Posted by: Matt_Dempsey Matt_Dempsey@epw.senate.gov (202)224-9797

EPA’s Proposed Rule on RFS (Sen. Jim Inhofe)

May 06, 2009

Link To Blog Post

Yesterday, the Environmental Protection Agency (EPA) initiated a draft rule for implementing the renewable fuels standard, as mandated by the Energy Independence and Security Act of 2007.  The act requires producers to blend 36 billion gallons of bio-fuels by 2022.

EPA’s proposed rule clearly reinforces the concerns I raised during debate on the 2007 energy bill.  I opposed that bill because I thought it would harm consumers and fail to strengthen our energy security.  A year and a half later few dispute that Congress erred in pushing too much ethanol too fast. Now we’re stuck with a proposed EPA rule that magnifies the bill’s flaws.

The 600-page draft rule requires the EPA to measure the immeasurable – the increases in CO2 emissions from indirect land use changes due to bio-fuel mandates.  A farmer plants a new acre of corn in Iowa?  Well, EPA will somehow quantify the effect that has on increased carbon emissions in Brazil, Malaysia, or maybe India.  The modeling for indirect land use change is unreliable and unproven and we are now resting huge amounts of investment on the whims of subjective EPA analysis.

Instead of allowing the markets to dictate fuel choice and consumption we continue to subsidize and push ethanol as a green savior.  This overly aggressive ethanol mandate has led to consumer backlash in parts of the country.  In my home state of Oklahoma, one convenience store chain experienced a 30 percent drop in fuel sales once they began selling fuel blended at E-10 levels.

In light of ethanol’s drawbacks and this unrealistic draft rule, Congress should reassess the achievability of these mandates and their potential ramifications on consumers, America’s energy security, and the environment.

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Posted by: Matt Dempsey Matt_Dempsey@epw.senate.gov (202)224-9797

EPW POLICY BEAT: IT’S BTU ALL OVER AGAIN 

As George Santayana once said, “Those who cannot learn from history are condemned to repeat it.”  Go back to 1993: the House considers a destructive BTU (British Thermal Units) tax on energy, passing it by just six votes, 219 to 213.  The Senate thinks briefly about the tax, and then unceremoniously dumps it, leaving those House members who voted for the measure holding the proverbial bag.  Fast forward to 2009: proponents of the Waxman-Markey bill are studying history, and they know that ramming through a controversial energy tax, only to have it die in the Senate, is bad politics.  “The first thing we need to do is see whether we can come together around a consensus position in the committees in the House, and that’s what we’re working on,” Rep. Chris Van Hollen (D-Md), told the Hill Newspaper.  “And then, of course, if we were able to arrive at that, the question is whether you would take it to the floor, or do you wait to see if anything develops on the Senate side,” he said.  “The chances of doing cap-and-trade in the Senate are much more difficult. We recognize that,” he added.  As Yogi Berra might have said, “It’s BTU all over again.” 

The House-Senate energy dynamic is not the only similarity between the BTU tax and cap-and-trade.  EPW Policy Beat recently read a 1993 paper by the National Center for Policy Analysis (http://www.ncpa.org/pub/bg127) examining the BTU tax.   As would be expected, the issues surrounding BTU and cap-and-trade—that is, their distributional effects, their regional effects, the regressive nature of both, etc.—are nearly identical.  And the arguments fashioned by proponents of the BTU tax and cap-and-trade, not surprisingly, look remarkably similar. 

Here are the excerpts that illustrate the almost comic similarities: 

A beneficial tax. “Proponents of the energy tax point to several benefits. They argue that the tax would (1) significantly reduce the budget deficit and therefore lower interest rates and raise investment, (2) reduce America's dependence on foreign oil, (3) benefit the environment by encouraging energy conservation and (4) be fair and affordable for all income groups because the tax on low-income families would be offset by increases in low-income support programs.”

Energy tax as panacea.  “In sum, over the past several decades the energy tax has been touted as a panacea for almost every economic and ecological crisis that has confronted the country. Even though the arguments for the energy tax have proved groundless, support for the concept has never waned.”

