates cost money. Today, for example, President Barack Obama declared that new U.S. automobiles must get an average of 35 miles-per-gallon by the year 2016. Yet it is widely acknowledged that meeting this new standard will add $1,300 to the cost of each new car. In general, when prices go up, people buy less. So, all other things being equal, less demand for a product (like cars) means fewer jobs, not more. (Of course, there is one way to raise prices and create more jobs: reduce worker productivity. If policy makers deliberately encourage inefficiency in an industry, more jobs will likely follow. But that reduced productivity also means workers will receive lower wages.)

Producing low-carbon electricity will also cost more money. Currently, producing solar photovoltaic electricity costs about 33 cents per kilowatt hour; wind generated electricity is about 9 cents per kilowatt hour; and coal-fired production with carbon capture and sequestration is estimated to cost up to 10 cents per kilowatt hour. In contrast, producing electricity by means of conventional coal-fired plants now costs 6.5 cents per kilowatt hour and nuclear power comes to 7.5 cents per kilowatt hour.

Once again, all other things being equal, higher costs mean that the energy industry will raise the prices of its goods and services. Which means that consumers will buy less, thus leaving the industry with less to spend on producing goods and services or to pay its workers. Will there be more people specifically employed making and installing higher-cost, government subsidized wind turbines, photovoltaic arrays, batteries for plug-in hybrid automobiles, and weatherized houses? Sure. But on net, there will fewer new jobs thanks to rising low-carbon energy costs.

In testimony before the Senate Energy and Natural Resources Committee last year, Peter Orszag, Obama's Director of the Office of Management and Budget, admitted that a 15 percent cut in carbon dioxide emissions would reduce American incomes. According to Orszag, the lowest quintile of households would pay an average of $680 more each year for goods and services (3.3 percent of their incomes) and the highest quintile would pay $2,180 more (1.7 percent of their incomes) than they would have in the absence of carbon rationing.

Another way to look at the Waxman-Markey cap-and-trade proposal is that it functions like a tax increase. Under the bill, about half of all revenues raised by the cap-and-trade system between 2012 and 2025 will be recycled to businesses and consumers, with the other half spent by federal government. While recycling revenues is better than nothing, it introduces inefficiencies because the process distorts how workers and businesses would have spent the money had it not been collected and redistributed by the government.

Finally, Christina Romer, the head of Obama's Council of Economic Advisors, calculated last year that a 1 percent increase in taxes reduces economic output by 2 to 3 percent over the following three years. The Congressional Budget Office estimates that the cap-and-trade scheme will collect about $80 billion per year in revenues, a figure that represents about 3 percent federal tax increase.

Man-made climate change may be a huge problem, but cap-and-trade proponents need to stop pretending that the solution will cost virtually nothing while producing more jobs than it destroys.

Ronald Bailey is Reason magazine's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is now available from Prometheus Books.