Cap and Trade vs. the American Dream: The House's Bill is an Economic Disaster That Keeps Getting Worse

COMMENTARY Environment

Cap and Trade vs. the American Dream: The House's Bill is an Economic Disaster That Keeps Getting Worse

May 22, 2009 4 min read

Former Distinguished Fellow

Michael is a former Distinguished Fellow at The Heritage Foundation.

The global-warming bill got a chilly reception when it was introduced in the House Energy and Commerce Committee's global-warming subcommittee. It was not only the subcommittee's Republicans but also a number of its Democrats who had serious questions about the proposal to slash greenhouse-gas emissions.

Unable to win subcommittee support for the bill, committee chairman Henry Waxman (D., Calif.) and his chief environmental lieutenant, Ed Markey (D., Mass.), had to withdraw it and go back to the drawing board. After intense closed-door negotiations, they returned to the full committee with a new version last Friday, May 15. Early indications are that this "new and improved" version now contains enough sweeteners to make it palatable to committee Democrats made queasy by the original draft.

These reluctant Democrats hail from states with heavy concentrations of manufacturing employment, lots of electricity generated from "dirty" coal, robust energy sectors (oil refineries, offshore platforms, etc.), and other characteristics that make their districts ground zero for any cap-and-trade scheme. Given all this, one would assume that the fruits of these negotiations would be a watered-down proposal that destroyed fewer jobs, imposed lower increases in energy costs, and demanded less austere lifestyle changes.

One would be wrong. Economists at the Heritage Foundation's Center for Data Analysis plugged the new provisions of the draft proposal into a sophisticated model of the U.S. economy. The results were nothing short of astonishing: The negotiations succeeded in making the revised plan even more economically debilitating than the original.

How could Waxman, Markey, et al. ease the pace for reducing greenhouse-gas emissions and still make things worse? Because all those shadowy backroom deals backfired. The new distribution of allowances for greenhouse-gas emissions, the Heritage team concluded, "created a less efficient pattern of government expenditures" that "more than offset the gain from the lower cap for 2020."

The Heritage team writes:

Waxman-Markey will cause higher energy costs to spread throughout the economy as producers everywhere try to cover their higher production costs by raising their product prices. Consumers will be most directly affected by rising energy bills. Even after adjusting for inflation, gasoline prices will rise 74 percent over the 2035 baseline price. Compared to the baseline, residential natural gas consumers will see their inflation-adjusted price rise by 55 percent. Because of its reliance on coal, the cost of electricity will rise by 90 percent -- again after adjusting for inflation and in addition to what the price would have been anyway in 2035.

As President Obama himself pointed out, cap and trade can work only when energy prices "skyrocket." To force consumers to use less energy , prices need to rise to painful levels.

If the latest Waxman-Markey proposal is signed into law, its economic impact by 2035 will be as follows:

  • Direct energy costs will rise by more than $1,500 per year for the typical family of four. Pain at the electric meter will cause consumers to reduce electricity consumption by 26 percent. Even with this cutback, the electric bill for a family of four will be $754 higher in 2035 than it would have been in the absence of Waxman-Markey, and $12,200 higher in total from 2012 to 2035.
  • Higher gasoline prices will have forced households to cut consumption by 15 percent, but a family of four will still pay $596 more in 2035 and $7,500 more in total from 2012 to 2035.
  • In total, for the years 2012-2035, a family of four will see its direct energy costs rise by $22,800. These inflation-adjusted numbers do not include the indirect energy costs consumers will pay as producers raise prices to recapture their higher production costs. Also excluded are the higher costs of developing more energy-efficient cars and appliances, the disutility of driving smaller, less safe vehicles, and the discomfort of using less heating and cooling.
  • As the economy adjusts to shrinking GDP and rising energy prices, employment will take a big hit. On average, employment will be lower by 1,105,000 jobs per year. In some years, cap and trade will reduce employment by nearly 2.5 million jobs.
  • The negative economic impacts affect the public purse as well. Waxman-Markey will drive up the national debt 26 percent by 2035. This represents an additional $29,150 per person, or $116,600 for a family of four. These burdens come after adjusting for inflation and are in addition to the $450,000 of federal debt per family that would accrue over this period even without cap and trade.

And all this for a negligible environmental gain: "All of these costs," the report concludes, "accrue in the first 25 years of a 90-year program that, as calculated by climatologists, will lower temperatures by only hundredths of a degree in 2050 and no more than two-tenths of a degree at the end of the century."

Two of these findings warrant special attention. First: "Pain at the electric meter will cause consumers to reduce electricity consumption by 26 percent." And second: "Higher gasoline prices will have forced households to cut consumption by 15 percent."

Why? Because consumers respond to dramatically higher energy prices by changing their behavior. This means that the Waxman-Markey approach contains within it a hidden mandate, one that will force us, like it or not, to change our way of life dramatically. We'll end up with shorter and fewer family vacations, smaller homes and cars, constricted commutes and (by extension) fewer job opportunities, fewer consumer purchases, etc. In other words, the only way average Americans can satisfy this unforgiving mandate is to do without things that matter to them and their families. We are being asked to forgo the sort of mobility, both literally and in the traditional American Dream sense of that word, that has defined our nation for generations.

If these tradeoffs receive the attention they deserve, the odds that anything even remotely resembling Waxman-Markey will be enacted into law go from slim to none.

This is the cap-and-trade lifestyle factor, and it keeps politicians awake at night.

Mike Franc is Vice President for Government Relations at The Heritage Foundation.

First Appeared in National Review Online