NAKED AND UNASHAMED: ECONOMIC CENTRAL PLANNING

"The most convoluted attempt at economic central planning this nation has ever attempted? is how Ben Lieberman, the senior policy analyst for Energy and Environment at The Heritage Foundation (Washington DC), described HR 2454, the American Clean Energy and Security Act of 2009 (also called Waxman-Markey) during his recent testimony before the House of Representatives.

Lieberman has cut right to the chase to expose the real issue we face as a nation. Think about it.

Living in Neverland, the media presents the climate bill as a noble idea to fight global warming (assumed to be real). They view the Honorables as undertaking an honest search for true answers. The talking heads hide any serious debate over nuclear power, for example, as a proven, cost-effective energy solution. They ignore proposals that address any fear of nuclear reactors and argue how their operational safety has improved by a quantum leap since Three Mile Island 30 years ago. They forget that our own military believes in it: virtually all submarines, cruisers and carriers built today are nuclear-powered. They silence any speeches about nuclear power as a real, tangible solution to reduce greenhouse gas emissions, create jobs and increase revenues in a tough economy.

But in the real world of Lieberman, the thinly-veiled ?solution? of the Honorables has nothing to do with honesty. ?It is clear that cap-and-trade is very expensive and amounts to nothing more than an energy tax in disguise,? he remarks as he reveals their plan to impose energy taxes that will restructure free enterprise through a swollen 1,400-page bill filled with loopholes and giveaways that limit greenhouse gas emissions and then gradually tighten that limit. Any business that burns oil, natural gas or coal must reduce their emissions or buy allowances that are traded on markets like commodities.

Will energy taxes actually stop climate change?

?No,? answers David A. Fahrenthold and Steven Mufson of the Washington Post. ?Even a huge 17 percent reduction in U.S. greenhouse gas emissions by 2020 doesn?t slow down the rate of climate change very much, because emissions are a global problem. Even if we meet our 2020 goals, the world?s total emissions only reduce about 3 percent according to the Energy Department.? This is precisely why the Honorables dictate far deeper cuts of 42 percent by 2030 and 83 percent by 2050.

So if none of this works, what is really going on?

?Inflicting economic pain is what this is all about,? answers Lieberman. ?When you sweep aside all the complexities of how cap-and-trade operates . . . the bottom line is that it works by raising the cost of energy high enough so that individuals and businesses are forced to use less of it. That is how the ever-tightening emissions targets will be met.?

Just how much pain are we talking about here? ?The steel industry emits about 9 percent of the heavy emissions in the U.S. heavy industry sector. According to a report by Goldman Sachs (New York, NY), this bill could add as much as $1 billion to production costs for U.S. steelmakers by 2030, the equivalent to an increase of $10 to $12 per ton,? says Scott Robertson in American Metal Market.

Integrated mills will be hit harder than mini-mills because they emit more greenhouse gases, mostly carbon dioxide and methane, during production. ?Electricity costs will impact both integrated and mini-mill producers,? explains Robertson. ?Mini-mills will be indirectly impacted by increased electricity costs. Integrated mills will also pay higher electricity costs, even though they use significantly less electricity than mini-mills. All of this means U.S. steel products will become less competitive in international markets. That creates an opening for even more imports to enter the U.S. ? unless an offset penalty is applied on imported steel to even things out.?

Most foreign steel producers ignore carbon emissions regulations and costs in their blast furnace operations, but at least this cap-and-trade bill allows the U.S. to impose our own import tariffs by 2020 against countries that do not maintain carbon regulations on their own industry.

Robertson says the initial pain on the steel industry may be artificially softened by government subsidies to certain heavy industry companies. ?Near-term steel earnings could suffer by 2 to 5 percent, an estimate that includes the direct cost of carbon emissions and indirect cost of higher electricity prices,? he says. ?But afterwards, high regulatory compliance costs will steeply increase electricity costs for all steelmakers over the next 20 years.?

Lieberman expands this notion a step further. ?These compliance costs embody the whole idea of a cap-and-trade system: a mix of higher prices for carbon-based fuels offset by a complex series of tax breaks and free allowances, new technologies and behavioral changes, and impacts on corporations and their profits.? In other words, this is a hidden regressive tax that will expand beyond higher gasoline prices, higher heating oil prices and higher electricity prices: higher energy costs will eventually impact every citizen.

From this perspective, perhaps the most significant financial comparison is to broadly compare the U.S. economy with and without the carbon tax. According to the Wall Street Journal, ?the hit to gross domestic product (GDP) is the real threat in this bill. The whole point of cap-and-trade is to hike the price of electricity and gas so that Americans will use less. These higher prices will show up not just in electricity bills or at the gas station, but in every manufactured good, from food to cars. Consumers will cut back on spending, which in turn will cut back on production, which results in fewer jobs created or higher unemployment. Some companies will instead move their operations overseas, with the same result.?

Lieberman shares exactly what this means to you and me. ?The higher energy costs kick in as soon as the bill's provisions take effect in 2012. For a household of four, energy costs go up $436 that year, eventually reach $1,241 in 2035, and average $829 annually over that span,? he explains. ?Electricity costs go up 90 percent by 2035, gasoline by 58 percent, and natural gas by 55 percent by 2035. The cumulative higher energy costs for a family of four by then will be nearly $20,000.?

