Posted by: bmeverett | June 29, 2009

Smoking and Climate Change

On June 22, President Obama signed into law The Family Smoking Prevention and Tobacco Control Act. As we know, all laws are more effective if they include the word “family.” The President called the law the culmination of “The decades-long effort to protect our children.” If President Obama were truly interested in convincing people not to smoke cigarettes, he has one simple, cost-free option available to him – stop smoking himself. Maybe, just maybe, the President doesn’t really want to stop people from smoking. Please ask small children and the faint-of-heart to leave the room before I say this, but the President may be more interested in extracting money from smokers without actually inducing them to quit. The recent history of tobacco suits and legislation makes it pretty obvious that government is a partner rather than an opponent of the tobacco industry. Instead of declaring cigarettes to be dangerous and banning their sale, the government has carefully calibrated tobacco lawsuits and taxes to ensure a steady source of revenue. If people were actually to quit, the federal budget deficit would grow even more rapidly, and most state budgets would crater.
On to climate change. Last Friday, the House passed the American Clean Energy and Security Act of 2009, also known as Waxman-Markey. As we know, all laws are more effective when they contain the words “American” and “Security.” The bill states as its objective “To create clean energy jobs, achieve energy independence, reduce global warming pollution and transition to a clean energy economy.” Wow! Pretty serious ambitions.
What the bill actually would do, however, should the Senate pass it and the President sign it, would be much more modest. The key provision is a cap on greenhouse gases, primarily carbon dioxide, that would reduce total US emissions by 17% (versus the 2005 level) by the year 2020. According to the Department of Energy’s Energy Information Administration (EIA). CO2 emissions in 2020 will be roughly 6 billion metric tons per year. The required reduction would be roughly 1 billion metric tons, equivalent to about half the petroleum or half the coal we currently consume. If the economy is to recover and continue growing, this reduction will require a major transformation of our energy sector. The Administration estimates that it can achieve this transformation at a cost of about $21 per metric ton of carbon or about $0.20 per gallon of gasoline.
One of these assertions is clearly untrue. Does anyone really believe that a government tax of $0.20 per gallon will fundamentally alter the way we drive? Gasoline had to reach $4 per gallon ($1.25 above the current level) in 2008 before consumers showed any significant change in behavior or buying habits. $0.20 a gallon is within the normal weekly variability of the market price of gasoline.
In terms of electricity use, a tax of $21 per metric ton of CO2 would add 2¢ to the current average price of 12¢ per kilowatt-hour for power produced from coal and less than 1¢ per kWh for power produced from natural gas. By comparison, solar power costs ten times as much as coal power.
The United States is a large emitter of CO2, but our emissions are not growing very fast. Emissions from China and India, on the other hand, are accelerating. The Waxman-Markey bill will reduce global greenhouse gas emissions (the only thing that really matters) by about 2½% by 2020. Meanwhile, no other country in the world is doing anything meaningful about reducing carbon emissions. There’s lots of rhetoric, particularly in Europe, but no action to speak of.
What is the President thinking here? Does he really believe that tiny energy taxes will transform the economy and make the seas stop rising? I don’t think so. President Obama has a problem. He is currently spending $1 trillion on his stimulus package in addition to the $750 billion George W. Bush TARP fund. The estimated cost of his health care package is another trillion dollars. He promised that no American making less than $250,000 a year would see a tax hike, but rich people simply don’t have enough money to fund all these programs even if we confiscated ALL their earnings.
My guess is that what the President and his allies in Congress really want from climate change legislation is money. I suspect that in the near future, we will see a very slight clarification to the President’s campaign promise: nobody with an income less than $250,000 per year will see an increase in INCOME taxes. Other taxes, however, such as tobacco, health insurance and energy, are about to go through the roof. Like tobacco, the President does not want his energy tax to damage the economy, or, in other words, actually to reduce carbon dioxide emissions. He is setting the tax at the level he thinks will maximize revenue.
The result will be (a) bigger government, (b) slower economic growth and (c) no meaningful change in greenhouse gas emissions. Great job.


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