The Week That Was 2010-07-17 (July 17, 2010) Brought to you by SEPP (www.SEPP.org) ****************************************** Although the Kerry-Lieberman American Power Act (APA) appears dead, Senator Reid announced he will introduce, yet, another version of cap-and-tax this month by any other name. But both the Congressional Budget Office (CBO) and EPA have produced studies showing that cap-and-tax will be economically harmful. The CBO report is a solid, prudent review of three studies: Resources for the Future, Brookings Institution, and CRA International. All report that significant declines in total employment will result from APA. Strangely, Brookings makes the unrealistic assumption that all nations, including China, India, and Brazil, will adopt carbon dioxide control measures even if the US does not. In spite of its harmful consequences, with the worst year-long unemployment rate since 1982, cap-and-tax continues to reappear. To understand why, it is useful to further examine APA to grasp the financial incentives involved. Most macroeconomic studies (economy-wide) do not examine the incidence of the tax (who actually pays the tax) and, correspondingly, the incidence of the subsidy (who reaps the benefits). A study by Chamberlain Economics does. http://chamberlaineconomics.com/publications/ APA establishes allowances for carbon dioxide emissions which decline every year. Part is sold at auction to establish a controlled range of prices and part is distributed free to favored industries that can be sold or traded, ideally within the controlled range of prices. Using the mean of estimated prices in APA, Chamberlain Economics estimates the value of the of the part distributed free during the 2013 to 2034 life of the program as $2.1 Trillion – about the amount of total Federal revenues in 2009. The largest beneficiary is the electricity industry to the tune of $870 Billion. Politicians claim the value of the free allowances to the electricity industry will then flow to the consumers of electricity. Chamberlain uses established microeconomic theory backed by empirical studies to show that much of the value will flow to the shareholders of the companies that are generally in the highest income group. Thus, the entire scheme results in a massive transfer of wealth from the lower and middle income groups to the wealthy. No wonder Duke Energy declared cap-and-trade will give share holders a $1,000,000,000 (Billion Dollar) profit. Very interestingly, the Carbon Capture and Storage (CCS) industry, basically non-existent with an unproven technology, receives $246 Billion in free allowances – twice the 2009 budget for California. Given the sheer volume of carbon dioxide involved, it is highly unlikely that CCS will ever become viable. [As a side note, Lord Oxburgh, the chairman of the third “independent” British commission investigating Climategate, is also honorary president of the British Carbon Capture and Storage Association. (http://tiny.cc/mpitm)] Using EPA numbers and established models from government agencies such as the U.S. Bureau of Economic Statistics, Chamberlain estimates the cap-and-trade decline in employment would be 716,000 by 2020 and 5.1 million by 2050. The estimated decline in wages would be $32 Billion by 2020 and $236 Billion by 2050. Unlike far too many studies of this type, the authors recognize that these estimates have great uncertainty and can only be considered as orders-of -magnitude approximations rather than precise estimates. *******************************************