But direct energy costs are only part of the consumer impact. Nearly everything goes up, since higher energy costs raise production costs on everything. ?If you look at the total cost of Waxman-Markey, it works out to an average of $2,979 annually from 2012-2035 for a household of four,? says Lieberman. ?By 2035 alone, the total cost is over $4,600.?

Beyond the cost impact on individuals and households, this bill also affects employment ? especially employment in the manufacturing sector. ?We estimate job losses averaging 1,145,000 at any given time from 2012-2035. Note that those are net job losses, after the much-hyped green jobs are taken into account,? adds Lieberman. ?Some of the lost jobs will be destroyed entirely, while others will be outsourced to nations like China and India that repeatedly state they will never hamper their own economic growth with energy-cost-boosting global-warming measures like this.?

Noel Sheppard of Newsbusters.com agrees, noting that a Senate hearing held by the Committee on Environment and Public Works arrived at a similar conclusion a couple of years ago. ?They estimated the costs to the average household would be between $800 and $1,300 by 2015, then increase to $1,500 to $2,500 by 2050. Under this scheme, the financial consultants at Charles River Associates (Boston, MA) estimated anywhere from 1.2 million to 2.3 million jobs would be lost.?

Under this broader scenario, Lieberman discovered that Waxman-Markey would cost our economy $161 billion in 2020, which is $1,870 for a family of four. As the bill's restrictions kick in, that number rises to $6,800 for a family of four by 2035. Overall, he found that cap-and-trade reduces U.S. GDP by an average of $393 billion annually between 2012 and 2035, and cumulatively by $9.4 trillion.

In the real world, the nation will be $9.4 trillion poorer with cap-and-trade than without it. That?s the bottom line you won?t hear that from any of the talking heads who still blab about the amount of weight Jessica Simpson recently gained.

This analysis would not be complete if we failed to return to Lieberman?s opening observation. Something else is happening here, something beyond the economic damage that cap-and-trade would cause in its own right. Cap-and-trade symbolizes a recurring trend in our government that is extremely disturbing: the growing appeal by the Honorables of economic central planning principles that foreshadow even more draconian regulations for our future.

This shift toward economic central planning was blatant in the unprecedented government intervention that recently restructured our banking, insurance and automotive industries. Its ugly characteristics have been publicly unveiled inside the town hall debates on universal health care. And here in cap-and-trade, economic central planning takes center stage in the corruption of our free enterprise business model.

Fahrenthold and Mufson identify several profound problems in cap-and-trade that reveal just how deeply economic central planning would alter our concept of free enterprise. Ironically, the first issue is how this system paradoxically prevents market forces from working for the very environment it pretends to be protecting:

?The market distortions imposed by this system would be significant,? says Mufson. ?Major energy companies such as ExxonMobil and Shell have invested hundreds of millions of dollars in technologies that capture and store carbon, as well as lower carbon alternative energy sources. A cap-and-trade system, however, sets up perverse incentives that distract these and other companies from market-based solutions to curb carbon output. Instead, resources will be funneled to the artificial market for carbon allowances that this system sets up.?

Another problem is how this system unfairly puts the U.S. at a competitive disadvantage with other countries. ?Though the EU and the U.S. may buy into cap-and-trade, industrial giants like China and India are not,? notes Fahrenthold. ?Remember those lost jobs? In addition to China and India, nearby Mexico is another country where cap-and-trade is not even a remote possibility. They are all more than willing to pick up the U.S. slack and bolster their already robust manufacturing sectors.?

Controlled through politics rather than competitiveness, this system plays to massive fraud and corruption. ?As energy companies look to game the system, cap-and-trade opens the door wide for fraud and corruption that could devastate U.S. investors and the economy as a whole,? says Mufson. ?For example, the biggest British polluting companies abuse a European emissions trading scheme (ETS) designed to tackle global warming by cashing in their carbon credits to bolster ailing balance sheets. We have already seen what happens when companies engage in creative accounting measures to hide losses: a staggering domino effect on Wall Street investors and the larger economy. Don?t forget that none other than Enron wanted a cap-and-trade scheme that allowed them to dominate this new, made-up market for carbon.?

Finally, this system threatens to break the federal budget at a time when we cannot afford it. ?Federal spending continues at a breakneck pace,? says Fahrenthold. ?The trillion-dollar stimulus bill and taxpayer funded bailouts add to U.S. budget woes and sink us deeper into recession. If that isn?t enough, cap-and-trade will add undue pressure on our fragile budget because the government will face the same challenges with higher energy costs that we consumers do. And the fall in industrial production means a loss of federal government tax revenues.?

Please review these facts and make your own decision about whether to support cap-and-trade legislation.

Living in Neverland, our media presents a fantasy world where cap-and-trade strategies controlled by an honorable government will save our planet from itself by curbing all those nasty carbon dioxide emissions. But in the real world, a government that wildly increases spending on the very systems that decrease its own revenues doesn?t seem to be so honorable.

Just a thought.

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Mike Riley is the editor of Fabricating & Metalworking magazine and the author of Backfield in Motion (Derek Press, 2007). Share your views with him on the cap-and-trade system at 205-681-3393 or mike.riley@cygnusb2b.com.