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# Cap & Trade: Even More Expensive Than Thought

Sometimes math is actually pretty easy. For example, when someone, say some MIT professors, writes a report claiming that a tax on certain businesses will raise a specific amount of revenue for the government (\$366 Billion to be exact), and that revenue is divided by an estimated number of American households (117 Million), there isn’t any doubt about how much money per household that tax represents (\$366 b./117 m. = \$3,128.21). Unless, that is, there are politics involved. Then the math becomes Bistromathic, which allows one of the progenitors of the original numbers to declare “you’re doing it wrong!” and almost everyone will believe him. Unfortunately for them, real math operates on real facts, and thus reality is destined to intrude upon their fantasy.

That, in a nutshell, is basically how the argument over costs of the Obama Administration’s cap and trade policy has unfolded. MIT’s John Reilly co-authored the original study, Republicans used the numbers to derive a cost per taxpayer, Reilly balked, and the media/leftosphere went into paroxysms of outrage about how the GOP were all a bunch of liars. But that was just the main course. For dessert, there will be crow (my emphasis):

During a lengthy email exchange last week with THE WEEKLY STANDARD, MIT professor John Reilly admitted that his original estimate of cap and trade’s cost was inaccurate. The annual cost would be “\$800 per household”, he wrote. “I made a boneheaded mistake in an excel spread sheet. I have sent a new letter to Republicans correcting my error (and to others).”

While \$800 is significantly more than Reilly’s original estimate of \$215 (not to mention more than Obama’s middle-class tax cut), it turns out that Reilly is still low-balling the cost of cap and trade by using some fuzzy logic. In reality, cap and trade could cost the average household more than \$3,900 per year.

The \$800 paid annually per household is merely the “cost to the economy [that] involves all those actions people have to take to reduce their use of fossil fuels or find ways to use them without releasing [Green House Gases],” Reilly wrote. “So that might involve spending money on insulating your home, or buying a more expensive hybrid vehicle to drive, or electric utilities substituting gas (or wind, nuclear, or solar) instead of coal in power generation, or industry investing in more efficient motors or production processes, etc. with all of these things ending up reflected in the costs of good and services in the economy.”

In other words, Reilly estimates that “the amount of tax collected” through companies would equal \$3,128 per household–and “Those costs do get passed to consumers and income earners in one way or another”–but those costs have “nothing to do with the real cost” to the economy. Reilly assumes that the \$3,128 will be “returned” to each household. Without that assumption, Reilly wrote, “the cost would then be the Republican estimate [\$3,128] plus the cost I estimate [\$800].”

In Reilly’s view, the \$3,128 taken through taxes will be “returned” to each household whether or not the government cuts a \$3,128 rebate check to each household.

In short, Reilly’s claim of “you’re doing it wrong!” amounts to parsing of direct vs. indirect costs. Yes, the cap and trade taxes will be passed onto the consumers in some way, but those aren’t the “real costs” to the economy. Only those direct expenditures made necessary by the policy (the “but for” costs) are “real costs.” As long as the federal government provides a benefit to the taxpayers with the cap and trade taxes, then those higher utility bills are a wash:

In Reilly’s view, the \$3,128 taken through taxes will be “returned” to each household whether or not the government cuts a \$3,128 rebate check to each household.

He wrote in an email:

It is not really a matter of returning it or not, no matter what happens this revenue gets recycled into the economy some way. In that regard, whether the money is specifically returned to households with a check that says “your share of GHG auction revenue”, used to cut someone’s taxes, used to pay for some government services that provide benefit to the public, or simply used to offset the deficit (therefore meaning lower Government debt and lower taxes sometime in the future when that debt comes due) is largely irrelevant in the calculation of the “average” household. Each of those ways of using the revenue has different implications for specific households but the “average” affect is still the same. [...] The only way that money does not get recycled to the “average” household is if it is spent on something that provides no useful service for anyone–that it is true government waste.

He added later: “I am simply saying that once [the tax funds are] collected they are not worthless, they have value.”

Essentially, Reilly is making the pernicious claim that a dollar in the taxpayer’s hand is the same as one in the government treasury. But we all know that’s not true, including (I’ll bet) Mr. Reilly.

No matter how efficient the government is, it will never be able to take \$X from me and return exactly \$X of benefit. Indeed, at least some portion of that \$X will be needed just to support the system of taking the money and providing the benefit. Already the taxpayer is at a loss.

