Indiana Governor: Cap and Trade Unfair to Hoosiers. Really?

In Friday’s Wall Street Journal Indiana Governor Mitch Daniels says "no thanks" to the American Clean Energy and Security Act, the climate bill proposed by Representatives Henry Waxman (D-CA) and Edward Markey (D-MA). Why? Apparently, it’s a stand against "imperialism."

Indiana, the governor suggests, gets no respect. Its “share of national income has been slipping,” claims Daniels, even as his state is doing more than its fair share to make America lean and green:

• “rocket[ing] from nowhere to national leadership in biofuels production,”
• becoming “the No. 1 state in the growth of wind power in 2008,” and
• “embark[ing] on an aggressive energy-conservation program.”

Now along comes this cap-and-trade bill — which for Daniels is “imperialism.” A plot to “exploit politically weaker colonies,” hatched by those evil, “wealthy” blue states — California, Massachusetts, and New York. We’ll call them The Imperialistic 3.

Really? Is Indiana a mere “colony”? And are those rich states strong-arming Indiana with climate change legislation? Or is the good governor exploiting a falsely populist, “us versus them” pose to advance an unstated political agenda?

Is Indiana a 'Politically Weaker Colony'?

When I think of persecuted “colonies” I think of the battle cry “no taxation without representation.” So let’s check out Indiana’s national delegation.

• Indiana’s per capita Congressional representation is essentially the same as every other state: about 1.5 per million.
  
• Like every state in the union Indiana gets two senators. On a per capita basis, that gives Indiana a lot more sway in the Senate than The Imperialistic 3.
• And when it comes to electing the president, Indiana’s electoral college votes per capita exceed those of California, Massachusetts, and New York.

So, if Indiana is the colony and The Imperialistic 3 are the imperialists, why does Indiana get more representation?

Whose Social Programs?

The governor predicts that the proceeds from a cap and trade “will be spent on their [read The Imperialistic 3’s] social programs while negatively impacting our [meaning Indiana’s] economy.”

The subtext to Daniels’s argument is that federally funded social programs unfairly benefit The Imperialistic 3's citizens to the detriment of folks from states like Indiana. That is simply not true.

The reality is that Indiana receives about $1.07 for each dollar it sends to Washington. The Imperialistic 3? For the same buck, they each receive between $0.80 and $0.85. So it is true: federal largesse does transfer wealth. But the direction of the flow is the opposite of what the governor would have you believe. Dollars flow from The Imperialistic 3 to states like Indiana, not the other way around. So Daniels’s argument about cap-and-trade dollars going to social programs that would harm Indiana’s economy is specious.

What Social Programs?

But there’s another problem with the governor’s arguments. Not all dollars from the Waxman-Markey cap and trade will go to “social programs.” During the first two decades the bill directs most allowance dollars toward local power companies and carbon-intensive industries in part to limit the costs of carbon-intensive electricity to consumers in states like Indiana.

But even the dollars collected by the federal government from auctioning emissions allowances (initially some 15 percent of the allowances' total value) will not necessarily go to the “social programs” that Daniels opposes.

In fact, the Waxman-Markey bill aims to send the dollars collected from allowance auctions to low- and moderate-income families to offset the increased energy costs. (See Waxman and Markey's Proposed Allowance Allocation [pdf].)

Outrageous Increases in Hoosiers' Electricity Bills?

But what about the cost of living? One great thing about Indiana, Daniels maintains, is its low cost of living, something The Imperialistic 3 wants to change with a cap and trade that would “more than double electricity bills in Indiana.”

Wow. That would hurt. But I have to tell you I was surprised to read “more than double,” because, according to the Environmental Protection Agency, the discussion draft of the Waxman-Markey bill would mean at most a 15 percent increase in household non-gasoline energy expenditures by 2050, with a total average, yearly household cost of less than $150. (See EPA's analysis [pdf].)

So where did Daniels crunch his numbers from? As best as I can tell, from a study [pdf] assessing the economic impact of the Lieberman-Warner climate bill considered by the Senate in 2008. That assessment of that old bill, by the American Council for Capital Formation (ACCF) and the National Association of Manufacturers (NMA), does project a large increase in electricity costs for Hoosiers.

But why would their cost projections be so much larger than EPA’s? To find out, we have to dig just a little deeper. It turns out that the ACCF/NMA analysis projects a carbon price between $227 and $271 per ton of carbon dioxide for 2030. The current price for emission allowances under the Regional Greenhouse Gas Initiative (America's first mandatory, market-based effort among 10 states to reduce greenhouse gas emissions) is under $4 per ton, and EPA projects costs of about $28-36 per ton under Waxman-Markey in 2030.

So, yeah, force the price of carbon above $200/ton and cap-and-trade costs will skyrocket. But are such high cost projections realistic? I don’t think so. It’s simple economics. For example, consider coal versus wind power. It's estimated that wind power becomes cheaper than coal at a price point of about $25 per ton. Low-carbon coal power using carbon capture and storage (CCS) becomes economically viable at a cost of about $40 per ton. If carbon prices rise above these price points, the energy system will naturally migrate to the cheaper options and moderate costs.

Moreover, the Waxman-Markey bill seeks to limit price spikes by slowly lowering the emissions cap over a number of decades to gradually transition to low-carbon alternatives and by including a variety of cost-containment measures.

There's another point to keep in mind. Projections of consumer costs are just that — projections. Over the past few decades, the actual costs of implementing just about every air-quality regulation on the books have turned out to be significantly less than the projected costs, proving American companies and entrepreneurs far more innovative than the prognosticators gave them credit for. Why should this not be the case with the proposed cap and trade?

What About China?

Daniels argues that Waxman-Markey is also a recipe for sending Indiana’s industries to China while insignificantly cutting global temperatures. It’s true that the bill, by itself, is inadequate to address the entire climate change issue. Global participation, including China's, will be required to tackle the problem in toto.

But Daniels would stall U.S. action until China acts, which is a convenient recipe for inaction since China won’t act until we do. What Daniels fails to point out is the bill's built-in protection against outsourcing: its carbon tariff gives the president power to protect American industries from “low-carbon dumping.” Given China’s economic dependence on American dollars, imposing a carbon tariff on Chinese products could even have the effect of forcing China to adopt a carbon cap of its own.

Why, Governor Daniels?

I don’t know Governor Daniels, but I suspect he’s an intelligent person. A crusade against imperialism in defense of Indiana is not the real reason the governor is against the Waxman-Markey bill. What do you suppose is?

This post has been revised to reflect the following correction:

Correction: May 19, 2009
Though the original cost projection we cited for EPA is correct (about $20 per ton under Waxman-Markey in 2020), we have updated the post to reflect the EPA cost projection for the year 2030 so that the comparison is between estimated CO2 prices for the same year.