How will a cap-and-trade scheme affect Americans' wallets? Does the economic downturn have a positive impact on the push for climate legislation? During today's OnPoint, Kevin Book, managing director at ClearView Energy Partners, an energy research and consulting firm, discusses the financial impact a cap-and-trade system could have on the average American. He explains why the economic downturn could have a positive effect on efforts to move new climate and energy legislation. Book also discusses how the United States can successfully strike a balance between satisfying the international community on climate change and meeting domestic economic priorities.
Monica Trauzzi: Welcome to the show. I'm Monica Trauzzi. Joining me today is Kevin Book, a managing director of research at ClearView Energy Partners, an energy research and consulting firm. Kevin, nice to see you, thanks for coming on the show.
Kevin Book: Thanks for having me.
Monica Trauzzi: Kevin, with cap and trade and energy policy discussions dominating Congress's agenda this spring there are many questions about the economic impacts of a cap and trade. What are the numbers? I mean how much of a financial impact will a cap-and-trade system have on the average American and is that number enough to continue making the economic argument against cap and trade?
Kevin Book: Well, the answers are both yes and no to the latter question and the reason is that an average is an average and it affects people who are directly average in directly average ways. The number is about 0.4 percent of your disposable income for every $10 per metric ton, which is an average on a national basis. That calculation could be a little high or a little low depending on what assumptions you want to make, but it seems at the surface to be a relatively affordable number. The problem is the variability. The variability is an extreme at the edges. If you have very little income even a small change makes an extremely big difference and so I think the arguments on both sides hold some validity. Yes, it's a small number in the average, but in the objective case for the person who has to look at this as a sacrifice it's a big one.
Monica Trauzzi: And one of the issues that's being debated is how to handle allowances. What do you believe is the cleanest way to handle allowances while bearing in mind all the different interests that are involved? And one of those interests of course is consumers.
Kevin Book: This is where every economist in the world says the right thing to do is a carbon tax or a full auction and none of them will ever be elected to office in the United States. The right thing to do is to figure out how to get the system going in a way to get everyone's buy-in. And a phased auction where you have allocations of allowances, which is different from taking dollars out of the general fund of the treasury. It's actually creating a new proxy currency and giving it out in proportion to the disadvantage parts of the economy. That's the only way ahead. It's been done by precedent in and it's going to be, I think, the path through which this bill eventually passes.
Monica Trauzzi: What leverage are coal and manufacturing states using in negotiations to minimize the impacts that the industries in their states will see from a cap and trade? What's happening in those discussions?
Kevin Book: Well, there's a lot of things in the Waxman-Markey bill that go above and beyond cap and trade. And so one of the questions to be answered is how many of the things that are out there now persist into the final version of the law? Because if you have just cap and trade then there is a manageable rebalancing, but if it comes with perhaps new source performance standards for new coal-fired power plants that essentially impede conventional coal power in the state that has been depending on it and planning to build it, well, that's a big deal. So let's assume that you actually are trying to fight on behalf of your domestic industry. First thing I think you want to do is narrow down the bargain to whether or not it's many standards in many systems or just cap and trade.
Monica Trauzzi: Democrats have the pressure of needing to address health care reform this year in addition to climate. A lot of people think that they're moving pretty quickly on climate because they have that health care deadline. Do you think they're moving too quickly? I mean how far do you see this legislation getting in the House?
Kevin Book: I see this legislation clearing the House this year. And I think that the reason that they're moving quickly is partly the practical side, which is that the second year of the congressional cycle is an even more pressure filled year from an election perspective for many of these at risk centrist blue dog Democrats. But also there's a practical side coming from the administration. This is really a come out of the gate with momentum kind of a moment. They have every reason to try to press ahead with the House and then maybe shelve for a little while some of the more tedious parts of the law. You know, dividing up allowances and figuring out who wins and who loses, that's a lengthy process. But if you can come out of the gate with momentum the chance that you have a strong finish either shortly before or shortly after Copenhagen seems very high.
Monica Trauzzi: In testimony before the Senate Environment and Public Works Committee in November 2007 you said, "Nothing cleans the air better or faster than an economic slowdown. Is that the case now?
