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October 26, 2009

Cap and Trade Economics: Thoughts and Quotes from the ENR Hearing

By: Julian Carmona, intern for the Sierra Club Global Warming & Energy team

On Wednesday (10/21/09) I attended the Senate Energy and Natural Resources Committee (ENR) hearing on the economics of the Cap and Trade system in the Waxman-Markey House Energy bill. The witnesses were picked from a mix of non-profits (Resources for the Future, Center on Budget and Policy Priorities) and academia (MIT, Tufts), and were highly praised by both Republicans and Democrats on the Committee. After making her introductory remarks about consumers bearing the brunt of energy costs, Sen. Murkowski (R-AK) allowed for the witnesses to begin their testimony.

There was a major theme that pervaded all the witnesses’ testimonies: a cap and trade system would disproportionately affect low income communities, and the cost would vary by region (they disagreed on how varying that cost would be). All witnesses agreed that there must be an explicit determination on how money could be returned to the consumer and how transitional assistance should be provided for low income families. Dr Karen Palmer from Resources for the Future stated that price distribution would be complicated because some state energy utilities are regulated and some are not. Dr. Palmer, along with Dr. Gilbert Metcalf, a professor of economics at Tufts University, agreed that a “Cap and Dividend” system might be effective in returning money directly to the consumer in the form of stimulus-like checks. Dr. Chad Stone, Chief Economist at the Center on Budget and Policy Priorities, suggested that a system akin to state assistance measures (food stamps, etc) that is embedded in the House bill could help low income families. Lastly, Dr. Danny Ellerman, former economist at MIT, declared that any allowances from permits given to corporations would flow to their shareholders and employees before going to consumers not with the company.

Then, the questioning started. This part was both informative and fun. Chairman Sen. Jeff Bingaman (D-NM) began by asking how consumers would receive money or rebates. This theme was a sticking point for senators Robert Bennett (R-UT), Jim Bunning (R-KY) and John Barrasso (R-WY) when they questioned the witnesses. But, ranking member Sen. Lisa Murkowski (R-AK) preceded them, and quickly switched the topic to regional differences. She started out by making a jab at the coastal states by citing an EPA report that put most of the tradable permits with the coastal regions and left the Midwest to fight for the rest. She went on to say that Alaska’s energy bills could be 22 times that of any New Yorker’s energy bill, which put her state at a disadvantage. Dr. Stone answered Murkowski’s concern by pointing out that once all impacts are combined, the general effect of cap and trade will be modest and vary slightly from region to region. He reassured that those who pay the most for energy will most likely see the least effects.

Anti-government, anti-tax, anti-cap-and-trade, credit default swap diatribes and polemics aside, Senators Bennett, Bunning and Barrasso had largely the same concerns as Bingaman and Sen. Maria Cantwell (D-WA): how can the government help consumers pay for price increases in their energy bills? Unlike their fellow Senators, they attacked the complexity of cap and trade and questioned whether there could be an easier solution, like a tax. Both Dr. Stone and Dr. Ellerman attacked that notion by pointing out that a tax does not solve the issue of who gets allowances and how regional utility disparities could be remedied. Dr. Metcalf warned that if we do not remedy these regional differences, we could run the risk of “enshrining” carbon intensive technology. 

But, the Republican block did not stray from usual jabs at climate change and big government. Senator Bob Corker (R-TN) said that the bill was used to expand government power and buy out interest groups. Barrasso made the point that if China and India do not sign on to a deal, then why should America, ignoring the fact he was questioning a panel of economists who knew way too much about zero sum games. Lastly, Bennett took the proverbial “cake” by saying that carbon dioxide was not a pollutant because it was “necessary for life.” He also declared that the “bridge to the promised land is built by fossil fuels.” His “promised land” was a time where we would get our energy from MOSTLY nuclear, with a little solar, geothermal, tidal, biomass, etc. But, of course this Promised Land is, physically, 30 years away.

There was a glimmer of optimism amongst the group. Every present Senator on the committee praised the panel for analyzing the nitty-gritty details of cap and trade. There was also a consensus that assistance should be provided to low income families and middle class consumers in order to help them transition into reducing their emissions. There was also an agreement that there should be a mechanism to bring money back to the consumer. Sen. Cantwell stressed that she, and her fellow senators, would not tolerate the polemics and hyperbole that have characterized the climate and energy debate.

Most importantly, Sen. Byron Dorgan (D-ND) urged Congress not stall on passing a comprehensive bill out of committee and on the floor.

No truer words have been spoken.  

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