Moreover, there is an implicit assumption in Reilly’s explanation that, in exchange for this de facto tax, the government benefits provided would be returned in proportion to their costs. But that would defy all historical precedence when it comes to the federal government which, once the money is received, tends to dole it back out to suit its own purposes. As Merv aptly states:

I really doubt the government will return any cost of cap and trade dollar for dollar. If they did it would be just an expensive money swap. To the extent the government does return any money you can bet that it will be based on conduct they want from people and not unconditionally. They will be imposing their choices on American families and their lifestyles.

To be fair, Reilly tacitly acknowledges this fact when he explains what use of his numbers would be acceptable to him:

“If the Republicans were to focus on that revenue, and their message was to rally the public to make sure all this money was returned in a check to each household rather than spent on other public services then I would have no problem with their use of our number.”

The fact is, cap and trade is going to cost taxpayers significantly more than the measly \$13/week tax cut that the Democrats and the left are so excited about. While the \$3,900 cost cited by John McCormack above is an accurate accounting of what Reilly’s study portends, even that is probably an unrealistically low estimate. Consider how the same policy has affected Europe:

Europe’s experiment with cap and trade has turned into a bureaucratic mess that has failed to live up to its initial expectations. A report by the GAO reveals that the supply of carbon permits has exceeded the demand causing allowance prices to fall substantially. This policy failure has caused the European economy to suffer and expectations to reduce CO2 emissions have been lowered.

Additionally, Europe’s cap and trade experiment has led to decreased employment opportunities and higher energy prices across the continent. In France manufacturers have packed up and left for Morocco. In the Netherlands factories are forced to close early to meet emissions standards. In Germany energy prices have risen 5% each year sparking widespread outrage. All across Europe evidence shows that cap and trade has hurt the economy. If the United States implements a European style cap and trade system, estimates show that it could wipe out between 1.2-1.8 million American jobs by 2020.

So the 95% of you who received a “tax cut” from Obama had better start saving that extra money up. You’re going to need every penny to service the debt required to pay for your costs of cap and trade.

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#### 23 Responses to Cap & Trade: Even More Expensive Than Thought

• SShiell says:

“Cap & Trade”  is sort of like  “Hope & Change”  Both are  “Bull & Sh*t”

• RAZ says:

Re the cap and trade program, see the article “Bound to Burn” by Peter Huber in the current issue of the City Journal.  Given Huber’s analysis, it makes absolutely no sense to implement such a program!

• That this is the exact kind of government interventionism that leads to economic turmoil seems lost on this MIT genius.

• looker says:

What WAS that Soviet farming experts name?  uhhhh, ahhh…Capandtradeization?  No that wasn’t it….

Oh well, it was a five year plan, and it probably worked just swell in rebuilding the Soviet Economy.

• J says:

Oh, come on. What’s really the difference between that money going back into your pocket and being used as foreign military aid for Egypt or Israel, funding for the National Endowment for the Arts, or as a commercial farm subsidy?

What would you have squandered that money on, anyway?

• arch says:

Cap & Trade will be far more expensive that \$3,900 per household annually.  Every family may find their direct energy costs (electricity, natural gas, gasoline) increase by that amount but their indirect costs will be far higher.

Companies that harvest raw materials use energy in the process.  Those increased energy costs are past along the the manufacturer.

Manufacturers who see their material costs go up also need energy to run their machines, light, heat and cool their facilities.  Their material costs and fixed overhead costs rise and with them the price of their goods.

If truckers see diesel fuel climb by 40%, they will not eat the cost, their service price paid by the business receiving the goods will increase.

Since most businesses work on a profit as a percentage of cost, when costs go up, prices go up even more.

Increasing energy costs by 40% is likely to result in a huge price increase at the consumer level.

As cost of living rises and energy costs cannot be offset by productivity, we will either experience double digit inflation or double digit unemployment as jobs go overseas or both.

Cap & Trade is a formula for economic disaster.

• unaha-closp says:

There is also the minor side issue that Cap + Trade does not reduce CO2 pollution.  \$3,900 a year for something that will not work is probably not a good idea.

• Billy Hollis says:

\$3,900 a year for something that will not work is probably not a good idea.

It all depends on your point of view, and what you think it means for it to “work”. If your objective is to assert government control over another large chunk of the economy, it works just fine.

And, if you come from that mindset, what does it matter that every family pays \$4K a year forever for the privilege of enhancing the power of their betters?

• James Marsden says:

I know I say this each time I post on here – or nearly every time – but The Clown™ is doing his damndest to make sure that he is a one-term President. He is going to have to destroy the economy to do it, but in the end he will anger enough people that they will throw him out of office in 2012.

• bains says:

But, but but… Obama is the One.