Presidential tax promises.  “Bill Clinton ran for president pledging not to raise taxes on the middle class. Although the energy tax clearly violates this campaign promise, during his State of the Union address President Clinton assured Americans that the energy tax would cost the typical middle-income family just $17 per month - or $204 per year. This estimate is highly suspect, however, because all other forecasts - including government forecasts - say that the burden on middle-income families would be much higher.”

Regional impacts.  “The actual impact on particular families would depend on where they live, how much energy they use in the home, what types of products they buy and how much driving they do. Contrary to the administration's claim that the energy tax hits all regions of the country equally, energy usage and production vary widely by state. Even if the tax applied to energy uniformly, the tax incidence would be much higher for residents of some states than others. The fact that different tax rates are applied to different types of energy makes the impact even less fair.”

A regressive tax. “The Clinton administration argues that low-income families would not be made worse off because of the energy tax. The truth is that an energy tax is among the most regressive of all possible taxes.”

Trying to keep the poor whole. “Although the administration proposes to increase government subsidies for low-income families by the average amount of the BTU tax they would pay, roughly half of the low-income families would have energy tax liabilities that are above the average.  Hence, for millions of poor families, a higher EITC and higher welfare benefits would not fully compensate for higher energy taxes.”

A hidden tax.  “The Clinton energy tax is largely a hidden tax. That is, the tax would not show up as a separate item when goods were purchased. Rather, it would be embedded in the production cost of the goods and services we buy. This is quite deliberate. White House officials have admitted that one reason the administration opted for a BTU tax is that it is less conspicuous than a gas tax. And they have resisted, in some cases unsuccessfully, moving the tax collection point closer to the final consumer.”

Higher prices across the board. “Some of the increased cost of production would be paid directly by consumers through higher gas prices, heating costs and electric utility bills. Consumers would also pay indirectly for the energy tax at the supermarket, the drug store and the shopping mall. White House economic adviser Robert Rubin conceded as much when he said, ‘The notion is [that] this BTU tax would get passed on to consumers.’”

Weakening international competitiveness.  “The BTU tax could weaken the international competitiveness of major U.S. industries. Currently, low energy costs are a primary advantage for U.S. manufacturers competing with Japanese, Korean and European industries. Low energy costs help U.S. industry keep production costs low. Proponents of the energy tax contend that U.S. industry would not be hurt by the energy tax, because energy costs would still be lower in the United States than in competitor nations. However, unlike the Clinton proposal, Japan and most European nations exempt industrial fuel from their energy taxes.”

Lower profits, fewer jobs. “As the auto and airline industries illustrate, the energy tax would impose substantial new costs on American manufacturers. For many industries, the BTU tax would almost certainly require layoffs as well as delays or cancellations of planned plant expansions and new hiring - and it would lower profits. Several studies that attempted to quantify the job loss and economic growth reduction from the BTU tax have arrived at remarkably similar estimates.”

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Contact: Matt Dempsey  (202) 224-9797

 In Case You Missed It… 

 The Wall Street Journal

Reckless 'Endangerment': The Obama EPA plays 'Dirty Harry' on cap and trade

Link to WSJ Op-Ed

President Obama's global warming agenda has been losing support in Congress, but why let an irritant like democratic consent interfere with saving the world? So last Friday the Environmental Protection Agency decided to put a gun to the head of Congress and play cap-and-trade roulette with the U.S. economy.

The pistol comes in the form of a ruling that carbon dioxide is a dangerous pollutant that threatens the public and therefore must be regulated under the 1970 Clean Air Act. This so-called "endangerment finding" sets the clock ticking on a vast array of taxes and regulation that EPA will have the power to impose across the economy, and all with little or no political debate.

This is a momentous decision that has the potential to affect the daily life of every American, yet most of the media barely noticed, and those that did largely applauded. When America's Founders revolted against "taxation without representation," this is precisely the kind of kingly diktat they had in mind.

