CAN WE HAVE A SERIOUS CONVERSATION ABOUT THE COST OF CAP-AND-TRADE?

By Elaine Spencer

Washington’s Department of Ecology recently issued a report entitled “Washington Western Climate Initiative Economic Impact Analysis,” which predicts that if the cap-and-trade program advocated by the Western Climate Initiative were adopted, the result would be an additional 19,300 jobs by 2020 and $3.3 billion increased economic output in the state product by 2020.  Presumably those numbers were meant for consumption as sound bites.

One is tempted to ask, however, “Can we be serious for a moment?”  First, it is important to put those numbers in context.  According to the Office of Financial Management, employment in Washington grew by 806,000 between 1990 and 2008.  In 2008 there were 2.95 million jobs in Washington.  So, while in this economy, all jobs are precious, adding 19,300 jobs over ten years is probably within the margin of error of any economic modeling.  The Bureau of Economic Analysis estimates the total state economy in 2009 at $278 billion, so again, predicting a $3.3 billion increase in ten years is probably within the margin of error of any predictions.

But aside from that, the methodology of the study simply ignores the biggest economic issues associated with cap-and-trade legislation or any other effort to increase the price of carbon – the costs to everyone of energy must first go up, before it can come down, and that will leave businesses and consumers with less money available to spend on other things.

Ecology’s study assumes that “all commercial and industrial customers will have an increase in economic output over time if they have made investments in energy efficient equipment;” “suppliers of energy efficient equipment (contractors, construction, retail trade sectors) will benefit from increased spending on energy efficient equipment;” and “residential and commercial sector customers will have an increase in costs due to greater investments in energy efficiency equipment relative to the Reference, scenario, [but t]hese higher costs are mitigated by energy cost savings for these same customers in future years after the initial investment is made.”  That all leads the authors of the study to predict net gains to the economy.

Indeed, there is no question but that raising the price of carbon will spur investment in new technologies to lower carbon use and make alternative fuels more affordable, and there will be suppliers and entrepreneurs who benefit from that.  But the Ecology study does not address the fact that the thing motivating this new investment is that all sectors of the economy will be making those investments because their costs of energy have been forced up.  Homeowners will see rising electricity costs and rising cost of gasoline for their cars.  That will leave them with less money to spend on other necessities and discretionary spending.  Businesses will experience similar increases in energy costs, and will also need to cut back their expenses elsewhere – reducing other investments or reducing employee compensation.  Furthermore, while in an ideal world consumers and businesses would all respond to those rising costs by new investments to offset those costs, in the real world many consumers and many businesses will not be able to make such investments.  A consumer struggling with an old refrigerator that needs to limp along for another two years until the kids are through school will not be in a position to buy a new energy-efficient refrigerator just because the cost of operating the old one goes up a few dollars a month.  That consumer will simply have less grocery money.  A business on the edge of failure will fail if its costs go up with no increase in revenue to match it.  The reason why it is so politically difficult to raise the cost of carbon is because real people and real businesses are hurt when their costs increase.

Let me be clear.  I believe that we must raise the cost of carbon, in spite of the cost and pain associated with doing so.  If we don’t, we will continue to be increasingly dependent upon foreign oil, coming from countries with which we have increasingly difficult relationships.  We will remain at the mercy of price shocks any time something happens to global energy supply or demand.  And we run a significant risk of having the debate over global climate change and greenhouse gases resolved by the sinking of low-lying countries or the mass die-back of forests or other unacceptable outcomes, at a point when we will have only bad choices as to how to respond.  Calvin Coolidge once said, “Economy is the method by which we prepare today to afford the improvements of tomorrow.”  Painful though it will be to take the steps now to convert our economy to less carbon dependence, the consequences of not enduring that pain are potentially far greater.

But is it really impossible to discuss the issue honestly?  Does it help the discussion to have the advocates of a cap-and-trade system offering up “economic reports” that simply ignore the economic realities?  I would submit that although there is daily evidence that some Americans have lost the ability to face hard choices and make painful decisions that are in their long-term best interest, nonetheless we are better served by not trying to pretend that the hard choices aren’t hard.  Leadership includes not only being in front while the masses go where they want to go, but turning the masses to go a harder way when that is essential.  We need leadership on carbon, and the ability of our leaders to persuade will be enhanced if people recognize that those leaders are being honest with them.