Counterproductive package of new taxes, transfers and obstacles to economic growth and liberty
Study: The Other Half of Waxman-Markey: An Examination of the Non-Cap-And-Trade Provisions
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The massive energy-regulating bill (H.R. 2454) the House of Representatives passed in June 2009 is now before the Senate. Though the cap-and trade program has received most of the media and public attention surrounding Waxman-Markey, the rest of the bill (at least 628 pages) could create economic harm just as great as cap-and-trade. Without cap-and-trade, H.R. 2454 might still be the most far-reaching, counterproductive package of new taxes, transfers and obstacles to economic growth and liberty ever assembled in one bill.
The bill affects so many facets of energy and the economy that simply summarizing its major provisions is challenging. To simplify, The Other Half of Waxman-Markey: An Examination of the Non-Cap-and-Trade Provisions in the Waxman-Markey Bill studies four types of policies:  “supply” measures intended to reduce industrial GHG emissions, most importantly in power generation;  “demand” policies intended to reduce energy (electricity) consumption that causes additional emissions, e.g. by power producers;  seemingly minor “stealth” provisions with the potential for major economic harm as the future unfolds; and  politically motivated transfers of wealth not covered in the first three classifications.
The centerpiece of the supply side is a national “renewable portfolio standard” (RPS), a provision that requires investor-owned utilities to obtain 20 percent of their power in 2020 from renewable sources or increased efficiency. (Municipal and co-operative systems that sell 25 percent of the nation’s power are exempt.) An RPS is both an inefficient environmental policy and an unnecessarily expensive way to produce power. It also cannot “create jobs”—power users pay the wages of workers in renewables, creating unemployment in industries that produce what users would have otherwise bought. Other supply provisions include a federal corporation—with a $1 billion annual price tag—that will coordinate research and development of carbon capture and sequestration. “Success” of this venture is defined as power costs that rise 40 to 70 percent. A new “Clean Energy Development Administration” will provide tax-supported finance for projects that a panel of political appointees determines are “breakthroughs.” Interestingly, the bill defines breakthrough projects as those that capital markets are unwilling to fund.
The bill also requires utilities and states (i.e. power consumers and taxpayers) to create infrastructures for electric vehicles that do not yet exist. Another $50 billion is available to vehicle producers and almost anyone else distantly connected with their technology; despite the fact that research has not shown that a shift to electric vehicles would actually reduce GHGs. . And despite a growing consensus that ethanol increases emissions, H.R. 2454 gives ethanol a six-year pass before any EPA regulation can take effect.
The bill also includes a massive federal takeover of state building codes and regulation. Even if we ignore the inherent constitutional issues the provision raises surrounding state jurisdiction, H.R. 2454 disregards the fact that market forces have steadily improved building energy efficiency and instead requires that by 2030 all new buildings use 75 percent less energy than our most efficient buildings today. The bill also tightens the regulation of lighting and appliances (including underwater installations) and is likely to require carbon labeling of many goods in the near future. Moreover, it requires that taxpayers reward retailers with $200 or more for each super-efficient appliance they sell and institutes the equivalent of a “cash for clunkers” program for industrial electric motors and related equipment. Finally, a last-minute 92 page addition to the bill provides grants for an assortment of “community” activities that are often only vaguely associated with energy efficiency.
Section 198 of the bill adds a presidentially-appointed “consumer advocate” to the Federal Energy Regulatory Commission (FERC), which already has such an office. H.R. 2454 gives the Commission itself no authority over the advocate, but gives the advocate authority over almost all of FERC’s legal staff. This “stealth” White House takeover of an independent regulatory commission is unprecedented andlikely reflects the political importance of FERC’s increased authority over markets for GHG allowances and renewable energy credits under the bill. Another likely time bomb is hidden in provisions on “adaptation” to climate change, which are largely devoted to protecting existing wildlife environments. Various appointed panels will become de facto environmental regulators not subject to usual oversight procedures. H.R. 2454 also funds extensive data collection and centralization of habitat databases, explicitly preparing for environmental pressure groups to utilize the data to fight state and local government proceedings that include energy development, urban planning and highway construction.
Finally, the bill includes a hodgepodge of transfer payments with little to unite them other than the political importance of their recipients. Applications for retraining funds and displaced worker “adjustment assistance” require participation by both political appointees and “community” groups. Adjustment assistance can be up to 70 percent of wages for up to three years, far higher and longer that ordinary unemployment compensation. Poor households will receive additional payments to compensate for purchasing power they will lose due to cap-and-trade, another indication that the administration sees the law’s effects on prices. After 2020, the President must impose labor-protecting tariffs on imports from countries with lagging climate programs, unless Congress says otherwise. The bill also contains numerous transfers to higher education for research on a range of the bill’s subjects. There will be at least six new types of research centers working on bill-related topics, including one whose only function is to coordinate the other centers.
The public has quite quickly come to understand that cap-and-trade is merely another tax. Though Waxman-Markey is superficially concerned with efficiency, in reality, the bill is an incredibly large and diverse package of inefficient projects, regulations and transfers. Its complexity reflects the complex political considerations that were necessary to induce the House to pass it by the tiniest of margins. This bill is a top-down, government-knows-best, division-of-the-spoils substitute for the serious legislation that is needed to address our nation’s energy challenges.