Kevin Book: Yeah, nobody ever wants that to happen. The point I was making in that testimony and as an analyst it's usually very gratifying to be correct in your predictions. It's unfortunate that it was such a dire prediction. The problem is that economic output is directly related to environmental pollution and emissions of greenhouse gases and other aspects of the things the Clean Air Act would have to address. And here's the question that I think we have to ask. If you get skinny by starving you kind of lose muscle at the same time that you lose the fat. That's not a great time to argue that you should starve some more. And the real question is what are we going to do in response to having lost this weight through illness? Are we going to heal the economy in a way that brings it cleaner and more economically vibrant into the future? Or are we going to potentially compromise one goal for the other as this country has done very often in the past?
Monica Trauzzi: Well, is it a feasible goal? Is the president's goal of addressing our economic issues through this green clean energy push a feasible one?
Kevin Book: Everything gets feasible in the intermediate to long-term. Now, of course that's a political sidestep and you see it a lot, that's why intermediate and long-term targets are so stark and short-term targets are so narrow. But the truth is this a lot of invested infrastructure that hasn't yet been paid for and it's going to have to run for a while or wealth is going to get destroyed. The whole idea of Kyoto was not to create a market so that people could trade things back and forth, it was to create environmental sustainability and economic stability and flexibility using trading as a way to get there. A long transition time is essential. Frankly, if you can't change your business in 15 to 20 years you don't deserve to be in business.
Monica Trauzzi: Congressman Peterson recently said he would not support a climate bill unless it included an ironclad way of keeping EPA from being able to write implementing rules. What's your take on the role of EPA in all of this and how they might use the endangerment finding if legislation is not passed?
Kevin Book: The endangerment finding is really the most interesting thing that's happened a long time because it's one of the larger Pandora's boxes in regulation that can be opened. The Clean Air Act Title II and Title I frankly, any criteria pollutant in any part of the first two titles of the Clean Air Act ends up being regulated at the statutorial, the low levels that are designed for pollutants of a different strength. And how EPA responds to a statutory requirement to regulate above 250 tons per year is either going to be the entirety of the U.S. economy being regulated or else something else. And I think what's not clear yet is whether or not EPA has already the administrative leeway to do something else. The direst sort of threat that's presented by the EPA regulation is, wow, this shuts down the entire economy. On the other hand, the question is, well, does it? We'll have to see. There's many legal scholars obviously hard at work on this, but the conclusion shouldn't be necessarily that it's over for the economy just because they proceeded with regulation. On the other hand, if you're a lawmaker you would probably want to have a hand in crafting how it affects your constituents.
Monica Trauzzi: You mentioned the meeting in Copenhagen earlier and the pressure from the international community is high. Europe has already signaled that the U.S. should be more aggressive in its emissions reduction plans. And at the same time a U.S. misstep on climate could mean negative global economic impacts. So what assurances can the U.S. make to the international community while still keeping in mind its domestic priorities?
Kevin Book: This is really complicated and I think one of the sagest stances on it that has been taken was the one that the UN climate chief, Yvo de Boer, took last year which basically said don't necessarily bring in ironclad stark reduction. Bring good intentions. And those weren't his words, but progress towards climate law would be enough for the United States to go to Copenhagen. And part of what's at stake in terms of the step being a misstep is that if you simply put a framework in place I think there's a school of thought, a valid one, that this is a victory for environmental goals. It doesn't have to be a more stringent framework because in the history of U.S. environmental laws that is a one-way ratchet, so it will get tighter eventually. The 1970 Clean Air Act, the 1990 Clean Air Act amendments, RCRA, RCRA amendments, it's not necessarily I think true and I think our negotiators are in a position to make the case that, yes, we can tighten this later. But look what the U.K. and Australia and other countries are doing. They're putting out contingent targets. They're saying, well, if you don't we won't either, sort of a mutually assured destruction scenario. I'm not sure that's a viable negotiation strategy either.
Monica Trauzzi: OK, we'll end it right there on that note. Thanks for coming on the show.
Kevin Book: Thanks for having me.
Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.
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