Obama climate change initiatives: A decidedly mixed bag

Previous regulatory overreach shows exactly what can happen when energy regulation goes awry. Case in point: Analysis of the EPA’s 2011 decision to regulate greenhouse gases under the Clean Air Act is estimated to decrease U.S. investment by 5 percent to 15 percent over the 2011-2014 period, or between $25 and $75 billion per year.

These are more than just numbers on a page: Each $1 billion in business investment translates into roughly 23,000 jobs. Thus, such a drop in investment would have directly led to job losses, direct and indirect, ranging from 476,000 to a staggering 1.4 million.

The president’s goal of doubling renewable electricity generation by 2020 will raise electricity prices and slow U.S. economic growth.  The Department of Energy’s data show that new electric generating capacity using wind and solar power tends to be considerably more expensive than conventional natural gas and coal resources.  The high costs of renewables will put a substantial strain on the federal departments that are being committed to renewable power generation including the Department of Interior and Department of Defense, both of which are already suffering significant budget strains under the federal sequestration.

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Furthermore, the elephant in the solar powered-room is that renewable energy production relies on taxpayer subsidies in order to keep prices artificially low. In 2010, roughly 76 percent of the $19.1 billion in federal tax incentives went to renewable energy recipients. This clever cost-concealing trick hides the real cost of renewable energy by simply passing it onto the taxpayer—a pyramid scheme in which families struggling from record-high utility costs end up paying two bills.

One positive feature of Obama’s climate change plan is to strengthen the efforts to work with developing countries from China to India to Brazil. According to the DOE’s U.S. Energy Information Association, greenhouse gas emissions in those countries and others are skyrocketing. China has already overtaken the United States, and India is not far behind. Combined, these developing countries overtook the OECD’s emission rate in the mid-2000s, and they will more than double the OECD’s energy-related carbon dioxide emissions by the mid-to-late 2020s.  Meanwhile, America’s greenhouse gas emissions have consistently declined since 2005.  Thus, President Obama’s intent to expand on the existing Major Economies Forum on Energy and Climate to accelerate efficiency gains in these countries is admirable and critical to reduction of global GHGs.

President Obama and policymakers should also recognize the importance of maintaining important tax code provisions that help facilitate the adoption of cleaner, less-emitting technologies.  As the debate over tax reform continues, policymakers need to beware of the trade-off between deductions for accelerated depreciation, Section 199, last in-first out accounting (called LIFO) and other provisions important to the US energy industry such as geological and geophysical (G&G) and intangible drilling costs (IDCs) in exchange for lower corporate income tax rates.  Delaying cash flow will retard capital spending, slow the adoption of cleaner technologies and hinder investment and job growth.  That’s because the rapid payback from depreciation allowances substantially reduces the risk premium for investment in plant and equipment. By contrast, it can take years for a tax rate cut to equal that benefit.   As the world leader in manufacturing and innovation, our country’s new products can quickly become industry standard the world over.

President Obama’s push to increase efforts to adapt to climate change is another positive aspect of his climate change plan. The private sector is already making strides in new business models through "no regrets" solutions (or changes that would be undertaken in the normal course of business).  Examples of this might include companies that are developing more drought-resistant seeds or hardening coastal infrastructure at risk from sea level rise.

Policymakers need to sift the wheat from the chaff in President Obama’s climate change proposal and make sure that the costs and benefits of each proposal are properly evaluated.  Failing to do so will stymie our attempt to restore strong economic growth.
   
Thorning is the senior vice president and chief economist at the American Council for Capital Formation, a nonprofit, nonpartisan organization advocating tax, energy and regulatory policies that facilitate saving and investment, economic growth and job creation.