A. H.R. 2454
On June 26, 2009, the U.S. House of Representatives passed H.R. 2454, the American Clean Energy and Security Act of 2009. The first page states that the measure’s purpose is “to create clean energy jobs, achieve energy independence, reduce global warming pollution and transition to a clean energy economy.” At the heart of the bill is a “cap-and-trade” scheme that will set ceilings on greenhouse gases (GHG) and institute a market for emissions permits, also called allowances. Both supporters and opponents have produced studies purporting to show that provision’s effects on the economy, and controversy continues. Cap-and-trade, however, is only one part of the bill. The remaining provisions may produce an additional negative impact as great as the one created by cap-and-trade. Among them are a national requirement that utilities obtain some quota of electricity from “renewable” sources or efficiency improvements. Others, such as a federal takeover of state building codes that will impose stringent efficiency standards, have yet to be subjected to a nonpartisan cost-benefit analysis. Numerous obscure provisions, such as grants for electric utility tree-planting programs and regulations on the design of underwater lighting, entail small expenditures that may be significant in the aggregate. Some sections of H.R. 2454 contain potential time bombs that may eventually cause as much harm as cap-and-trade, others transfer important regulatory decisions from the states to Washington, and still others needlessly and expensively restrict the choices of both producers and consumers of energy.
B. The Organization of H.R. 2454
The final version of H.R. 2454 (cited as “House Final”) combines the bill reported out of Committee on June 5, with an addendum that first appeared at 3 a.m. on June 26. The entire bill passed later that same day, after the leadership had restricted floor debate to three hours. It was received by the Senate on July 6 and placed on the calendar the next day. The bill contains five broad titles:
Title I—Clean Energy. This title imposes renewable-power and efficiency requirements on utilities, proposes a government corporation for carbon capture and sequestration research, provides funds to manufacturers and buyers of electric vehicles and developers of the infrastructure that will serve them, provides funding for research on a “smart” transmission grid, changes some transmission siting rules, sets up a “Clean Energy Deployment Administration,” and makes minor changes in existing loan guarantee provisions for nuclear power.
Title II—Energy Efficiency. This title imposes federal requirements on state and local building codes to greatly reduce energy consumed in newer buildings, and provides incentives for efficiency-related retrofits in older ones. There are new design requirements for lighting and appliances, emission rules for vehicle and aircraft engines, requirements and support for greater efficiency in industry, and plans for community-based efficiency programs.
Title III—Reducing Global Warming Pollution. This title specifies GHG reduction goals, sets up a registry and allowance market, provides for offsets, sets an initial allocation of allowances and rules for trading them in markets, and sets union-level wage rules for projects funded by the bill.
Title IV—Transitioning to a Clean Energy Economy. This title includes programs to reduce emissions “leakages” from production relocations to other countries, including the option of imposing carbon-based tariffs on these leakages. It provides for job training and adjustment assistance to displaced workers, energy refunds to low-income consumers, and foreign aid programs to mitigate emissions in less developed countries. It also programs to monitor and guide adaptation to climate change.
Title V—Agricultural and Forestry Related Offsets. This title, negotiated to gain the support of farm interests, first appeared in the 3 a.m. addendum to the bill. It allows farmers and forest owners to create and exchange emissions offset credits under Department of Agriculture oversight.
C. The Organization of This Report
H.R. 2454’s overarching purpose is to determine and enforce a sequence of GHG reductions.  Using 2005 levels as a base, the bill requires a 3 percent reduction in GHG emissions by 2012, a 17 percent reduction by 2020, and an 83 percent reduction by 2050. The cap-and-trade program will be central to that effort, but it will be supplemented by policies intended to affect such important sectors as electricity generation, which accounts for 40 percent of GHG emissions as defined under the law. The program’s provisions are to affect both the supply of and demand for emissions. Section II below covers the bill’s major supply-side measures, intended to limit the production of emissions in power generation and elsewhere:  a national renewable electricity requirement,  carbon sequestration for conventional powerplants,  support of “advanced” technologies, including nuclear, and  support for the “Smart Grid.” Section III is devoted to demand side measures, intended to reduce and restrict household and business activities that induce greater emissions of GHGs:  support for electric vehicles and alternative fuels, which could produce fewer GHGs per mile than conventional ones,  changes in the design of electricity-using equipment,  more restrictive building codes, and  localized conservation and efficiency efforts. Section IV covers two “stealth” issues that may upset federal-state regulatory relationships and increase the scope of environmental interventions:  changes in the organization of the Federal Energy Regulatory Commission (FERC), and  policies intended to facilitate “adaptation” to climate change. Section V covers some other politically motivated wealth transfers not discussed in earlier sections, such as:  transfers to workers, including retraining, transitional assistance and union-scale wage requirements;  new powers to impose tariffs on imports from emitting countries; and  funding for research to be performed by important interest groups. Section VI summarizes the discussion. Even without cap-and-trade, H.R. 2454 might be the most impressive package of new taxes, wealth transfers, and obstacles to economic activity that a Congress has ever assembled.
II. Supply-Side Interventions
A. Renewables: The National Renewable/Efficiency Portfolio Standard
Setting aside automotive sources, the production of electricity emits approximately 40 percent of U.S. greenhouse gases as the law defines them. Even without any of H.R. 2454’s new provisions, electricity is already comprehensively regulated. State public utility commissions approve utilities’ generation and transmission investments and set rates to final (”retail”) customers, and FERC has jurisdiction over “wholesale” exchanges of power between utilities and non-utility power producers, as well as most hydroelectric activity. The Environmental Protection Agency (EPA) and state agencies regulate emissions from fossil-fueled generators, and the Nuclear Regulatory Commission oversees licensing and operation of nuclear powerplants. In addition, the siting of virtually all generating facilities and transmission lines is under state, and sometimes local, regulation, in addition to the “alphabet soup” of federal laws and regulations pertaining to their construction and use permits. These include the National Environmental Policy Act (NEPA), the Clean Water Act, the Clean Air Act, Clean Air Act (CAA) and the Endangered Species Act (ESA), to name but a few.
