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The Cap-and-Trade Scapegoat and the Illusion of Cheap Energy

Jeff Siegel | Wednesday July 1st, 2009 | 9 Comments

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It may not have made as many waves as the Michael Jackson story, but last week, after the House passed the cap-and-trade bill, the media response was overwhelming. Not that anyone should be surprised. This is a huge issue.
However, it seemed that much of the earliest coverage stirred up an awful lot of hostility and opposition. And it was everywhere. From the most conservative blogs to the most liberal social media sites – those who oppose any kind of effective climate change legislation were not pacing back and forth in the waiting room. They were hitting up every possible media outlet to express their opinions and outrage.


Now I have no intention of opening up the global warming debate here. Those who believe global warming is some kind of scam are not going to change the minds of those who believe there’s something to it. And vice-versa.
However, one thing that I’m finding increasingly frustrating is the amount of manipulated data that’s being disseminated all over the internet…and mainstream media.
Let’s first take a look at the data that was debunked earlier in the year – but was used as a rallying cry on Fox & Friends last Friday.
You’ve likely heard it before – that cap-and-trade will cost consumers an extra $3,100 a year. This is the figure that a handful of bureaucrats in D.C. came up with after massaging some data found in an MIT study.
John Reilly, one of the study’s authors told House Minority Leader, John Boehner that the MIT study had been misrepresented in press releases distributed by the National Republican Congressional Committee. Reilly stated that it was misleading and simplistic to only look at the impact on energy prices, as it didn’t account for the proposals that have been designed to offset the energy cost impacts on middle and lower income households.
Of course, it wasn’t just Boehner’s office that pumped out the press releases about the supposed high costs associated with cap-and-trade.
The Heritage Foundation chimed in with their analysis of the bill which they claim adds little more than a massive energy tax in disguise that promises job losses, income cuts and a sharp left turn toward big government.
Their cost estimate is $1,500 a year.
On the other side of the coin, we have John Reilly’s estimate of about $800 a year. . . an EPA analysis which estimates a cost of between $98 and $140 a year. . .and a Congressional Budget Office estimate that puts the total at $175 a year.
I suspect all of these numbers have already been run through the opposition’s spin mill, rejected thoroughly, and blasted back out on the internet.
Either way, no matter how accurate or manipulated the data – the truth will only be realized in practice.
Listen: Certainly no one wants to spend more money for energy. Especially during these rough economic times. And this is what opponents of climate change legislation are banking on – telling us that energy will cost more because it will cost more to produce. But isn’t this really just an illusion – like the “cheap” energy we consume today?
I would argue that energy production would not cost more. The price we pay to the utilities for that energy, however, would. And there’s a very important difference between the two.
What we’re really talking about here is attaching an environmental cost to the production of electricity. But that cost has always been there. It’s just that you and I never see that cost on our bill.
Bottom line: There is a definite environmental cost associated with the production and combustion of fossil fuels. And that cost is the deterioration of natural capital (water, minerals, fish, trees, oil, soil, air, and living systems, including wetlands, estuaries, coral reefs and rainforests)
Now before you write this off as some kind of radical environmental agenda, hear me out…
As explained in the book Natural Capitalism (which is an absolute must-read for energy investors), natural capital has never really been valued appropriately. Rather, it has constantly been liquidated, thereby further enabling the deterioration of ecosystem services that really represent the most important type of capital – things like the regulation of atmosphere and climate, the cycling of nutrients and water, pollination, control of pests and diseases, and the maintenance of biodiversity. While the value of these free, natural, and self-regulating services are worth trillions annually, this value has never really been reflected on balance sheets.
Instead, the costs associated with the loss of natural capital have long been externalized onto the environment. i.e.) you, me and every single thing that lives around us.
And the truth is, we’re only talking about CO2 with this cap-and-trade bill. As far as I’m concerned, there’s still the mercury issues associated with coal, the waste issues associated with nuclear, and the security issues associated with our reliance on oil. These aren’t included in the bill. But throw those on your tab, and you’ll see an even higher cost per kWh (or higher cost per gallon of gas when referring to oil being used primarily as a transportation fuel)
Point is, the price we pay for energy today does not reflect the true cost of producing that energy. An effective climate change bill could at least begin to enable a more accurate cost structure.
I know, I know. No one wants to shell out a penny more for anything. And I’m no different. But if we truly believe in a free market system, than we should not resist a fair and accurate cost analysis of energy. Because the truth is, it’s never really existed.
Now understand, I’m not saying cap-and-trade is the answer. To be honest, this thing is so politically-motivated, it’s hard to figure out the most effective, and honest solution. Seems to me, the best way to do this is simply to charge consumers the REAL price. I’m confident that if no subsidies existed (direct or indirect) for any kind of power generation (fossil fuel or renewable), and ALL natural capital costs were figured into the equation – the market would dictate the rapid expansion of renewable energy and smart grid development, which would thereby enable a decrease in fossil fuel consumption, and ultimately a decrease in CO2 emissions.
But hey, that’s just my opinion. Perhaps you have a different one. So please feel free to leave your comments below. Just keep it civil.


▼▼▼      9 Comments     ▼▼▼

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  • Ray Taub

    Really excellent post. This is one of the few common-sense posts about the subject I’ve seen in the last couple weeks.

  • http://www.greenchipstocks.com Jeff

    Thanks Ray. And thanks for reading!

  • Charlie

    Thanks for the article. It would be great to read about how we’re actively supporting these industries through tax policies, in addition to ignoring the real costs, as you mention.
    The EPA has successfully used cap and trade to reduce acid rain and NOx and in the Clean Air Intersate Rule (CAIR), 2005. The cost was less than the both the EPA and the hysterical folks projected. The Acid Rain program has been used as a model in other countries. For more info, see http://www.epa.gov/captrade/

  • Ashwin

    “I’m not saying cap-and-trade is the answer. To be honest, this thing is so politically-motivated, it’s hard to figure out the most effective, and honest solution.” — Really great summation of the convoluted nature of what we’re dealing with right now…

  • Ashwin

    “I’m not saying cap-and-trade is the answer. To be honest, this thing is so politically-motivated, it’s hard to figure out the most effective, and honest solution.” — Really great summation of the convulated nature of what we’re dealing with right now…

  • http://www.globalwarmingisreal.com Tom

    Jeff, thanks for the great post. The noise has been almost deafening for me the past few days and I appreciate the clear-headed thinking, though lament there isn’t more of it as we try to deal with this issue.

  • http://www.twitter.com/kynamdoan KyNam Doan

    Jeff, you’ve cut through all the numbers and presented a very compelling argument. This is an issue that has been sidelined and marginalized because people don’t want to have to pay for the true cost of energy.
    This underlying thought process reconciles profit with planet in its entirety. Great job!

  • http://www.Padosa.com Eric Cohen

    Great post. Unfortunately our political process is an imperfect system of compromise that has given us a less than perfect bill. But if it begins to price environmental costs perhaps that will be enough to get the system moving in a better direction.
    Thanks again for the excellent post!

  • http://www.twitter.com/kynamdoan KyNam Doan

    Someone brought up the issue of the unfair burden on the lower and middle income brackets. I was at a loss for a valid response (as I’m a strong proponent of social progress as the betterment of the denominator).
    It hit me soon after, that the lower and middle income brackets are also most prone to health impacts from pollution. So they’re either paying with their health, or they’re paying out of their pockets. It’s an unfortunate situation all around. But in the long run will be best for all.