Cap and Tirade
The controversial plan to limit greenhouse gas emissions could be the worst thing to happen to Texas. Unless, of course, it’s the best.
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Two bits, four bits, six bits, a dollar.
All for fossil fuels, stand up and holler.
The several thousand oil company employees who disembarked from buses at the Verizon Wireless Theater in downtown Houston came to rally against federal legislation that, as they saw it, threatened their jobs and their industry. They would have been in a considerably more relaxed mood had they known that within six weeks the Obama administration would announce that it was abandoning its efforts to pass a major climate-change initiative this year. That sweltering Tuesday in August, however, the workers and their employers still had plenty to worry about. Some had come from The Woodlands, the headquarters of Anadarko Petroleum, about thirty miles from downtown, to cheer for Big Oil, the home team, and to jeer the American Clean Energy and Security Act—or, as it is informally known, the cap-and-trade bill. The legislation would, depending upon whom you believe, lead America into a new era of green energy or unduly burden American families with increased costs for everything from food to electricity while achieving scant reductions of greenhouse gases, which contribute to global warming. The rally, which made the pages of the New York Times, featured a high school band, a video starring country singer Trace Adkins, hamburgers and hot dogs, and T-shirts with the slogan “I’ll pass on $4 gas.”
In September a similar, if more somber, event took place in Austin. It featured Governor Rick Perry and representatives of state agencies with a stake in climate-change legislation, as well as panels of experts, and no one in an official capacity had anything good to say about the administration’s proposal. “It could have many names: It could be the ‘pay more to heat your home’ bill,” said Todd Staples, the commissioner of agriculture. “â€Š‘Pay more for the food you eat’ bill or ‘pay more for the clothes you wear’ bill.” This conference, touted as a climate-change summit, had more doom and gloom than the Houston rally. The concern was that the Obama administration might press Congress for action before the United Nations Climate Change Conference, scheduled to be held in Copenhagen this December.
A federal mandate to reduce pollution is something that Texas political and business leaders have long dreaded. Oil refineries, petrochemical plants, and electric-power-generating facilities that rely on coal are in the crosshairs. Because Texas belches more greenhouse gases into the atmosphere than any other state, our industries would be the most vulnerable to global economic forces. The worst-case scenario is that the cost of reducing emissions will cause prices of any economic activity involving fossil fuels to skyrocket. Naturally, these price increases will be passed along to consumers.
For many years Houston’s business elite scoffed at accusations that the dirty air was a threat to public health, calling it “the smell of money.” If a cap-and-trade bill does become law (and that is far from certain), it will mark the moment when Texas’s chickens come home to roost, the time when the state must answer for decades of lax regulation of its smokestack industries and for continuing to generate electricity powered by coal, the dirtiest of all fuels.
The idea behind cap and trade is to set a ceiling on the level of emissions-—in one version a 20 percent reduction by 2020. After that, the cap will be ratcheted downward over the next thirty years until greenhouse gases have been reduced by 83 percent of their 2005 levels. The “trade” part of cap and trade is that federal regulators will issue get-out-of-jail-free cards, known as allowances, to industrial polluters. The idea is to establish a market that will enable allowances to be bought and sold. A company with a high level of emissions would be a likely buyer, one with low levels a likely seller. I have barely scratched the surface of how this market will work; there is, for example, a lively argument over whether allowances should be distributed to polluting industries for free or auctioned off by the government. The ultimate goal, of course, is to prevent the harmful effects of global warming.
The debate over cap and trade is usually cast in scientific terms, but it is really more about religion than science. Those who favor it have faith—faith that it will change the world for the better, faith that the weaning of the American economy from fossil fuels will lead to major investments in clean energy and new technologies. In other words, “If you come, they will build it.” Those who question it argue that America should not unilaterally burden its economy and its households with new costs in the absence of an international agreement on limiting emissions. In other words, the plan won’t work unless the BRIC countries—Brazil, Russia, India, China—go along, which they won’t. After the House version of cap and trade passed out of committee this summer, Martin Feldstein, a former chairman of the Council of Economic Advisers, wrote in the Washington Post, “The proposed legislation would have a trivially small effect on global warming while imposing substantial costs on all American households.” How substantial? The Congressional Budget Office says an average of $455 per year. Advocates say less than the cost of a postage stamp per day.