Adding to the mass of existing regulation, H.R. 2454 will impose a national “Renewable Portfolio Standard” (RPS) on all but the smallest investor-owned utilities. It will require each utility to obtain at least 6 percent of its power from sources defined as renewable (though some may come from efficiency-related savings instead) by 2012, 9.5 percent by 2014, and 20 percent by 2020. There will also be a corresponding and equal federal renewable-energy purchase requirement schedule. But because of their status as governmental and quasi-governmental agencies, municipal and cooperative electric systems that distribute 25.7 percent of the nation’s power are exempt from the requirement. Currently, 29 states and the District of Columbia have RPS laws, most of which require timetables for gradually increasing the percentage of energy their utilities obtain from renewables.  Like most of those state policies, H.R. 2454 defines renewables as: wind turbines, geothermal steam plants, small hydroelectric facilities, burners of biomass (plant and wood waste not from federal lands), and thermal and photovoltaic solar installations.
The Federal Energy Regulatory Commission (FERC) will determine the details of RPS regulation and monitor utilities’ compliance. Those that cannot produce or purchase renewable power will have the option to buy “Renewable Energy Credits” (RECs) from generation owners who do not need the credits for their own compliance. Utilities will also be able to claim energy savings from efficiency-related programs (e.g., load and peak reductions) for up to 25 percent of their RPS obligations. Any utility short of the requisite total of renewable power, RECs, and efficiency improvements faces an “alternative compliance payment” to its state government of $25 for each MegaWatt-hour (MWh) that it is in deficit. This is above and beyond the costs of the power it actually distributes. H.R. 2454 will require that states spend these payments on either the deployment of renewable generation or “cost-effective energy efficiency programs,” to be defined by FERC. The new efficiency standards and techniques for measuring savings will replace a variety of existing state rules. The complexity and delays that have been seen at the state level will be mirrored and magnified in complex and lengthy FERC proceedings. These new uncertainties are almost sure to further distort and delay efficient investments that utilities might have made in the absence of the jurisdictional change.
The economic case for a federal RPS regulation is at best weak, and the existing state-level record can only increase our doubts about its likely efficacy. The supposed logic of a national RPS is counter to almost all economic reasoning about competitive markets and their economic efficiency. An RPS is possibly the most inappropriate policy imaginable for controlling atmospheric emissions, whether dealing with EPA “criteria pollutants” (including oxides of sulfur and nitrogen) or greenhouse gases. Instead of setting a policy goal, examining its costs, and letting the market function to reach it as economically as possible (very roughly, EPA’s strategy toward criteria pollutants), RPS percentages are arbitrary, set without considering the benefits of lower pollution or the costs of alternative policies that might reduce pollution more cheaply. Instead, an RPS simply orders utilities to invest in certain politically favored generation technologies that are needlessly costly ways to both produce power and reduce pollution.
As a “jobs” program, most generators of renewable power have higher labor requirements for construction and operation than conventional ones. In effect, those people who endorse the rationale of creating jobs support throwing away part of the labor force on inefficient production. Nor is a national RPS likely to bring forth renewable technologies that can compete without subsidies against conventional power plants. Almost two-thirds of U.S. electricity is already consumed in RPS states, and there is no evidence that expanding RPS will make breakthroughs more likely. Renewables are already a worldwide industry, and there is also no evidence that a federal RPS will boost America’s position in these global markets. Alarmism about resource exhaustion is rapidly fading as we have recently witnessed the discovery of literally hundreds of years of onshore natural gas supplies in “unconventional” formations (shale, tight sands, and coal seams) and the development of cost-competitive technologies to explore for and produce them. Better yet for those with climate concerns, natural gas emits less carbon per unit of power produced than any other fossil fuel.
Despite years of popular attention and decades of subsidies, non-hydro renewables delivered only three percent of the nation’s electricity in 2008. That production is increasingly concentrated in wind turbines, the only renewables to have experienced substantial growth since 1999. Generation from biomass (burning plant and wood waste) fell by 6.2 percent over the period, and geothermal energy increased by only 0.6 percent. Solar’s seemingly impressive 70.3 percent increase still left it producing less than 1 percent of all renewable power. RPS or no, renewables will continue as a minor presence for the next several decades. Their capital costs are considerably higher than those of conventional generators, and using reasonable assumptions about allowance prices under cap-and-trade they will remain at a disadvantage. The U.S. Department of Energy’s Energy Information Administration (EIA) simulated several RPS proposals using its National Energy Modeling System (NEMS). The model has numerous flaws and often predicts poorly, but both advocates and critics generally agree with its finding that under a national RPS, such as that of H.R. 2454, the bulk of generation capacity needed to meet growing demand over the next four to six decades will continue to be fossil-fueled, even under optimistic assumptions about improvements in energy efficiency.
Renewables (particularly hydroelectric and geothermal facilities) are often site-specific and will require new transmission facilities to integrate them into the existing grid. Localized resistance to new transmission facilities has become highly effective and remains strong against lines intended to carry renewable power. Site specificity is a matter of degree – the few U.S. areas with persistently strong winds (the Dakotas, West Texas) are far from consumers. By contrast, fossil fuels can be transported to plants that are located where they best contribute to efficiency and reliability. Wind and solar power are intrinsically intermittent, and in most regions the wind blows least during the warm-weather peaks when additional generation would be most valuable. This lack of “dispatchability” increases utilities’ costs because they must run additional reserves to pick up their loads if the wind dies unexpectedly. In most regulatory regimes, ratepayers in general pay the costs of transmission dedicated to renewables and the operation of additional reserves, rather than investors in the renewables.
