Obama’s Climate Policy and “Intended Non-Consequences”: Another Trip to the CAFÉ?

by Steven Hayward in Climate, Energy Policy

My Heritage Foundation pal David Kreutzer and his colleagues have produced an initial economic estimate (based on economic assessment models developed by the federal government) for the cost of Obama’s climate policy announced on Tuesday, and it portends sticker shock for electricity rate payers: hundreds of thousands of lost jobs, and a total reduction in national income of $1.47 trillion by 2030.  (This comes on top of a truly stunning new study that I’m still chewing over that finds federal regulation since 1949 has reduced U.S. national income by 2 percent a year, which compounded means our total potential national income has been diminished by 72 percent below its potential; in other words, in the absence of regulation, national income today would be over $50 trillion as opposed to the $15 trillion that we actually produce.   This ought to open the eyes of liberals especially: think how much more redistribution you could do with that kind of total national income!  See the figure below from my AEI pal Mark Perry.  If this finding is anywhere close to being correct, it ought to launch a serious reconsideration of our entire regulatory state.)

Obama’s climate strategy may turn out to be this grim, but Obama is partly right to point out, as he did in his speech, that industry has cried “wolf” about ruinous regulatory costs before and been proven wrong because they underestimated the creativity of America’s private sector engineers (the real heroes of environmental progress) to develop lower cost solutions for the regulatory mandates of the Clean Air Act.  There is reason to doubt whether the same dynamic will occur with regard to electric power generation, for reasons that are well known to anyone who studies energy.
But there is also reason to suspect that it won’t work out according to any simple scenario because. . . Obama doesn’t really mean it.  Which means the actual policy in practice, while possibly less costly, will actually be much worse, and involve much more needless bureaucracy.  Which is really the main point of liberal governance today.
Obama emphasized “flexibility” for different states in his speech.  This is code for acknowledging reality—namely, that states like Indiana and Ohio that get more than 80 percent of their electricity from coal will be hit disproportionately hard by anti straight-up anti-coal regulation.  So the EPA will devise a program that is not straight up, and will spread the costs around to everyone else everywhere else.  Check out this account from Thursday’s Wall Street Journal story:

And if environmental regulators follow the model used to reduce auto emissions, as some utilities and many environmentalists hope, the results may not be as costly as critics fear.
Greenhouse-gas emission rates vary greatly by region. In general, emissions are higher in coal-producing areas like the Midwest and southeast than in other regions that use more natural gas for power production, such as Texas and California, or have access to hydroelectricity as the Pacific Northwest does.
Analyst Hugh Wynne of Sanford Bernstein said it is likely “some sort of credit system” will be created to achieve U.S. goals that allows low-emitting resources to offset those that are more polluting.
The president’s memorandum to the Environmental Protection Agency, issued Tuesday as he gave his speech, suggests the agency could treat utilities the way it does car makers, taking a portfolio approach to reducing emissions.
Auto makers are required to improve the overall fuel economy of vehicles they sell, using fleetwide averages to calculate results. They can continue to sell gas-guzzlers, but they must also sell large numbers of gas-sippers and electric vehicles to achieve targeted improvements.
If the EPA takes a similar approach to the power sector, instead of imposing strict, rigid emission limits on each power plant, a utility that decided to continue running coal-fired power plants—the biggest emitters of greenhouse gases—could do so. It would just have to generate more electricity from nuclear or renewable resources and probably put in place programs that reduce overall electricity consumption, such as energy-efficiency programs.

That comparison to auto emission standards (the infamous CAFE requirements, or “Corporate Average Fuel Economy”) is more revealing than the WSJ reporter knows.  Everyone is familiar with the “law of unintended consequences,” i.e., how we often get perverse results or even results directly contrary to the intent of a law.  A good example is emergency room visits under things like Obamacare.  Obamacare and Romneycare are supposed to reduce costly emergency room visits.  But instead it is likely to increase them, because many low income/low-information citizens will think that they are now “covered” for medical care and can go to the emergency room when they need to without worry.
But the CAFE regulations are the best example of what my former AEI colleague Chris DeMuth calls the “intended non-consequences” of policy that may well come into play with Obama’s coal regulations.  CAFE requires the fleet average gas mileage, but does not require that every car meet the standard.  And if Ford sells too many Ford Explorers, it simply pays a fine to the federal government.  BMW and Mercedes, who can’t hope to make the CAFE standards, routinely pay the fine as a cost of access to the U.S. market, and since they are minor players compared to GM and Ford, it’s a minor cost of doing business.
One other CAFE wrinkle: Ford and GM could meet the CAFE standards if they were allowed simply to import their European models (including especially diesels).  But the CAFE law forbids this, because naturally Congress wanted to protect American auto worker jobs.  Likewise, Congress wouldn’t dare impose a $2 a gallon gas tax, which would be much more effective in lowering fuel consumption than the indirect CAFE standard, just as a carbon tax would be more effective in lowering CO₂ emissions than the EPA Clean Air Act route.  Above all, Congress dares not make the cost or pain of policy explicit to citizens.  But the intended non-consequence of this policy is that, as Chris explains, “after a third of a century of CAFE, American drivers are consuming more fuel per capita than they did in 1975.”  Heh.
More from Chris:

None of this was foreordained in the nature of government action. If Congress had instead imposed a substantial gasoline tax, say several dollars per gallon, the conservation effects would have been immediate, pronounced, and inescapable and would have been realized in all vehicles of every size, both old and new. Private incentives would have been aligned with rather than against the avowed public purpose. But there would have been another response that would have been even more immediate: there would have been rioting in the streets, and every legislator who voted for the tax would have been retired at the earliest opportunity. Americans do not want their driving incentives realigned. Instead, in the same statute that established CAFE—the misnamed Energy Policy and Conservation Act of 1975—Congress lowered gasoline prices through price controls on domestically produced crude oil. That would have led to more rather than less fuel consumption—except that the cost savings were themselves consumed by the time-costs of the gas station lines of the late 1970s.

The point is: Obama’s climate policy is going to be a repeat of CAFE, except for coal plants. It will be a bonanza for state utility regulators, “consumer advocates,” Washington bureaucrats and lawyers, and corporate subsidy-seekers and cost-shifters.  It will impose the maximum cost for the minimal result, all the while hiding and shifting and obscuring the true cost.  And I can guarantee we’ll keep using coal.  Maybe not as much, but we’ll still be using it.

http://www.powerlineblog.com/archives/2013/06/obamas-climate-policy-and-intended-non-consequences-another-trip-to-the-cafe.php