Jun 29, 2009

Bad deal

As far as I can tell the debate over global warming was never finished. There still seems to be disagreement over whether or not it’s even a problem, but Congress is working on major legislation hoping to do something about it. For every scientist that endorses the concept of climate change there is one that disputes it. The evidence used to justify climate change is equal to a nanosecond of geologic time. Somehow we’ve got the American Clean Energy and Security Act of 2009 ready to come out of Energy and Commerce Committee for a floor vote. The clean energy portion of the bill is fine. However, the addition of the cap and trade portion, meant to reduce greenhouse gas (GHG), makes it bothersome.

Cap and trade is an economic concept that some think will provide incentive to move away from carbon-based fuels that produce GHG. Congress is planning to establish limits on various GHG emissions and those who are able to sequester carbon will receive credits that they can sell to GHG producers who go beyond their set limits. This is an over-simplified definition of cap and trade, but rest assured, if this law is passed it will effect the agricultural industry.

The European Union (EU) set up a cap and trade system several years ago that is an absolute mess. The Government Accountability Office (GAO) reviewed the European program and called it a failure. EU governments overestimated the amount of carbon output and issued more permits than needed. The supply of carbon allowances, the cap, exceeded supply of credits and the market essentially collapsed. In 2006, carbon credits were trading at 30 euros per ton of carbon dioxide, by 2007 they were trading at one tenth of a euro, about 13 cents.

The EU later told the GAO that they couldn’t be certain that the European cap and trade system reduced any emissions of GHG. By 2008, they had reduced GHG by 3 percent, but experts say that had more to do with the economy than cap and trade.

This climate change legislation is certain to raise a ruckus once folks figure out what it is. One thing’s for sure. It is going to be very expensive. According to the Congressional Budget Office (CBO) it will cost $110 billion by 2020 and everyone gets to pay. The CBO—which has credibility issues—has analyzed the effects of cap and trade on U.S. households and claims that the gross cost would be about $890 per U.S. household. Then the rebates and tax credits kick in and re-distribution of wealth starts.

The CBO expects the law will provide a $40 credit to low income households and will cost as much as $345 for higher income households. Average cost is expected to be $175 per U.S. household annually.

I suppose that you could be proud that agriculture has been holding up the passage of this bill in the House of Representatives. House Ag Committee chairman Collin Peterson, D-MN, is the guardian of a group of rural state votes. The bill’s sponsor, Henry Waxman, D-CA, needs those votes to have a chance of passing the bill. That’s when the deal making started. Peterson demanded three items for agriculture: USDA needs be involved in establishing carbon offsets, not the EPA; Agriculture and forestry need to be exempt from carbon emission regulation; And, he demanded EPA reevaluate the indirect land-use-change theory when factoring the carbon footprint of biofuels, paving the way for expansion of the biofuel industry without the problems posed by the fact that EPA believes corn-based ethanol may have a larger carbon footprint than conventional petroleum-derived gasoline. Waxman agreed to those three demands last Tuesday.

However, by the following day, Waxman was starting to walk backward on the verbal deal that was struck with Peterson. According to sources in Washington, D.C., Waxman didn’t seem to recall the part about exempting agriculture from regulation.

This bill is bad legislation, it was defeated in 2008 when it was originally sponsored by Barack Obama during his tenure in the Senate. It’s no better today.

Agriculture would have had a pretty good deal with Peterson’s demands included in the legislation. Some farm groups see the capture of carbon credits as an additional source of farm revenue and are caving into the concept.

The government assumes that the additional cost incurred by carbon-based industry as a result of this legislation will simply be passed on to consumers, but it’s clear the costs will be much higher, both in terms of unintended consequences for the U.S. economy and real dollar expenditures. This law amounts to nothing more than a new tax which redistributes more revenue and gives government a little more power over industry.