As a practical matter, the great bulk of any increase in renewables to meet a growing RPS requirement will come from wind. Wind and solar are the only renewables with potential sites widely dispersed around the country. Wind also lacks the polluting properties of biomass and is close to passing a market test in some locations. Despite this success relative to other renewables, almost all wind generation depends for survival on a federal production tax credit that roughly amounts to a 20 percent subsidy per kWh, and the more optimistic projections for its future generally assume that the subsidy will remain in place indefinitely.  Barring breakthroughs in other technologies (batteries, flywheels and compressed air storage of intermittent power), the likely dominance of wind implies that the RPS is largely special-interest legislation intended to benefit a single industry. Regions such as the relatively windless Southeast will be disadvantaged because they will have to purchase RECs from generators or renewable power that may not be deliverable, in which case they must also produce power from local resources. While utilities will probably be able to sell the undeliverable power near its source, there is no guarantee that such sales will cover the costs of the purchased RECs.
B. Coal: Carbon Sequestration
Perhaps Congress already realizes the impracticality of providing for all of the nation’s growing electricity demand with renewables and improved efficiency. To address emissions from new coal-fired plants that must almost surely be built in the future, H.R. 2454 contains “technology forcing” provisions for development of carbon capture and sequestration (CCS) technologies that will store these emissions below ground. To coordinate CCS policies, the bill institutes a nonprofit “Carbon Storage Research Corporation” to be administered by the Electric Power Research Institute, an organization funded by utilities and government. The corporation’s required expenses (between $1 and 1.1 billion per year for ten years) will be funded by kilowatt-hour taxes that are twice as high for coal-generated power as for natural gas. This tax will cost the typical residential user 25 cents per month. However, homes use only 37 percent of U.S. power, and taxes nominally paid by business users will affect households through higher product prices, increasing the costs American families must pay.  The tax burden will be somewhat consistent with Congressional politics—Vermonters with hydroelectric and nuclear power will pay substantially less than Alabamans with electricity from coal and natural gas. In addition to this cost, there is no guarantee that the corporation’s research will succeed. Concerns have also been raised about the safety and efficacy of CCS. To incentivize other innovative efforts, H.R. 2454 includes a complex set of rules that will allocate free allowances to generator owners who experiment with CCS between now and 2019. (All “free” allowances will have some cash value on markets, and the bill will spur wasteful rent-seeking competitions to obtain them.) After 2020 all newly permitted coal-fired plants must use CCS when they begin operating and must reduce their emissions by 65 percent. Because of this mandate, new CCS-equipped plants will have higher costs than older plants without CCS. Utilities will therefore have an obvious incentive to keep older plants in operation, rather than replacing them with costly new facilities. If, as seems likely, further advances in the reduction of criteria pollutants occur the new policy could leave the nation operating more older generators (producing more pollutants known to be harmful) over a longer future than in the absence of subsidies to CCS. Therefore, this rule will almost surely produce the unintended consequence of higher emissions of criteria pollutants than would otherwise occur. The current readiness of CCS technology is doubtful. The most advanced U.S. project in progress will begin its sequestration trials on 25 MW of the output of a 2,545 MW facility in Alabama, beginning in 2011.
The research and administrative costs in H.R. 2454, however, pale relative to the likely costs of sequestration. Current state-of-the-art technologies allow approximately 60 percent of total carbon to be sequestered. The costs of sequestration are both capital and fuel-related. According to a study for the environmentally oriented Pew Center on Climate Change, adding CCS will increase capital costs of new plants by 20 to 25 percent, (from their current levels of $500 million to $1 billion for a 550 MW plant), and its energy demands will reduce a plant’s usable power output by 15 to 30 percent. The two effects will increase the cost of a delivered megawatt-hour by 40 to 70 percent. The industry’s investment requirement will increase because a generator with a nominal 550 MW capacity will produce a net output of only 390 MW.
C. Nuclear Power and “Advanced” Technologies
H.R. 2454 exemplifies the prevailing political schizophrenia over nuclear power that stems from its low emissions, waste disposal issues, and psychological impact on some citizens. Little publicity has been given to the fact that EIA’s previously described simulations show that investments in new nuclear power plants and extensions of the lives of existing ones will be necessary to achieve H.R. 2454’s GHG reductions. In 2008 nuclear power produced 19.6 percent of all electricity generated in the United States. Depending on the exact scenario, the nation will require nuclear generation to increase between 8 and 26 percent by 2020 and between 10 and 109 percent by 2030. Because nuclear plants generally operate whenever they possibly can (as “baseload” units) even the low figures will entail additional construction rather than more intensive operation of available units. The prospects for new units are problematic in today’s regulatory climate. The Nuclear Regulatory Commission is currently processing applications for 26 new reactors, but the Obama administration has effectively closed the Yucca Mountain waste facility prior to its ever opening. H.R. 2454 leaves the central problem of waste disposal unresolved. Its most important nuclear provisions are instead minor modifications to a loan-guarantee program established by the 2005 energy law.
