All Cost, No Gain

Ted Gayer
Ted Gayer
Ted Gayer President - Niskanen Center, Former Executive Vice President - The Brookings Institution

July 6, 2009

Let’s say at your doctor’s urging, you decide it’s time to quit smoking. You enlist the help of your spouse, who agrees that going cold turkey is too difficult and thus counterproductive. Instead, the goal is to cut from 40 cigarettes per day to 20, with a further halving to occur in three months. Since your spouse is the one who does all the shopping, you both decide on a plan to have her ration your cigarettes to the target level. This gives you maximum flexibility in meeting the quota. You can reduce the cigarettes that accompany your morning coffee, or you can cut out the smoking you do with your buddies on your stoop in the evening, or you can eliminate the late-night smokes you rely on to stave off eating binges. You can substitute eating, fidgeting, or nicotine patches for cigarettes, whichever you think works best to get you to your goal.

The day that this plan is implemented, your spouse comes home with 20 cigarettes for you, but decides to change the rules by insisting that you must achieve a complete secession of smoking during the mornings, to be achieved by substituting nicotine patches for all your morning cigarettes. In combination with the pre-established 20-cigarette daily quota, this new requirement can only serve to make achieving your daily goal more burdensome for you. If you had decided that the easiest way to meet the target is by reducing smoking with your buddies in the evening, and if you know that nicotine gum makes you queasy, then your spouse’s plan just made reaching your 20-cigarette goal considerably more difficult.

It should be relatively easy to convince your spouse that the additional meddling has increased the burden of reaching your goal, without achieving any additional smoking reduction gains. Yet both the House of Representatives and the Senate seem unable to learn this lesson. The House recently voted for an energy bill (sponsored by Congressmen Henry Waxman and Edward Markey) that would institute a cap-and-trade program for greenhouse gas emissions. The advantage of a cap-and-trade system is that it sets a quota on emissions, but allows complete flexibility on how to achieve the quota. Polluting firms can choose between reducing production, shifting towards cleaner burning fuels, or investing in more fuel-efficient production technology. They can also opt to not reduce emissions, and instead pay other firms to reduce emissions for them (the “trading” component of cap-and-trade). In the end, the emissions goal is met at a minimum cost.

With a cap-and-trade program, the main issue of concern is at what level to set the cap: going cold turkey is too costly, but a quota set close to current emission levels will not achieve enough benefits to mitigate climate change. Indeed, much of the discussion surrounding the energy bill concerns whether the pollution reduction it achieves is worth the cost or whether it is not aggressive enough.

Unfortunately, there has been little discussion of the other components of the Waxman-Markey bill that will increase the cost of pollution reduction without achieving any climate benefits. Most notably, the bill includes a renewable electricity mandate, which requires electricity utilities to substitute renewable energy (such as wind, solar, or geothermal energy) for energy derived from fossil fuels. Electric utilities would need to generate 6 percent of their electricity from renewable energy in 2012, ramping up to 20 percent by 2021. (The draft Senate energy bill mandates that 15 percent of electricity generation come from renewable energy by 2021.) In its analysis of the Waxman-Markey bill, the Environmental Protection Agency—citing time constraints—evaluated only the benefits and costs of the cap-and-trade component. While it is true that a full analysis of the costs of the bill’s electricity mandate would take considerable time, it would take little time for the EPA to conclude that it achieves zero climate benefits relative to only having the cap-and-trade program.

The electricity mandate undermines the cost-saving feature of a cap-and-trade program. Rather than allow the market the flexibility to find the cheapest sources of pollution reduction, the mandate prescribes where and how the reductions must occur. Any reductions achieved through the mandate will just be offset by fewer reductions in other sectors, resulting in no net reduction in emissions. Greenhouse gas emissions have the same effect on the climate whether they are emitted from electricity producers, manufacturing facilities, or automobiles, so the mandate achieves no additional environmental benefit. It is possible to set a mandate tight enough to achieve more reductions than is required by the cap-and-trade program. (This is not the case with the proposed mandates.) This indeed would achieve some additional environmental benefits, but would make the cap-and-trade program superfluous. What’s more, the same benefits could be achieved at lower cost by eliminating the mandates and instead tightening the cap.

The point is—much like your spouse’s meddling in how you should cut back your smoking—the renewable electricity mandate is all cost and no gain. So what could motivate such a policy? It could be your spouse (i.e., Congress) means well but is unaware of the costly consequences of additional meddling. Or it could be your spouse (i.e., Congress) wants to be punitive, making it more difficult for you to reach your smoking (i.e., greenhouse gas) reduction goal. Or it could be that your spouse (i.e., Congress) was convinced through generous contributions from the nicotine gum (i.e., renewable electricity) industry that the goal can only be met by mandating this alternative product. Unfortunately, this is just the tip of the iceberg. The House’s energy bill contains numerous mandates, including energy efficiency requirements for buildings, vehicles, and outdoor lighting, in addition to the existing renewable fuel mandate for the transportation sector.

Achieving reductions in greenhouse gas emissions is a costly endeavor. Congress only makes things worse by supplementing their cap-and-trade program with expensive mandates that serve no environmental end.