And he has perfect pects…

And Bush is Hitler!

(thus concludes the response to me by a “centrist” voter, after mocking me for participating in the tax-day demonstrations.)

• Mac says:

*Turns on teleprompter*
You see the trickle down economics didn’t work.  The tax cuts for the wealthy, they never made it to the consumer and they didn’t make to the employees pay checks.  The greedy corporations just made larger profitsSo what I plan to implement ,since trickle down economics do not work as I’ve already stated and you know to be true, is a tax on CO2 emissions by those companies who emit CO2.  Since as i stated trickle down economics do not work because corporations are greedy this will not be passed on to the consumer or the employees pay checks the greedy corporations will keep the tax for themselves….wait that doesn’t make any sense…somebody has been fooling with my teleprompter…..uh what i uh meant to uh say is uh uh the trickle down economics of the past … uh uh uh uh didn’t uh work uh.  Thank you I will not be taking any questions.

• Harun says:

It won’t raise that much revenue when production moves to China, India, or Mexico.

• shunha7878 says:

I watched Waxman energy committee today and while the Republicans did ask about cost, they did not say how much it will cost. If cap and trade goes through, cost will go up by 10. The Republicans have to tell the American public the true cost. Also all power will be rationed. Don’t think it will be this high? Go buy a pack of cigarettes. The last pack of cigarettes I bought in 1985 was 50 cent.  Oh, don’t forget about the black outs. Time to put the old wood heater in.

• JB says:

“The lowest cost estimates by the Congressional Budget Office and respected economists place the total cost of the Iraq War and rebuilding efforts between \$ 1.8 Trillion (lowest estimate) and \$4.0 trillion (highest estimate) through 2016 (taking into account a residual peacekeeping force).
In contrast, President Barack Obama’s widely criticized stimulus package was passed by congress on a party line vote to the tune of \$787 billion dollars. The major difference here: President Obama’s stimulus plan hasn’t cost the lives of 4,000 troops and over 100,000 (lowest estimate possible) Iraqi citizens.”

• Mac says:

I wonder how they plan to shield the poor and middle class on this one?  Certainly not by refunding it at the end of the year.  I don’t consider myself poor by any means but this still represents just under 10% of my annual take home pay and just shy of what i spend a year on groceries.

• creative86 says:

No matter how efficient the government is, it will never be able to take \$X from me and return exactly \$X of benefit. Indeed, at least some portion of that \$X will be needed just to support the system of taking the money and providing the benefit. Already the taxpayer is at a loss.
++++++++++++++++

Correct.
The *X* in your equation is 8, I call it “The Rule of 8″.
Thats where everything the gov’t spends ends up costing eight times the original amount.
If the gov’t says a thing will cost \$1,000,000.00 after it is all said and done it will have cost at least \$8,000,000.00.
This is due to the enormous amount of red tape, regulation, graft and corruption at all levels.

• Terry says:

Too F’ing late to worry about this now, now that O’s little regulatory blackmail scheme has been set up.  What, you thought that the announcement that CO2 is a pollutant that threatens human health and the environment under the CAA was a coincidence?   At this point it is far better to set up some type of cap-n-trade scheme that exempts CO2 and methane from the CAA than to defeat a cap-n-trade bill and do nothing.  If you think cap-n-trade will be an expensive boondoggle, just wait till the true believers at EPA start regulating everything that produces CO2.

• flak says:

Most likely, if (not when) something like this will be introduced, it will probably be some form of “cap & share” as opposed to orthodox Cap & Trade.  Politically, this approach will garner much more support than a standard Cap & Trade provision, and the result will likely be a leaching of support for the opposition on this issue.

• Phlinn says:

“No matter how efficient the government is, it will never be able to take \$X from me and return exactly \$X of benefit.”
This is the same (well, similar at any rate) zero sum flaw prevalent in left wing justifications for wealth redistribution.  If we accept that exchanges can increase net wealth, then it is  possible that any given government spending will be of net benefit to the taxpayers, even if they don’t realize it in advance and thus do not approve until after the fact.   This sort of calculation is why I think Billy Beck, among others, is right to argue from principles instead of on utilitarian grounds.  I think it’s unlikely that any individual example of government spending will be of net benefit as examples abound of waste, but there is no proof that it can’t happen and it’s at least reasonably arguable in the case of police, fire fighters, and roads for instance.  I wouldn’t mind a government that limited itself to those activities.  Alas, there is no such thing.

• David says:

I’m not sure it’s a flaw to think that all government spending is less efficient than private spending.  I cannot think of a single counter-example of where the government beats the private sector.