Instead of facilitating carbon-free nuclear power, the bill puts in place a “Clean Energy Deployment Administration” (CEDA) that will provide “access to affordable financing” for clean energy technologies, energy infrastructure technologies (e.g., smart transmission grids), energy efficiency technologies, and any manufacturing technology associated with the previous three. It will lend from a revolving fund with a $7.5 billion capitalization of Treasury “green bonds.” The amount is actually quite small when compared with an estimated $50 billion allocated to these technologies under the American Reinvestment and Recovery Act of 2009. The CEDA will be administered by a presidential appointee with a five-year term and substantial discretion. That person’s powers include the ability to determine what constitutes a “clean energy technology.” H.R. 2454 says that it is one for which “as determined by the Administrator, insufficient commercial lending is available at affordable rates to allow for widespread deployment.” The bill appears to say that by definition a “clean energy” technology is one that fails a market test but nevertheless strikes CEDA’s unelected management as promising. CEDA’s Advisory Council will contain a mix of academics, industry, and political personnel. It will determine whether a technology qualifies as a “breakthrough,” defined by H.R. 2454 as one that has “generally not been considered commercially ready … as a result of high perceived technology risk or other similar factors.” Quite simply, the Council will determine that some technologies are valuable enough to risk taxpayers’ money on, despite the fact that private investors with their own money to lose will not fund them. The Council’s standards will be based on the politics and preferences of its own members. Beyond CEDA are a multitude of political programs. H.R. 2454 covers entrepreneurs (formerly thought of as market-oriented independents) with a “Clean Energy Technology Business Competition Grant Program” through which the Secretary of Energy gives grants to organizations that provide “incentives, training and mentorship” to entrepreneurs in renewable energy. Numerous specific energy sources get their own organizational support. There will, for example, be a “National Bioenergy Partnership” of regional public-private organizations to coordinate development and deployment of “sustainable biomass fuels and bioenergy technologies.” 
D. Transmission Policy
Electricity can only be reliably delivered over adequate transmission facilities. During the 1990s, power sales continued to grow in the face of a substantial and prolonged fall in transmission investment that has given rise to legitimate concerns about reliability. A recent upsurge in transmission spending is welcome, but its likely duration is unknown. The decline had several plausible causes. First, increased competition enabled by federal policies gave large transmission-owning utilities good reason to avoid expanding the capacities of lines that competitors had obtained legal rights to use. Second, beginning in the 1980s the abilities of localized groups to block construction of new lines led to regulatory permit delays that sometimes exceeded ten years or resulted in project abandonment. Third, federal law continues to give state regulators the ability to approve new transmission, and the physical properties of power flows sometimes reward delay—a line built in one state can actually decrease (or sometimes increase) the cost of delivered power in another, and there is no easy way to negotiate compensation payments. States still have authority over siting, but the Energy Policy Act of 2005 gave FERC “backstop” powers to order eminent domain if states prohibit or needlessly delay lines that satisfy certain “national interest” criteria. Since then, the courts have imposed limits on this authority, but in any case the underlying legal process is so complex and time-consuming that FERC has yet to exercise it.
H.R. 2454 contains two attempts to resolve these quite real problems, neither entirely satisfactory and both more governed by politics than economics. The first will give FERC increased backstop authority to invoke eminent domain in the West while leaving its powers unchanged elsewhere. FERC will now be able to override Western states’ decisions to refuse siting or to impose “unreasonable conditions,” provided the line was conceived in a regional planning procedure (as most are today) and is intended to transmit energy from renewable sources. As a practical matter this is one of the bill’s few provisions that may bring consumer benefits, but they will be an unintended consequence. Lines to reach yet-unbuilt renewable generators often pass through areas where coal- and gas-fired generation already exist or can be built quickly. In the early years (which may become decades) their unused capacity can transmit less expensive fossil-fuel power to distant users.
The second attempt to resolve transmission problems is embodied in the bill’s provisions to support the modernization of transmission technology, a set of initiatives generically referred to as the Smart Grid. H.R. 2454 requires the EPA Administrator and Secretary of Energy to assess the value of incorporating Smart Grid–compatible hardware and software into appliances. The hardware will include controllers that allow users to choose their responses to power prices that will change over the day (e.g., dishwashing only after midnight) and possibly to allow electricity suppliers to remotely control customer-owned appliances, particularly air conditioning. The California Energy Commission proposed such requirements in 2008, although they were promptly withdrawn after widespread protests. H.R. 2454 stacks the deck in favor of the government by determining benefits on the basis of a “best case” analysis under “optimal circumstances.” It unrealistically assumes that all consumers have the ability to communicate with their utilities electronically and schedule appliance use to maximize their savings. A related mandate requires utilities to prepare peak-load reduction plans. They will submit the plans to FERC, which will publish annual data on their content and on utilities’ compliance. The standards, unsurprisingly, are those of perfectionists. The minimum reduction a utility can propose “shall be the maximum reductions that are realistically achievable with an aggressive effort to deploy Smart Grid and peak demand reduction technologies and methods.” 
III. Demand-Side Interventions
Like its supply-side policies, H.R. 2454’s demand-side policies are a massive collection of unjustified, inefficient and inequitable federal interventions into markets, few if any of which would pass a cost-benefit test. Higher market prices induce energy users to take cost-effective steps to reduce their consumption; they induce suppliers of energy commodities to find and produce more; and they bring forth innovations and inventions that better allow users to adjust to changing market realities. There are theoretical cases where interventions can be justified, but H.R. 2454 goes far beyond them. Its demand-side provisions are intended to reduce emissions by reducing demand for fossil energy in four broad areas:  Motor vehicles, including development and manufacture of electric cars and subsidies to alternative fuels;  Lighting, appliances, and industrial equipment, for which the bill mandates design changes;  Structures, which will be under a federalized building code with national standards for retrofits and timetables for efficiency improvements; and  “Community” activities to be subsidized in the name of energy efficiency.
