Chu is Right, But Not About Cap and Trade
April 23rd, 2009Posted by: Roger Pielke, Jr.
The following comment by Energy Secretary Steven Chu from the Earth Day congressional hearings on the Waxman-Markey cap and trade bill is really interesting:
As Secretary of Energy, I think especially now in today’s economic climate it would be completely unwise to want to increase the price of gasoline. And so we are looking forward to reducing the price of transportation in the American family. And this is done by encouraging fuel-efficient cars; this is done by developing alternative forms of fuel like biofuels that can lead to a separate source, an independent source of transportation fuel.
It is interesting for several reasons. First, The EPA analysis of the Waxman-Markey bill shows clearly that the bill increases the costs of gasoline (see p. 29 in the report here in PDF and p. 50 in the Appendix here in PDF). Apparently neither Chu or those critical of the bill who were questioning him were aware of this fact (or else Chu wouldn’t have phrased his response as he did and those critical would have followed up on this exact point).
More importantly however is that Chu’s answer contradicts the entire point of cap and trade legislation. The point is to make fossil fuels more expensive and this new expense will motivate efforts to improve efficiency and invest in alternative energy technologies. Henry Waxman explained this logic just last week:
If we raise the price of energy, which will happen if we’re reducing the amount of carbon emissions, and industries have to figure out how to live in a carbon-constrained environment, they are going to have to figure it out because it’s in their profitable interest to figure it out.
The key point is that under a cap and trade regime increases in the costs of energy come before (and indeed are the reason behind) advances in efficiency and technology. So if Chu really believes that it would be unwise to raise the price of gasoline, then he is not a fan of cap and trade.
Chu is correct that a successful strategy will be based on making energy cheaper. But this approach is not cap and trade.
April 23rd, 2009 at 4:36 pm
Obama needs to take some time off flying around the world to have some staff meetings, so his Team gets on the same page. It is getting extremely comical to watch all the contradictions and miscommunications.
You forgot to mention that Chu was also forced to admit he erred in his earlier statements to the effect that $8/gallon gas was just what America needed.
April 23rd, 2009 at 4:40 pm
Some humor from the hearings: http://www.globalwarming.org/2009/04/23/comedic-highlights-of-the-waxman-markey-bill-hearing/
April 23rd, 2009 at 5:31 pm
“The point is to make fossil fuels more expensive and this new expense will motivate efforts to improve efficiency and invest in alternative energy technologies. ”
Not necessarily. If fossil fuels become more expensive then the development of the huge reserves that are contained in tar sands and oil shales and EOR (enhanced oil recovery) and exploration in deep water and other inhospitable places become more attractive. So supply of fossil fuels will still be there to challenge the ever costly alternatives.
April 23rd, 2009 at 5:48 pm
“More importantly however is that Chu’s answer contradicts the entire point of cap and trade legislation.”
Rodger provides that quote as if it matters. Contradicting one’s self is the very heart of politics. Every day that you get by without being pinned down is a success. If you keep it up until your time in office runs out, they put a statue of you in Washington.
April 23rd, 2009 at 9:03 pm
if done properly, cap-trade doesn’t raise the price of all fossil sources across the board. in fact, it rewards the most carbon-efficient fossil sources. In the original EPA analysis of Lieberman-Warner (now Boxer-Lieberman-Warner, but essentially the same bill), only coal-based electricity increases in price while other sources actually decline in price from their baseline because of the reward they get from being more carbon-efficient than coal. That said, if liquid fuel is carbon-capped at the refiner and/or importer level, which it likely will be, they have no native efficiency opportunities, so the price will have to increase. Other countries have sidestepped this problem by explicitly leaving transportation out of their carbon regulatory regimes.
April 23rd, 2009 at 11:49 pm
kevin,
Electricity is the same no matter how it is generated and there can only be one market price for electricity. If the government taxes coal based electrical plants this will raise the price of the electricity across the board. The higher prices might make some non-emitting sources more viable but these sources are not used today because they are more expensive. This means that the consumer will not see any savings.
To make matters worse: if the cap and tax plan actually succeeds in encouraging people to spend money on more expensive energy soucres then the government will lose the carbon tax revenue. The government will then have to replace this revenue by taxing other things.
If CO2 is a problem then energy prices much go up and people must accept that everyone will be poorer as a result of the increased costs. This economic reality is unescapable.
April 24th, 2009 at 5:22 am
[...] Roger Pielke Jr. wonders how the energy secretary squares support for cap-and-trade with a call for lower energy prices. Meanwhile, a couple of former DOE officials call for a
April 24th, 2009 at 5:38 am
[...] Roger Pielke Jr. wonders how the energy secretary squares support for cap-and-trade with a call for lower energy prices. Meanwhile, a couple of former DOE officials call for a “realistic” energy policy and warn of [...]
April 24th, 2009 at 8:08 am
Raven, sorry, you’re wrong. The electricity markets are far more complex than that, and “there can only be one market price for electricity” is … well, clearly not true if you’ve spent time in the utility industry. Under cap-and-trade, coal-dominated utility customers will see higher prices while some nat. gas customers will very likely see their prices fall. If you don’t believe me, go find the EPA analysis of Lieberman-Warner and read their supporting documentation. You can quibble with their analysis if you want, but they are correct.
April 24th, 2009 at 8:24 am
kevin- you say “…only coal-based electricity increases in price while other sources actually decline in price from their baseline because of the reward they get from being more carbon-efficient than coal.”
That’s a pretty deep pile of wishful thinking. Do you really think an IPP nat. gas plant owner is going to pass their savings onto the customers? It’s the same story we hear about solar PV. Manufacturing costs have dropped over the past 8 years. Yet customers are not seeing those cost reductions. Solar PV consumer prices have actually gone up over the same time period (until the most recent 4 months of recession).
The only way I can see to make cap and tax reduce fossil fuel use is by driving up its cost. Th only way I can see to protect consumers from gasoline price hikes is to legislate the price of gasoline. You can try to meet both objectives by legislating how much profit/loss the energy producers can obtain from running their businesses.
We have an excellent example of this approach in CA during the electricity deregulation fiasco of the late 1990’s into the early 2000’s. It bankrupted two major power utilities in less than 5 years. Fortunately, the speaker of the house, a CA rep, should have excellent hindsight and avoid repeating such a financial fiasco….right?
April 24th, 2009 at 4:08 pm
[...] Roger Pielke Jr. wonders how the energy secretary squares support for cap-and-trade with a call for lower energy prices. Meanwhile, a couple of former DOE officials call for a “realistic” energy policy and warn of [...]
April 24th, 2009 at 5:26 pm
Kevin,
Electrical prices tend to be regional so nothing you said alters my point: prices will go up for all electricity in a market.
It is possible that a national cap and trade could have the effect of subsidizing electrical prices for some regions at the expense of other regions where coal fired power generation is the only option. However, those regional effects only increase the economic pain inflicted by the cap and trade system.
I suspect you are grossly misinterpreting the EPA claims. Cap and trade cannot not make expensive electricity sources cheaper. All it can do increase prices to the point where the expensive electricity sources become economic