The Cost of Cap-and-Trade

On Tuesday, the House Energy & Commerce Committee began hearing testimony on the Congress's newest attempt to deepen the recession -- the Waxman-Markey energy and climate change legislation, which would establish a federal cap-and-trade program.

As we have discussed here previously, this Administration has estimated that a cap-and-trade program could generate over $646 billion for the federal government over the next ten years (some Administration officials have said that number could go as high as $2 trillion). All that money has to come from somewhere -- our pockets.

So what does that mean for the average consumer? A number of government agencies and non-government actors have been trying to sort that out. Estimates for the cost of a federal cap-and-trade program have been consistently burdensome on the average family.

• The Congressional Budget Office estimated that a 15 percent cut in CO2 emissions could cost the average household roughly $1,600 (in 2006 dollars)
http://www.cbo.gov/ftpdocs/100xx/doc10018/03-12-ClimateChange_Testimony.1.1.shtml

• EPA estimated that the Lieberman-Warner cap-and-trade bill would decrease household consumption by $1,375 in 2030 http://www.epa.gov/climatechange/downloads/s2191_EPA_Analysis.pdf

• The National Association of Manufacturers found that nationally household disposable income could decrease between $4,022 to $6,752 by 2030 under a cap-and-trade program
http://www.accf.org/media/dynamic/1/media_191.pdf

The President’s budget would give some of the money raised by the cap-and-trade program back to consumers through a tax credit. However, it is only $800 for families earning less than $150,000 per year. This is roughly half of the lowest projection above, so the tax cut would be wiped away by a new energy tax.

It should be no surprise, then, that this week, the President's "new and improved" EPA came out with a quick analysis of the Waxman-Markey proposal. EPA concluded it would cost consumers less than $150 per year, significantly less than just about every other economic analysis of the impact of a cap-and-trade program.
http://www.epa.gov/climatechange/economics/pdfs/WM-Analysis.pdf

One of the ways it accomplishes this feat is by assuming that the "bulk of the revenues" will be returned to consumers through the President's tax credit. Failure to do so, EPA says, would result in "substantially larger losses in consumption." So EPA's estimate relies on the assumption that once the government gets our money, it will be sure to give it back to us. Considering the amount of red ink in Washington, how many of you believe we'll see the "bulk" of that money again?

Also, we should take note that this analysis did not include the cost of the renewable energy and energy efficiency mandates in Waxman-Markey. EPA also cites a number of other uncertainties that could affect the economic impacts, including the availability of international offsets. In light of the number of issues not evaluated by EPA in its haste to get these numbers out for Earth Day, I will not be shocked when other agencies and groups find that the costs are expected to be much higher.