A. Electric Vehicles and Alternative Fuels
H.R. 2454’s transportation policy begins with an unfunded requirement that utilities develop plans for a network of charging stations and other facilities to support the growth of plug-in hybrid and electric vehicles (PHEVs). These activities will support a “Large Scale Vehicle Electrification Program” that will provide transfers to three different sets of market participants:  governments, utilities, auto manufacturers, car-sharing companies or organizations, and “other persons or entities,” that is, anyone with enough political importance;  vehicle buyers, who will get the difference between the PHEV price and that of a supposedly comparable model; and  providers of charging and related facilities.  Several of these programs may be coordinated with automaker bailouts. Assistance to manufacturers (”such sums as are necessary”) will in part be determined by their location “in local markets that have the greatest need” rather than a high probability of success.  The bill also allocates to vehicle manufacturers some free carbon allowances, which can be used to meet some of their manufacturing costs, and those that save more fuel will receive larger allocations. Lastly, H.R. 2454 raises the ceiling on loans to manufacturers from $25 billion (set by the 2007 Energy Law) to $50 billion. The bill’s language makes it impossible to guess the total amounts that will be allocated to the various activities.
The most fundamental issue about electric vehicles has hardly been studied: Assuming GHGs are really a problem, what are the costs and benefits of policies toward them? Since electricity output will largely be generated by fossil fuels for at least the next several decades, will reduced vehicle emissions lower the economy’s net carbon output? There will also be costs (both economic and carbon-related) of new vehicles and infrastructure, as well as increased accident costs from lighter weight vehicles. Many electric vehicle technologies are still under development and their costs are largely matters for conjecture. H.R. 2454’s gamble on electric vehicles reflects today’s politics. Natural gas is accessible and domestic, and vehicles of all types have been successfully converted to run on it. We have recently learned that it is superabundant in hitherto untapped “unconventional” shales, and the development of hydraulic fracturing has made centuries of this gas accessible at today’s prices. In contrast with its largesse to electric vehicles, H.R. 2454’s only attention to gas appears in a last-minute addendum ordering a modest study of gas-fueled vehicles.
After years of research we are still not certain about the algebraic sign of ethanol’s environmental benefits, that is, whether its GHG emissions are above or below those of the fuels it replaces. The currently definitive study from the National Academy of Sciences compared the climate change and health costs of one billion gallons of ethanol with its gasoline equivalent, finding costs of $469 million for gasoline and a range from $472 to $952 million for corn ethanol. Add the cost of growing and processing the corn to the comparison with the oil and the outcome becomes even less favorable. If we are interested in the well-being of consumers we would further need to include the effects on grocery prices of converting 30 percent of the corn crop to ethanol. Ethanol, however, is well-represented in Washington and its representatives are aware of the risks of such comparisons. Prior to H.R. 2454, the EPA was charged with determining ethanol’s lifecycle emissions. H.R. 2454 puts EPA on hold while the National Academy of Sciences spends three years assessing existing ethanol research. Following that, EPA has another year to propose a rule and one more year to make it final, after which it will become effective six years after the bill becomes law. Whatever the scientific outcome, H.R. 2454 gives ethanol six years’ exemption from regulations that affect other fuels. If the findings on ethanol are negative, the bill gives the farmers’ friends at the U.S. Department of Agriculture the option of running their own study, with results due six years from enactment.
H.R. 2454 also institutionalizes an “open fuel standard” which will allow the Department of Transportation to require automakers to manufacture vehicles that are capable of running on E85 (85 percent ethanol, 15 percent gasoline) or M85 (the same for methanol) with the concurrence of EPA and DOE, through and possibly after 2016. The proportions of gasoline and ethanol or methanol are for DOT to choose. Barring some unlikely political events, H.R. 2454 cements in place ethanol requirements whose likely effects are increased GHG emissions and higher food prices worldwide. By themselves the bill’s ethanol provisions would probably not pass, but burying them in a bill like H.R. 2454 might do the trick.
B. Building Codes and Retrofits
H.R. 2454’s provisions on energy use in buildings is a departure from federalism, based on a claim that people don’t really know what’s best for them but Washington does. A large number of state and local building codes and regulations already exist to ensure that new and remodeled buildings meet standards of engineering integrity and adequately address local conditions—whether climatic, economic, or social. The state and local codes set broad limits on design and construction but leave builders and owners free to explore tradeoffs within those limits according to their personal standards (which may include their expectations about what subsequent owners will value). H.R. 2454 will replace today’s deference to local conditions and preferences with a national building code far more stringent than any state codes.
The rationales for this change are several, and all are weak. One alleged reason for a federal takeover is that nine states have no statewide energy codes for commercial buildings and eleven lack them for residences. Perhaps unfamiliar with competitive markets, Congress apparently concluded that architects and contractors actively choose to design and construct buildings that needlessly waste energy. Congress thus disregarded the fact that these professionals are constantly in competition to offer packages of quality and price that appeal to buyers, with energy use being but one of a buyer’s many cost considerations. There is no evidence that homeowners in codeless Illinois are worse off than those who live in states with codes. In reality, households and businesses economize on energy where doing so is effective by their own standards. Even the Pew Center on Global Climate Change notes approvingly that between 1979 and 2001 average energy consumption per household decreased by 27 percent, from 126 million BTUs per year to 92 million. This reduction occurred while the average square footage of new single-family homes rose by 32 percent.