Michael Webber is a believer. He is an assistant professor of mechanical engineering at the University of Texas at Austin, and he has an engineer’s faith that technology can change the world. I heard him speak at the state’s cap-and-trade summit and later interviewed him. Webber cites as a precedent for why cap and trade could work the success of a similar system to combat acid rain that was established in the Clean Air Act of 1990. “The prevailing wisdom is that cap and trade is bad for Texas,” he said. “We are the biggest carbon emitter, and we have the biggest price to pay. I don’t believe the models, because they don’t include the benefits of clean air or the costs of doing nothing.”
“Texas wins in a carbon-constrained world,” he said. “We have what the world wants: low-carbon fuel. We have natural gas, wind, and solar energy. Few states have all three. The natural gas market could double or triple, and we have one third of the nation’s natural gas. We can do more to produce low-carbon fuels than any other state. We have more experience with sequestering carbon dioxide than any other state, and we’ve been doing it for years in the oil fields. We can teach the rest of the country how. We have our own electric grid. That allows us to have more-sophisticated markets, and we can base the price on the time of day. We have a regulatory climate that allows us to build transmission lines. If Texas falls in line on cap and trade, the nation falls in line. We could be the enabler.”
If Webber is the true believer about Texas’s low-carbon future, Michelle Michot Foss is the skeptic. The chief energy economist of the Center for Energy Economics at UT-Austin’s Bureau of Economic Geology, she too spoke at the cap-and-trade summit, and she painted a grim picture for Texas. She believes that if cap and trade takes effect, 173,000 jobs would be lost by 2030, the gross state product would decline by $26 billion, and real disposable income would fall by $24 billion. What about the creation of green jobs? The short answer is that no one knows. “It’s hard to defend green jobs claims,” she told me. We know that there are going to be costs associated with cap and trade; what we don’t know is whether they will be offset from the creation of new businesses and new jobs and what the wages from those jobs will be.
Foss is also skeptical about the impact of greenhouse gases on the atmosphere, which, of course, is the reason for implementing cap and trade in the first place. (She referred me to recent developments in climate science that suggest that variations of solar activity are one of the principal determinants of climate.) Using data gathered by the Environmental Protection Agency and other agencies, she has calculated that if all carbon dioxide from U.S. coal-fired power plants were captured or eliminated, we would remove only .00000382 percent of the weight of the atmosphere. “We can’t predict a climate benefit,” she said.
Foss echoes another complaint that economists have about cap-and-trade legislation: A lot of the trading so far has been in political favors designed to buy votes for the bill. Farm states could benefit from new programs that would be overseen by the farmer-friendly Department of Agriculture, not the EPA. Rust Belt states could benefit from a tariff on goods from countries that don’t regulate emissions. “We shouldn’t pick winners,” she says. She is also concerned that the bill has loopholes that companies can exploit. Foss gives the example of a company that offsets its pollution by planting trees in Brazil. “That doesn’t reduce emissions in the U.S.,” she says, “nor does it create economic benefits here.”
For all the sky-is-falling alarms that were raised in Houston and in Austin about cap and trade, the bill is on the back burner for at least the rest of this year. It was too much, too soon, too expensive, too intrusive, too ambitious, too speculative. It makes more sense for the federal government to invest in new technologies—battery storage for wind and solar energy, for example—than to try to save the planet. But Texans should not celebrate too much at the demise of cap and trade. We have gotten a reprieve, but we’re still in the line of fire. And we have no one to blame except ourselves. The state’s environmental regulators should learn from this near miss that they need to wean Texas from coal, because cap and trade will come back. Like Webber, I want to see green energy become a reality, and I want Texas to lead the country in that direction—as long as we don’t have to stop producing oil and gas to do it.