Climate Crisis: The Perfect Excuse to Raise Taxes

It was the worst of times for the economy and the best of times of the next installment of the Obama transformation. Known as the American Clean Energy and Security Act of 2009 (PDF) or The Waxman-Markey bill, the goal is to reduce energy consumption and with it carbon emissions, according to the E.P.A.’s review which accompanies the release of the draft bill.

The bill was announced this week in a coordinated one-two punch by Congressional Democrats and the Obama Administration. The bill’s proposed cap-and-trade mechanism assumes that carbon prices would range from $13 to $17 a ton in 2015, and rise by about 5 percent a year. By 2020, carbon costs would reach $17 to $22 a ton. That is approximately what participants in a European Union cap-and-trade program are currently paying according to the EPA. The bill also seeks to reduce carbon emissions by increasing the market share of renewable energy like wind and solar to 26 percent of the nation’s energy mix by 2030, and 46 percent by 2050. Without it, E.P.A. estimated renewables would remain at about 14 percent of power generation resources. Republicans said this bill amounted to a declaration of war by the West Coast and East Coast on the Midwest and South and that cap-and-trade amounts to a hidden energy tax.

Will this Bill really work?

This is the first draft of the bill and you can expect a tremendous amount of sizzle and froth as proponents and opponents vent over the features. But we do know a few things both by logic and intuition that likely will shape the American public’s view of the right balancing of interests in this matter.

1. The European Experience is a Failure. The bill purports to learn from the EU emissions trading scheme, as it is so appropriately called, where a cap and trade system is in place seeking to change behaviors about emissions by imposing a carbon tax on releases. The problem in Europe is the politicians granted so many “allowances” (think indulgences in the Eurocentric mindset and earmarks in the American political scheme of things) that nothing much changed. Emissions reduction results have been modest. Yes, they are trying to fix it, but for all the criticism of the Bush Administration after rejecting Kyoto, US performance under a voluntary approach was on par with or better than the Europeans.

2. Renewable Generation is now Mainstream, but Transmission is limiting it. Renewable energy production in the US has exploded. Wind is expected to capture more than 75% of the total market share for renewable options. The problem is the transmission grid was not designed to support small scale, intermittent resources. While the production tax credits Congress has periodically renewed are the mother’s milk of renewable market share growth, the basic infrastructure to fully integrate renewables into the grid is insufficient. Don’t believe me—look at West McCamey, Texas, where wind resources flourish but the fragmented transmission grid that once protected Texas from the rest of America now imprisons its best resources. The same is true of wind potential in Wyoming and Iowa and other places far removed from load centers. In short, if we want renewable energy to grow to the levels the Obama team dream of we must spend as much or more on transmission as we do on the renewable generation itself. Utilities will buy more renewable energy because state regulators tell them to do so and reward them by allowing the incremental cost to be passed through in rates. Congress has never met a subsidy it did not like and so the production tax credits will continue in fits and starts propelling renewable market share upward. The real question is whether the Government, Utilities and Investors will pump enough new capital into the transmission grid to make it work effectively to create a scalable market for renewables—and a profit without being on the government dole?

3. Too Much of a Good Thing. Because the commitment to renewable energy is largely politically driven, manufacturers of wind turbines and other OEM equipment have been content to max-out their production capability and make profits rather than following the lead of the ethanol crowd, overbuilt and exposed to unintended consequences. Achieving the Administration’s renewable energy goals will be daunting because there probably is not sufficient production capacity to deliver the equipment needed in the time frames politicians want. And even if you could do so you still have the transmission delivery problem in # 2 above.

4. Backup for Intermittent Renewable Energy Resources is Natural Gas. Because the wind blows only when it the atmospheric conditions are right—not when politicians and utilities want it, every megawatt of wind generation must be backed up by a megawatt of “dispatchable” energy which almost always is natural gas combined cycle generation these days. The same type of power plants we have been building for the last generation of resource additions are going to be built again under the ruse of backing up renewables.

5. Coal and Nuclear Generation are NOT going away. The installed based of coal fired generation is still the backbone of America’s resource mix and a stabilizing influence on energy prices given the long term nature of coal contracts. Nuclear power has proven to be a reliable, low operating cost resource and the NRC seems willing to keep extending the useful life of the existing fleet of power plants. These resources are not going away. Dreams of building the next generation of baseload nuclear or clean coal technology power plants face the challenge that neither can match the cost effectiveness of combined cycle natural gas.

6. Carbon Taxes will Increase Energy Prices and Raise Tax Revenue. The bottom line for most Americans is that the cap and trade legislation proposed will raise their energy costs and generate vast additional revenues for the government but the underlying strategy, generating resources and emissions results will continue on their same slow and steady improvement trajectory. The analysis by most credible consultants suggests that a carbon tax of at least $40 per ton or more will be needed to really change the economics of emission reduction investment. The Waxman-Markey bill will not come close to those carbon tax levels and thus should be called out for what it really is —a tax increase not a policy change to believe in.

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