H.R. 2454 starts from “baseline” codes that are the most stringent currently available. (The baseline code for residences is the “Conservation Code” created by the International Code Council.) The drafters of Waxman-Markey apparently believe that the baseline codes waste too much energy, and so the bill specifies by how much. After Waxman-Markey is enacted, new buildings must consume 30 percent less energy than specified by a baseline that was set by building industry consensus. Five years ahead, in 2014 (2015 for commercial buildings), all new construction must consume 50 percent less than the baseline. Beginning in 2017, there is to be a further five percent reduction every three years, with an ultimate drop of 75 percent relative to the already-tight 2009 baseline codes.  Local consensus on building codes will largely end. Instead, the U.S. Department of Energy will write national regulations and determine whether they are “life-cycle cost justified.” If the Department finds a code that is thus justified and gives larger energy use reductions, it may specify that code as its new standard.  The government can deny funding under some of the bill’s other provisions to states that are out of compliance. In states below 90 percent compliance, the Department of Energy may “conduct training and education of builders and other professionals in the jurisdiction.” H.R. 2454 also provides funds from the sale of emission allowances to states that will support stronger code enforcement.
If H.R. 2454’s changes really are efficient, the nation has missed out on an incredible free lunch, one that could have simultaneously enriched builders and lowered the costs of occupants. The free lunch claim comes from a group of architects calling themselves Architecture 2030, whose president presented his case in testimony before the House Energy and Environment Subcommittee. The organization reached its favorable conclusions about building codes on the basis of its own data, which are not publicly available and have yet to appear in peer-reviewed publications. The National Renewable Energy Laboratory (NREL) also appears to favor code changes, again without the benefit of any known peer-reviewed studies. Architecture 2030 cites NREL studies claiming that code changes that force a 30 percent cut in residential energy use will save households in all regions between $403 and $612 per year. The average cost-neutral point for home efficiency upgrades is a 45 percent reduction. Architecture 2030 and NREL apparently missed the implications: If code changes cut energy use by less than 45 percent, their analyses show that households will be better off, but if the cut exceeds 45 percent they will be worse off. H.R. 2454, however, will require 50 percent reductions in five years (and ultimately 75 percent reductions), leaving households worse off, according to numbers taken from the bill’s supporters.
H.R. 2454 also encourages energy-related building retrofits. It requires EPA to institute a program to partially fund state-authorized retrofits of existing buildings with more efficient equipment and materials, using funds from allowances allocated to the state for up to 50 percent of the cost of the retrofit. The allowable percentage of funding from allowances will increase with expected energy savings, and other bonuses are possible for such project attributes as water saving. H.R. 2454 also puts the government into the business of providing publicly available “energy performance labeling” of buildings, probably including their GHG emissions. The labeling was originally to apply to all buildings, but the final version of the bill applies only to new construction.
The bill also contains seemingly trivial provisions. For example, there are thirteen pages that authorize up to 50 percent federal funding for electric utility tree-planting programs that “utilize targeted, strategic tree-siting guidelines” determined by the “best available science.” In most circumstances, utilities can seek grants only if they have signed contracts with “nonprofit tree-planting organizations.” Each utility participating in the program is to consult with a “local technical advisory committee” that will design an “approved plant list.” The bill takes three pages to specify that the committee must have a board with members representing eight different interested parties, including landscapers, local governments, environmental organizations, and people who represent “affordable housing.”  Though superficially amusing, the tree-planting material is sobering: there is no imaginable case for federal grants to electric utilities that wish to plant trees, and no conceivable way in which the composition of a local board so affects the national interest that it should be specified in federal law.
C. Equipment Redesigns, Information and Assistance
H.R. 2454 brings new design regulations for lighting, appliances, engines, and an array of industrial equipment. There are 22 pages of technical specifications on light bulbs and lamps, some strengthening existing standards and others extending past standards to previously exempt goods. Art lovers will find that after 2012, “art work light fixtures” attached to picture frames cannot exceed 25 watts if they have one socket and 15 watts each if they have two or three. Swimmers will learn that the design of underwater lights for pools may now be under federal jurisdiction. H.R. 2454 also specifically regulates water dispensers and hot food-holding cabinets, and there will be new limits on “normalized standby power” for pumps in hot tubs. Less exotic housewares are not left out. “[S]howerheads, faucets, water closets, and urinals” will each get either “a minimum level of water efficiency or a maximum quantity of water use,” determined in accordance with test procedures prescribed under the bill’s Section 323. The Secretary of Energy is also ordered to produce a new rule for measuring the energy consumption of televisions.
The bill also offers financial incentives to aggressive marketers of energy-efficient appliances. It initiates a “best in class” program of bonuses to retailers who sell models at the top of the “Energy Star” list. The program will have an annual appropriation of $600 milion. If retailers are competitive, the program’s cash will at least in part be passed through as discounts to (mostly well-off) people who buy “best in class,” a wealth transfer from the rest of the public. Retailers will also get “bounties” for trade-ins of inefficient appliances for new efficient ones. Developers of super-efficient appliances that go into production will also get substantial bonuses—for example, $250 for each washer or drier produced and $200 for each refrigerator. Analogous to Energy Star, EPA will also receive funds to begin a “WaterSense” program that rates products based on their water use.
Beyond energy and water use, H.R. 2454 includes provisions on disclosure and labeling of the carbon content of products sold at retail and wholesale. EPA will first study the feasibility of initiating procedures for measuring, reporting, and labeling greenhouse gas content. Next, EPA will have 36 months to establish the program. This order does not appear to be conditional on the results of the feasibility study. Participation will be voluntary, but H.R. 2454 specifies that EPA will “utilize incentives and other [unstated] means to spur the adoption of product carbon disclosure and product carbon labeling.” Also on the information front, the bill’s last-minute addenda include an “Industrial Energy Efficiency Education and Training Initiative,” intended to “educate and motivate commercial building owners and industrial facility managers to utilize” a particular politically-favored product [mechanical insulation]..
