Obama's Plan To Make the Poor Even Poorer

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President Obama has called inequality "the defining challenge of our time." But on June 2 he will announce new "cap-and-trade" environmental regulations that will make the poor a lot poorer and the rich a little less rich.

Mr. Obama said in his January State of the Union Address, "Wherever and whenever I can take steps without legislation to expand opportunity for more American families, that's what I'm going to do."

But these steps without legislation will reduce opportunities for the poorest Americans. Those in the lowest fifth of the income distribution spend 24 percent of their income on energy, compared with 4 percent for those in the top fifth. Mr. Obama's new proposed cuts in carbon emissions, in the form of "cap-and-trade" proposals that were rejected by the Democratic House and Senate in the first two years of his presidency, will raise the cost of energy, particularly electricity, and hit the poor hardest.

The proposal is called "cap and trade," or "outside the fence," because EPA is not mandating that every power plant reduce its emissions by the same rate, but that emissions fall by a certain rate system-wide. Reuters reports that the new regulations would lead to regional carbon-trading compacts as different states coordinate and reduce their emissions.

Cuts in carbon emissions slow economic activity by raising the cost of electricity. That is why cap-and-trade bills proposed in the 111th Democratic Congress by Senators John Kerry (D-MA) and Joe Lieberman (D-CT) and Representatives Henry Waxman (D-CA) and Edward Markey (D-MA) were defeated. These bills would have raised taxes by about $650 billion over eight years, which would in 2010 have been the largest tax increase in history. Council of Economic Advisers chair Jason Furman (then National Economic Council deputy director) told Senate Finance Committee staffers that the figure could reach $1.3 trillion to $1.9 trillion over the same period.

With cap-and-trade's failure to pass Congress, the Environmental Protection Agency is now set to institute the scheme by regulation. No need for congressional legislation, Mr. Obama is taking matters into his own hands.

The new climate change rules will reportedly move beyond regulation of power plants to regulation of regional emissions. If emissions from a power plant exceed EPA's requirements, a state, or group of states, would be able to shut down other energy-intensive manufacturing and allow the power plant to continue its emissions.

The proposal is expected to require steep cuts in carbon emissions, but allow states and companies flexibility in how to reach emission targets. Although not released and not finalized, the rule is expected to cut emissions from utilities by 25 percent, according to the Washington Post. Targets are expected to occur in a two-step process, with smaller cuts first and larger cuts required by 2030.

Everyone wants cleaner air, but most people also want the security of employment that comes from industrial activity. Most would agree on the need to strike the right balance between the economy and the environment. The question is what is that balance. The air is getting cleaner every year, as old equipment is replaced by new. Greenhouse-gas emissions from power plants have declined by 16 percent from 2005 to 2012, according to EPA.

Under preliminary reports of the proposed regulations, every state would have to meet its target by ensuring plants reduce emissions or by financing reductions in other ways, such as reducing consumer demand or investing in more costly renewable energy such as wind and solar power. These impose real costs on the economy, such as fewer factories, trips, and jobs. Electricity made from solar power costs twice as much as electricity made from natural gas.

Coal-fired electricity generation accounted for 37 percent of total U.S. electricity generation in 2012, according to the Energy Information Administration. It expects the role of coal to decline only slightly in the years ahead, to 34 percent in 2035. To meet the rules, new coal plants would have to incorporate carbon capture and sequestration technology, at a cost of billions a year for consumers. Many would close. Raising the cost of energy would be particularly tough on Midwestern states' residents, who get much of their electricity from coal.

In May 2010, when the country was debating the cap and trade plans proposed by Messers Kerry, Lieberman, Markey, and Waxman, the Congressional Budget Office issued a report entitled How Policies to Reduce Greenhouse Gas Emissions Could Affect Employment. It concluded that "job losses in the industries that shrink would lower employment more than job gains in other industries would increase employment, thereby raising the overall unemployment rate."

The CBO report shows that emissions reduction programs would cause job losses in coal mining, oil and gas extraction, gas utilities, and petroleum refining. In addition, workers' wages adjusted for inflation would be lower than otherwise because of the increase in prices due to a cap and trade program. CBO concludes that some workers, therefore, would leave the labor market, because at the new lower wages they would prefer to stay home.

According to CBO, "While the economy was adjusting to the emission-reduction program, a number of people would lose their job, and some of those people would face prolonged hardship." Workers laid off in declining industries would find it hard to get new jobs. This is not in the interests of many Americans, especially when the labor market is weak and air quality is continuing to improve.

A CBO report published in December 2013 concludes that cap-and-trade would result in imports of energy-intensive goods from abroad rather than produced in America. There's nothing wrong with exporting energy-intensive goods, but the associated jobs get exported too. The report states, "Imposing an economy-wide carbon tax or cap-and-trade program would put the U.S. firms most affected-those that are emission-intensive-at a competitive disadvantage relative to their competitors in other countries unless those countries implemented similar policies."

Here's why: "Such a policy would impose costs on domestic firms, allowing foreign producers from countries with less stringent policies, or no policy at all, to charge less for their goods than U.S. producers."

More imports from abroad mean fewer jobs in America, more jobs offshore. Mr. Obama has frequently voiced his opposition to offshoring jobs, but his new cap and trade policies will give firms a new incentive to do so.

For those concerned about economic growth, poverty, and inequality, cap-and-trade makes no sense, either nationally or regionally. Our air is getting cleaner, and will continue to do so for the foreseeable future as new capital replaces old. Cap-and-trade did not pass a Democratic Congress in 2010, and Mr. Obama should not impose it on a regional basis through regulation.

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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