According to a new report from the Congressional Budget Office (CBO), a federal carbon tax could have a dampening effect on the U.S. economy by increasing the cost of production for goods and services. The report was released yesterday.
Read the Full Report Here
Specifically, the report states, “By raising the cost of using fossil fuels, a carbon tax would tend to increase the cost of producing goods and services—especially things, such as electricity or transportation, that involve relatively large amounts of CO2 emissions. Those cost increases would provide an incentive for companies to manufacture their products in ways that resulted in fewer CO2 emissions. Higher production costs would also lead to higher prices for emission-intensive goods and services, which would encourage households to use less of them and more of other goods and services.”
In short, the CBO finds that a federal carbon tax isn’t just a tax on major emitters of carbon; it is a tax on consumers. How much of a tax? The report is not certain. However, a 2011 report by the CBO found that a similar cap-and-trade program with an initial price of $20 per ton on carbon would have raised $1.2 trillion over its first decade.
The CBO report goes on to report, “The higher prices it caused would diminish the purchasing power of people’s earnings, effectively reducing their real (inflation-adjusted) wages. Lower real wages would have the net effect of reducing the amount that people worked, thus decreasing the overall supply of labor. Investment would also decline, further reducing the economy’s total output.”
In weighing these high costs against reductions in carbon output, it is important to recognize that the share of global carbon output contributed by the United States continues to fall. Once the world’s largest emitter of carbon at about a quarter of all emissions, the United States today represents 18% of output, while China produces 26%. Due to the growth of China, India, and other fast-developing nations, this “market share” will continue to fall. In fact, the carbon output of the United States has grown only by 10% in the past two decades, while China has increased carbon output by 240% and India has increased 157%.
“Trying to address a global issue with a federal carbon tax offers the worst of all outcomes,” explains PACE Executive Director Lance Brown. “You saddle the American economy and its consumers with higher costs, while not making an appreciable dent in global carbon output. Policymakers shouldn’t walk away from this idea. They should run.”
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As part of a National Governor Association’s Policy Academy on Industrial Energy Efficiency and Combined Heat and Power, Alabama Governor Robert Bentley has organized a summit on June 11th to continue discussion on the topic. The meeting is free of charge, although pre-registration is strongly encouraged.
Register for the Summit Here
The Summit will be held from 9:30 AM to 3:30 AM at the Alabama State Capitol Auditorium. The keynote address will be delivered by Governor Bentley, with discussions to follow on topics such as pursuing energy efficiency, opportunities for Combined Heat and Power technologies, and the relationship between utilities and industrial energy efficiency. As part of the program, PACE will moderate a panel discussing possibilities for expanding the use of Combined Heat and Power in Alabama.
In large part, the Summit on June 11th is an extension of work conducted by the NGA Policy Academy Core Team, a group appointed by Governor Bentley representing voices from across the energy industry. The group included PACE, as well as a number of PACE’s institutional partners, such as Manufacture Alabama, the Alabama Rural Electric Association, the Business Council of Alabama, and the National Federation of Independent Business.
“Efficient use of electricity by our state’s industrial sector is in everyone’s best interest, and Governor Bentley should be commended for convening this exciting opportunity for discussion,” said PACE Executive Director Lance Brown. “We join with the Governor in encouraging you to attend this important Summit.”
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Transmission is the component of the electricity system that often gets overlooked, but it shouldn’t be. In fact, understanding the cost of delivering the power our nation’s utilities produce – and who pays those costs – is becoming more important than ever. The U.S. will spend $14 billion this year alone to upgrade its aging transmission infrastructure.
Consider the case of Iowa, where the Federal Energy Regulatory Commission (FERC) is considering whether customers of Interstate Power & Light Co. in Iowa and Minnesota should be forced to pay a substantial portion of the costs for new transmission to connect wind farms to the grid. The cost is substantial, saddling half a million customers with $170.5 million over a nine-year period.
Or Michigan, where electricity rate payers were asked to cough up 20% of the costs – over $3 billion – to build transmission lines for wind farms outside of the state, even though state laws disallows renewable power generated outside of Michigan from counting toward the state’s Renewable Portfolio Standard. What benefit did those customers get for their investment? The warm and fuzzy feeling that someone, somewhere was drying their laundry with wind power?
The confusion stems, in part, from FERC’s Order 1000, that allows regulators to spread the cost of building new transmission fairly liberally, even to customers that don’t really see the benefit. This is termed “cost socialization” and appears to FERC’s preference, at least for now, for paying the nearly $150 billion it could cost to connect onshore and offshore wind turbines to the grid. Turns out that while the wind itself is free, it is frighteningly expensive to get it into your light bulb.
The Wall Street Journal calls cost socialization “like arguing that Oklahomans should pay to fix potholes in Manhattan.” That’s a good analogy, but here’s a real-life example. Customers of Entergy in places like Mississippi and Louisiana will soon be part of a regional transmission organization that stretches across the Midwest in 15 states and even into Canada. But will power customers as far south as New Orleans have no choice but to pay the cost of building transmission lines for wind farms in Minnesota that satisfy Renewable Portfolio Standards in Illinois, Iowa, and Missouri? It certainly seems so.
In other words, through Order 1000’s system of cost socialization, you could soon be asked to pay the cost of renewable energy mandates whether you like it or not. It’s time for our energy policy makers in Washington, DC, to work with FERC to make sure that doesn’t happen.
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