In places, H.R. 2454’s language appears to imply that businesses (including regulated utilities) have failed to see obvious sources of profit and must be told to pursue them. For example, it directs the Secretary of Energy to reward companies that devise methods for “innovative recovery of thermal energy.” If the recovery (for example to generate saleable electric power) is worth the cost in private markets, we can safely assume that it will happen. Someone who invents a new production technique can usually devise a patent or licensing scheme that allows him to capture some of the benefits that accrue to society from its more widespread use. The same criticism applies to the bill’s requirement that DOE conduct an assessment of electric motors and the electric-motor market that will “characterize and estimate the opportunities for improvement in . . . energy efficiency.” Upon completing its assessment the Department will formulate a “proactive, national program … delivered in cooperation with [unspecified] interested parties” that will make people aware of “energy and cost saving opportunities” they would apparently have otherwise missed.
To incentivize electric motor users, H.R. 2454 has its own “cash for clunkers” program, in the form of rebates for the purchase of motors that meet certain efficiency standards. Since the electric motor industry does not have a dealer organization, as the auto industry does, the Secretary of Energy will take applications for rebates. As in the clunkers program, an applicant must show that it has “properly disposed” of the old motor and send in its nameplate along with the application. Going a step farther than “cash for clunkers,” the distributor of the motor also gets its own rebate from the $350 million that has been appropriated for the program. Note that even if energy efficiency is a valid goal there is no reason to expect that this program is worthwhile. It does not consider the energy expended in making the new motor, and it fails to account for the lower present value of costs if construction of the motor is deferred.
The last-minute addenda to the bill include a section that sets up a “revolving loan fund” consisting of grants to states (up to a maximum of $500 million per year, per state) that will be used to help small manufacturers adjust to clean-technology markets. An inclusive definition means that the program will probably be available to any manufacturer with a work force under 500. Eligible firms include any whose products “relate to the production, use, transmission, storage, control, or conservation of energy.” H.R. 2454 appropriates $15 billion per year for this program for the next two fiscal years.
D. Community Programs
This entire 92-page Subtitle of H.R. 2454 was inserted as part of the last-minute addendum. It mandates efficiency standards for buildings affected by the subtitle’s various programs. There are provisions giving preference to lenders that originate mortgages to finance improvements in home energy efficiency in “underserved” areas, and, and there is a pilot program for efficiency-related loans to governmentally “assisted housing.”  The bill also includes an “education and outreach” campaign in which the Department of Housing and Urban Development (HUD) will be “encouraged” to work with “appropriate entities” to hold “renewable energy expositions.” HUD will also be allowed to guarantee the “green” portions of mortgages under its purview, but the guarantee cannot exceed 10 percent of the amount loaned. Federal financial regulatory agencies are also asked to encourage institutions under them to open “green banking centers” that will provide information on efficiency, home improvements, and eligibility for federal loans and subsidies.
There are also energy efficiency block grants of $2.5 billion in 2010 and “such sums as may be necessary for each fiscal year thereafter.” Another part of this title institutes a Department of Energy “Grant Program to Increase Sustainable Low-Income Community Development Capacity,” with nonprofit organizations as the only eligible applicants. The grants may be used for training organizations to “improv[e] efficiency,” for providing loans or grants to others “to carry out energy efficiency improvements,” or for “such other purposes as the Secretary [of Energy] determines are in accordance with the purposes of this subsection.”  Lastly, this title of the bill has a section called “Making it Green,” which asks DOE to set incentives for developers to contract with tree-planting organizations in order to “ensure that plants at sites affected by community programs survive for at least three years. There is also a call for “selection and installation of indigenous trees, shrubs, grasses, and other plants based upon applicable design guidelines and standards of the International Society for Arboriculture.”
IV. “Stealth” Inclusions
Important parts of H.R. 2454 may affect the economy only in the relatively distant future. These consequences, however, were well understood by all interested parties prior to the bill’s passage. H.R. 2454 also includes at least two “stealth” provisions that have gone virtually unnoticed but whose effects will probably be substantial. One is a seemingly minor reorganization of the Federal Energy Regulatory Commission, and the other is a new set of institutions that will oversee “adaptation” to climate change. There are surely other such provisions in the bill just waiting to be found.
A. “Consumer Advocacy” at FERC
Electric utilities operate under both state and federal regulation, with the division of responsibilities set by the Federal Power Act of 1935 and later laws amending it. Broadly, state regulators set the rates utilities may charge final users, known as “retail” customers. They also oversee utilities’ investments in generation and transmission necessary to discharge their service obligations. FERC regulates “wholesale” power transactions, which are defined not by their size but by the fact that they do not entail delivery to final customers. It sets allowable rates for utilities’ power and transmission transactions with other utilities and independent generators, even if the parties are in the same state. Natural gas enjoys a roughly similar separation of federal and state regulation. FERC is an anomaly among regulatory agencies—during the administrations of both political parties, it has rather consistently attempted to increase competition in wholesale power and gas markets. Almost alone among agencies, it operates under a legal requirement that no more than three of its five Commissioners (including the Chairman) may be members of the same party.
Section 198 of H.R. 2454 establishes an “Office of Consumer Advocacy” (OCA) at FERC, to be an “advocate of the public interest,̶