So no, there is no “flaw” in the zero-sum analysis of the government.  The government does not produce and therefore is de facto a zero-sum organization.

• Phlinn says:

Lack of counter examples is not proof of a general statement.   And your statement  is either false or trivial and meaningless, since individuals within it are capable of producing.  If you don’t count that production towards governments production then you can’t count the taxes gathered by individuals against the government either.

We could start a long debate on whether government roads are a net improvement over what would actually be there without government involvement, but I’m not inclined to do so.  I just want to point out that the debate exists, and is an unresolvable question.   It’s not a proper comparison to look at how much more efficient the private sector could be in similar circumstances versus what the government actually does, since the private sector is not uniformly efficient and whoever steps in might do a less efficient job.  But both sides in a utilitarian based argument about liberty <em>must</em> engage in such speculative comparisons.  Statistics can be persuasive, but are not proof.

This rambled a bit, but I didn’t have time to edit it properly.  My apologies.

• David says:

“Lack of counter examples is not proof of a general statement.”

There are no counter-examples to show that unicorns do not exist.  Do you believe in unicorns?

What’s important here is not if counter-examples exist (for there may always be undiscovered counter-examples), but if it is possible for the counter-examples to exist.  And in the case of the private sector vs. the government, government has had plenty of opportunities to show themselves superior to the private sector and yet never have.  Conversely, where the government has a monopoly (such as roads) there is no way for the private sector to demonstrate itself superior and so no counter-examples have the possibility of existing.

Because there is no possibility to demonstrate the non-existence of unicorns, it is impossible to know if unicorns exist or not.  Likewise, where the government has a monopoly over a given economic activity, such as roads, it is impossible to know if the private sector would have a better performance than the government.

Luckily for us, we do have evidence of the private sector beating the government on many other fields, which has lead many famous economists, such as Hayek or Friedman, to theorize that the private sector is always better than the government in any field of economic activity (even if there are no counter-examples to show the private sector can do better than the government).

But, realize that you trick yourself into believing that “I just want to point out that the debate exists, and is an unresolvable question.”  It’s a logical sleight of hand.   It’s only unresolvable because voters allow the government to keep a monopoly, removes any possibility of counter-examples from appearing, and guaranteeing the issue remains unresolvable.

“And your statement  is either false or trivial and meaningless, since individuals within it are capable of producing.”

Individuals within the government are not producing anything in meaningful economic terms.   They are only transferring wealth and consuming resources in the process.

• Phlinn says:

The statement “There are no unicorns that anyone has ever found” is a fundamentally different proposition from “It is impossible for unicorns to exist.”  And I would argue that in many cases government has proven itself more efficient than the private sector depending on the criteria used to determine efficiency.   If the goal is to prevent individuals from allowing smoking in their establishment, that is something the government will always be able to do better than anyone who refuses to use force.  It’s not a good goal, if you argue from principles such as equal rights, but it may be a good goal on purely utilitarian definitions of good.

Road effectiveness is unresolvable on a more fundamental level than you realize.  Say for instance one state goes with wholly privately owned roads.  Somehow, someone can be found to buy up every road in the state.  Assume there are toll booths everywhere to provide some sort of payment for those roads.  Further assume the owners are empowered to enforce safe driving to everyone’s satisfaction.   And assume that on net it provides better service, maintenance, and accesibility than the old system at a lesser cost for most individuals in the state.  But we can’t just compare it to another state, since terrain, weather, and population density vary and have a huge impact on road systems.   We also can’t compare it to itself in the past, as technology has changed,  climate changes in unpredictable ways, and individuals change as they age.    You could try to control for those variables, by running it in half the states for a decade, and the other half for the next decade, but since that sort of grand social experimentation is impossible, you can’t rigorously prove that the private sector will be better in all cases.  And you still have to deal with who it’s better for, and how you define better.  It’s the univeral ‘all cases’ that really kills it, and that’s  with a number of assumptions to the benefit of private roads.

“Individuals within the government are not producing anything in meaningful economic terms”.  So a teacher who succesfully passes  on algebra skills to her students is producing nothing whatsoever in meaningful economic terms?  You might be able to argue that she doesn’t do so as well as a private teacher, but you can’t claim she is producing nothing.  Those skills are of economic benefit to the students recieving them.   A government contractor who builds a road has created something which is of economic benefit to someone.   You seem to be claiming that the lack of net gains implies zero gains, and that since the government doesn’t produce anything it will therefore always be a net loss.  This is circular, with the first implication being demonstratably false.