The Waxman-Markey Game Plan for Higher Energy Prices

When Representatives Henry Waxman and Ed Markey unveiled their 648-page discussion draft climate and energy bill, they claimed that “The American Clean Energy and Security Act of 2009” will not only save the planet, but will provide the economy with a “green recovery” to boot. The bill, which was the subject of four days of hearings with more than 65 witnesses, features sweeping changes in energy policy including forcing families and businesses to buy more expensive electricity, implementing a low carbon fuel mandate (fuel with less energy in it), additional taxes on electricity generated from reliable energy sources, new energy efficiency mandates, and a cap and trade style energy tax. The measure represents a high water mark for political economic planning, but a low road for American family budgets.

Carbon Caps: A Tax Doesn’t Really Hurt If We Give the Money Back, Right?

The Waxman-Markey bill admits that the bill’s provisions, such as a cap and trade energy tax program, are very economically damaging and thus require countermeasures to (supposedly) cushion the blow to consumers. Since energy is, literally, the capacity to do work, increasing the costs of doing work will hurt the economy. In fact, much of Title IV is dedicated to limiting the economic impact of this plan, or as the bill describes it, “Preserving Domestic Competitiveness.”

Cap and trade is a tax on energy. Because cap and trade regulations increase the costs of doing business in the U.S., business will flee to countries with lower energy costs and the U.S. companies that remain will be put at a competitive disadvantage. The effect of limits on carbon dioxide emissions in the U.S. will be to export the jobs and industries which cause those emissions to other countries without such regulations. This exodus will limit jobs in the U.S., harm the U.S. economy, and not reduce global emissions of greenhouse gases. This last fact—that American efforts to clamp down on emissions may simply cause emitters to relocate to other jurisdictions—is referred to as “carbon leakage.”

In an attempt to counter this problem, the Waxman-Markey bill lays out a series of policy measures that attempt:

(1) To prevent an increase in greenhouse gas emissions in countries other than the United States as a result of direct and indirect compliance costs incurred under title VII of the Clean Air Act.

(2) To compensate the owners and operators of entities in eligible domestic industrial sectors and subsectors for carbon emission costs incurred under title VII of the Clean Air Act. [emphasis added]

This describes one of the ways in which carbon caps will enhance the power of unelected bureaucrats, even without officially raising taxes or government expenditures. First, federal regulators will set an absolute limit on how much carbon dioxide can be emitted by various industries. They will then “auction” (sell) these rights. This will foster a new market in paper permits sold by the government, giving legal permission for carbon dioxide-emitting businesses to trade in the (essential) business activity of emitting carbon dioxide. Then, to ease the blow, federal lawmakers may hand out many of these permits – for free – to favored constituencies. The whole operation is a massive tax hike and giveaway program, but its details are opaque to most voters who don’t understand the details (all 648 pages worth) of what “cap and trade” really means. The dirty little political secret, of course, is that cap and trade is not meant to be understood, and in fact, is a semantic device to make a tax on carbon emissions appear as though it not really a tax.

Another area of concern is found in the “Distribution of Rebates” section of the legislation. This section describes the distribution of rebates in a way that makes it appear as though the regulator won’t have much discretion in handing out carbon emission permits that may carry quite a hefty price tag.

However, in subsection (b)(2) (on page 540) the bill reads:

(2) PRESUMPTIVELY ELIGIBLE SECTORS AND SUBSECTORS.—An owner or operator of an entity shall receive rebates under subsection (a) if such source is in a sector or subsector that is included in a six-digit classification of the North American Industrial Classification System that meets the criteria under subparagraphs (A) and (B). The Administrator may rescind the eligibility of such sector or subsector only if the Administrator determines, after notice and an opportunity for comment, that, even in the absence of the rebates distributed under this section, such sector or subsector would not be subject to carbon leakage. [emphasis added]

In other words, the bill allows the Administrator to overrule the “objective” criteria for rebate eligibility if she decides that the cap and trade program poses no threat of “carbon leakage” to that industry after all. The considerations for making this determination are enumerated on pages 545 and 546 of the discussion draft, but they are rather vague and provide little to constrain the Administrator. In sum, the bill turns huge powers (including the very powers by which an industry’s success or failure may be determined) over to unelected and thus unaccountable government bureaucrats.

Starting a Trade War

The tremendous and arbitrary power the bill give the feds over private companies isn’t the only ominous feature of the Waxman-Markey bill. It also proposes a separate program of allowances—only this time, the “cap” is applied to imports coming into the United States. On page 561, the bill reads that if the President determines domestic companies are facing unfair competition because of disparate climate regulations among countries, then the Administrator shall issue regulations

(A) establishing, determining an appropriate price for, and offering for sale to United States importers international reserve allowances;

(B) requiring the submission of appropriate amounts of such allowances in conjunction with the importation into the United States of a covered good produced by any sector or subsector for which the President made an affirmative finding under section 414(b);… [emphasis added]

In essence, this provision admits that the consequences of increasing the costs of energy needed to manufacture American goods may make them uncompetitive, and so offers a way to penalize other countries for not adhering to U.S. standards. Since the direct route of establishing formal tariffs on imports may be too aggressive, and too blatant a violation of international trade agreements, the bill attempts this nuanced version of imposing U.S. standards on foreign nations and the companies that make products there. Under the Waxman-Markey approach, there would be a “stealth tariff,” because importers would need to purchase allowances for certain goods coming from countries that had looser carbon limits. With the world in a severe recession, starting another trade war is a terrible idea.

These are just a glimpse at a few of the implications to the U.S. in a bill which is the starting point for consideration by Congress of a comprehensive “reset” of our economic and energy policies. By themselves, they pose ominous threats to U.S. and world economic growth. The Waxman-Markey bill, unfortunately, is not limited to these particular impediments to economic growth and job creation.