The Policy Blessing of Climategate


Yesterday I wrote about the scientific tragedy of Climategate. Why a tragedy? Because the Climategate shenanigans have made it much more difficult for us to know how bad man-made global warming might really be. And it undermines public and policymaker trust in the honesty and probity of scientists.

That being said, Climategate could be a real political and economic blessing in that it may slow the adoption of really bad policies aimed at trying to forestall climate change. What policies? Just for instance, I explained in my column, "Energy Price Deceit," how the Waxman-Markey cap-and-trade scheme must raise energy prices. Otherwise it won't work as designed to get consumers to cut back on using fossil fuels:

So in an attempt to ward off voter displeasure over higher energy prices brought about by Congressionally-mandated carbon rationing, the denizens on Capitol Hill have tacked on a number of Rube Goldbergesque policy obfuscations designed the mask the price increases. These include subsidies and tax breaks for retrofitting buildings to use less energy, setting energy conservation appliance standards, subsidies for higher mileage automobiles, and imposing a renewable fuel standard on utility companies, among many other things.

The chief technique that Congress is using to hide the mandated price increase in electricity and natural gas from voters is giving away free emissions permits to local electricity and gas distribution companies. In the ACES bill, some 30 percent of emissions permits are allocated free to local distribution companies who are supposed to sell the permits and then pass along the money to consumers as a lump sum rebate to offset their higher utility bills. Why a lump sum?

As Harvard University environmental economist Robert Stavins explains in his article on "The Wonderful Politics of Cap-and-Trade," the hope is that such rebates will compensate "consumers for increases in electricity prices, but without reducing incentives for energy conservation." Even if they are getting a rebate, higher monthly electric bills will still likely annoy voters. But let's assume that this scheme actually works as intended and blunts household displeasure about paying more for electricity and natural gas.

There's one big problem: The proposal merely shifts the price paid by consumers for energy from local utilities to other products and services. For example, Resources for the Future economists Rich Sweeney and Dallas Burtraw calculate that auctioning all of the carbon emissions permits would result in a price of $20.91 per metric ton. However, allocating 30 percent of the carbon dioxide emissions permits free to local utilities as proposed under the ACES bill would mean lower electricity prices, and lower prices would mean more consumption. The result is that there would 24 percent fewer emissions reductions in the electricity sector than would have been the case had all permits been auctioned.

The higher emissions in the electricity sector make it harder for other sectors of the economy—automobiles, construction, steel, cement, food processing, retail, agriculture—to stay below the national cap on carbon dioxide emissions. And this pushes up the demand for the remaining permits, which boosts their prices. Sweeney and Burtraw calculate that the requirement for increased emissions reductions in other sectors under a national cap would raise the allowance price to $26.90 per metric ton. The result, according to Sweeney and Burtraw, is that "this raises the costs of goods and services from these sectors."

So this plan to allocate "free" permits could well end up costing consumers even more than they "save" on their household electricity and natural gas bills. Fearing the electoral consequences of honesty, Congress is trying to hide the fact that they are increasing energy prices by distracting the American people with a torrent of rebates, subsidies, and tax incentives, along with plenty of happy talk about renewable energy and creating "green jobs." The result is that Congress has devised a complicated and inefficient scheme where distributing a "free" commodity actually makes products and services more expensive than it would otherwise have to be. That's truly "wonderful politics"!

See also my column in which I ask, "Is Government Action Worse Than Global Warming?"  In case you're wondering, the answer is, yes. So it would be a blessing indeed if the fallout from Climategate slows the Copenhagen and Waxman-Markey juggernauts.