Cap and Tax is NOT Energy Policy

Promoted from the diaries by Neil Stevens

One of the lamest arguments in favor of the passage of Cap and Tax was that it was good “energy policy”.  Rep. John Larson (D-CT 1), among others, went off at length in this direction.  You might suspect from the title that I may take exception with this assessment.

Before we go further, a couple of definitions:

Policy: A governmental plan (contrast with “program”), generally formulated within the executive branch which has the purpose of solving a particular problem facing the nation.

Elasticity: The percent change of the quantity of a good/service supplied or demanded for a unit percent change of price.  This definition can be confirmed in any undergrad microeconomics text.

So we see “energy policy” thrown out there as an argument.  What problem facing the nation does are we trying to solve?  In this case, it is the inelastic demand for fossil fuels (primarily oil) combined with the inelastic supply of the same fossil fuels.  The supply is inelastic in that the nation imports a sizable percent of its oil and thus does not have direct control over supply quantity.

Given the definition of the problem, it seems that there is a two part solution:

1. Increase the elasticity of supply by expanding the domestic supply of oil (or, as the 45th President said in Minneapolis last September, “drill baby drill”).  There are areas under our control where reserved can be tapped – the Continental Shelf, ANWR, offshore of my home state of Florida, and if we can get the technology developed (program evolving from policy…), oil shale such as that found in the Bakken Formation.  When price goes up, we have the power to increase supply – supply price elasticity.

2. Increase the elasticity of demand by promoting alternatives – ALL alternatives.  Power generation can be accomplished with nuclear, domestic natural gas, clean coal (even if Babbling Joe Biden says we’ll never switch to coal…), and the green technologies when further developed (there’s policy begetting programs again) like solar, wind, and geothermal.  Transportation can add hybrids (as a side note – let’s add some “heft” to these cars – I certainly wouldn’t put my butt in a Smartcar on PGA Blvd. or I-95), and for that matter use CNG as a fuel source.  When the price of oil goes up, we start using other sources to accomplish the same goals – substitution = demand price elasticity.

These two points have been summed up as an “All of the Above” energy policy.

Then we have this Cap and Tax, umm, thing.  It taxes ANYTHING that uses combustion to generate power.  Does it matter if my Mustang’s gasoline came from oil drilled in Texas or Saudi Arabia?  Nope – tax it all.  Does it matter if FPL uses natural gas from Louisiana or Algeria?  Nope – tax it all.  What about West Virginia coal?  Nope – tax it all.

All Cap and Tax does is produce a step change in the cost to anyone who uses some fuel to generate power via combustion.  One more definition:

Cost Push Inflation: The upward/leftward shift of the aggregate supply curve caused by an increase in the cost of the production of goods/services.  For a constant aggregate demand curve the resulting market clearing point is at a lower output (GDP) and higher price (inflation).

The relevance of that definition to Cap and Tax should be self-evident.  By the way, the cost push inflation associated with the oil shocks was one source of the stagflation of the 1970s.

One more reason that we’re headed back to the 1970s, and why Barack Obama will be remembered as the Jimmy Carter of the 21st Century.