Michigan Democrat John Dingell helped to write the Clean Air Act, as well as its 1990 revision, and he says neither was meant to apply to carbon. But in 2007 five members of the Supreme Court followed the environmental polls and ordered the EPA to determine if CO2 qualified as a "pollutant." The Bush Administration prudently slow-walked the decision. As Peter Glaser, an environmental lawyer at Troutman Sanders, told Congress in 2008, "The country will experience years, if not decades, of regulatory agony, as EPA will be required to undertake numerous, controversial, time-consuming, expensive and difficult regulatory proceedings, all of which ultimately will be litigated."

The Obama EPA has now opened this Pandora's box. The centerpiece of the Clean Air Act is something called the National Ambient Air Quality Standards, or NAAQS, under which the EPA decides the appropriate atmospheric concentration of a given air pollutant. Under this law the states must adopt measures to meet a NAAQS goal, and the costs cannot be considered. For global warming, this is going to be a hugely expensive futility parade.

Greenhouse gases mix in the atmosphere, and it doesn't matter where they come from. A ton of emissions from Ohio has the same effect on global CO2 as a ton emitted in China; and even if Ohio figured out a way to reduce its emissions to zero, it would still have no control over the carbon content in its ambient air. But under the law, EPA would be required to severely punish Ohio -- and every state -- for not complying with NAAQS.

Under the Clean Air Act, the EPA also must regulate all "major" sources of emissions that emit more than 250 tons of an air pollutant in a year. That includes "any building, structure, facility or installation." This might be a reasonable threshold for conventional pollutants such as SOX or NOX, but it's extremely low for carbon. Hundreds of thousands of currently unregulated sources will suddenly be subject to the EPA's preconstruction permitting and review, including schools, hospitals, malls, restaurants, farms and colleges. According to EPA, the average permit today takes 866 hours for a source to prepare, and 301 hours for EPA to process. So this regulatory burden will increase by several orders of magnitude.

The EPA took the highly unusual step of not accompanying its endangerment finding with actual proposed regulations. For now, EPA Administrator Lisa Jackson claims her agency will only target cars and trucks. That is bad enough. It probably means, for example, that California's mileage fleet burdens will seep out to every other state. So even as taxpayers are now paying tens of billions of dollars to prop up GM and Chrysler, Ms. Jackson will be able to tell the entire auto industry it must make even more small cars that consumers don't want to buy.

Still, why confine the rule only to cars and trucks? By the EPA's own logic, it shouldn't matter where carbon emissions come from. Carbon from a car's tailpipe is the same as carbon from a coal-fired power plant. And transportation is responsible for only 28% of U.S. emissions, versus 34% for electricity generation. Ms. Jackson is clearly trying to limit the immediate economic impact of her ruling, so as not to ignite too great a business or consumer backlash.

But her half-measure is also too clever by half. By finding carbon a public danger, she is inviting lawsuits from environmental lobbies demanding that EPA regulate all carbon sources. Massachusetts and two other states have already sued in federal court to force the EPA to create a NAAQS for CO2.

Which brings us back to the Obama Administration's political roulette. Democrats know that their cap-and-tax agenda is losing ground, notably among Midwestern Senators. The EPA "endangerment" is intended to threaten businesses and state and local governments until they surrender and support the Obama agenda. The car industry is merely the first target, meant to be the object lesson.

Massachusetts Democrat Ed Markey put it this way at MIT recently: "Do you want the EPA to make the decision or would you like your Congressman or Senator to be in the room and drafting legislation? . . . Industries across the country will just have to gauge for themselves how lucky they feel if they kill legislation in terms of how the EPA process will include them."

This "Dirty Harry" theory of governance -- Do you feel lucky? -- is as cynical as it is destructive. And contra Mr. Markey, if cap and tax is killed this year, it will be done in by Democrats, many of whom are starting to realize the economic harm it would inflict. In March, the Senate voted 89 to 8 on a resolution vowing to pass a climate bill only if "such legislation does not increase electricity or gasoline prices."

That's called democracy, but for the Obama Administration such debate is an inconvenient truth. If they can't get Congress to pass their agenda, they'll use EPA and the courts to impose it. How lucky do you feel?

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