Cap and trade: Where’s the benefit?

Martin Feldstein breaks down the costs and benefits for Americans in the Waxman-Markey cap-and-trade bill that just got approved in committee, and finds a lot of the former and none of the latter.   The Harvard economist says that the bill will cost each American household an additional $1600 in energy costs.  What can we expect in return?  Self-esteem, if we ignore the fact that we’re getting taken by China and India:

The Congressional Budget Office recently estimated that the resulting increases in consumer prices needed to achieve a 15 percent CO2 reduction — slightly less than the Waxman-Markey target — would raise the cost of living of a typical household by $1,600 a year. Some expert studies estimate that the cost to households could be substantially higher. The future cost to the typical household would rise significantly as the government reduces the total allowable amount of CO2.

Americans should ask themselves whether this annual tax of $1,600-plus per family is justified by the very small resulting decline in global CO2. Since the U.S. share of global CO2 production is now less than 25 percent (and is projected to decline as China and other developing nations grow), a 15 percent fall in U.S. CO2 output would lower global CO2 output by less than 4 percent. Its impact on global warming would be virtually unnoticeable. The U.S. should wait until there is a global agreement on CO2 that includes China and India before committing to costly reductions in the United States.

The CBO estimates that the sale of the permits for a 15 percent CO2 reduction would raise revenue of about $80 billion a year over the next decade. It is remarkable, then, that the Waxman-Markey bill would give away some 85 percent of the permits over the next 20 years to various businesses instead of selling them at auction. The price of the permits and the burden to households would be the same whether the permits are sold or given away. But by giving them away the government would not collect the revenue that could, at least in principle, be used to offset some of the higher cost to households.

Feldstein’s numbers are less striking than those from the Marshall Institute, which calculated the cost of a cap-and-trade system at $3000 per household three months ago.  Marshall also calculated the impact of cap-and-trade on growth, while Feldstein for the moment focuses only on direct costs.  Feldstein does note that he is sticking with low-end estimates, giving us essentially the best-case scenario as energy producers pass the costs of restrictions onto the consumer.

Those costs, by the way, amount to a regressive tax on energy consumers.  Energy isn’t a luxury item — or at least it isn’t now.  Everyone needs to have heating and power in their homes, and any widespread and significant price increase will most hurt those households with the least amount of disposable income.  Henry Waxman wants the credits his bill gives away for free to result in subsidies for low-income earners, but energy prices are a multiplier in the economy, since the entire distribution chain of goods and services have to include higher costs into their own prices.  A substantial increase of energy prices will mean higher prices on food, clothing, and other essentials that these subsidies cannot address.  It will also fuel inflation, which will further erode the buying power among low-income earners.

And what do we get for all of this sacrifice?  Nothing.  The amount of reduction cap-and-trade will produce is negligible in terms of lowering the Earth’s temperature.  Moreover, it will allow nations like China and India to gain a competitive advantage in the global marketplace.  They will get the investors and businesses, while the US loses jobs overseas.

In short, Waxman-Markey is a disaster for the economy, but Democrats care more about looking good than in maintaining the American standard of living.

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