Understanding Cap & Trade

Cheryl Hogue has an article entitled, "Unfriendly Skies" in the October 17 issue of Chemical and Engineering News. It is basically about an argument between international air lines and the European Union. The European Union (EU) says that when airlines fly into EU airspace, they generate significant quantities of carbon dioxide through the burning of their jet fuel. The EU says the airlines are subject to "Cap & Trade", which essentially means they must pay a tax. The airlines object because it will cost them money.


This is only a small segment of the many arguments which involve Cap & Trade in the EU. It may be interesting to review Cap & Trade, for what it really is; a government tax.

Since the end of the Cold War and the collapse of the Soviet Union, Western Europe has been continually moving toward a socialist culture. However, the bad economics of socialism is starting to catch up. We see this in the economic problems of Greece, followed by Italy and Spain. Even Germany will eventually not be exempt. I believe the existing governments will all go down to defeat as the EU is unable to meet its obligations to the population. These obligations involve government benefits of unemployment insurance, free housing, free medical care, etc.. In an effort to maintain solvency in the various governmental coffers, and the EU in total, various tax forms have been developed. The latest of these is the "Carbon Tax", which has been previously previously disguised under the term Cap & Trade.

The Obama Administration has seen Cap & Trade operating in Western Europe and has been impressed by its success, in spite of various difficulties that have emerged. The attractive aspect has been a potential source of tremendous government revenue to support a socialistic program of giveaways and maintain governmental power.

In order to sell Cap & Trade to its populations, the EU and the United States have developed a sales technique. The EU has already established the program, while the US is still toying with it. The sales technique is routine for the devious selling of all goods and services. Scare the customer into buying to avoid perilous consequences and convince him that it doesn't cost anything. Ancillary to that is the use of complexity, new terminology and scientific innuendo, so that the customer normally cannot understand what is occurring, without significant effort on his part, and usually which he is unwilling to contribute. Cap & Trade very adequately covers all these points, but it behooves some of us to try to explain it, so that the public has an opportunity to adequately understand what it is buying.

We have already covered the government motivation for instituting Cap & Trade. We now concentrate on the specific selling techniques. First, the fear factor. If government can relate carbon dioxide emissions from burning fossil fuels to climate change, with disastrous results of such climate change, the fear factor has been established. Projections for climate change can easily result in dire consequences without any proof that those consequences will really occur. A few of the proposed dire consequences of climate change are melting of the polar ice sheets with rising sea levels to flood civilized areas, eliminating ice at the North Pole which will lead to the destruction of polar bears, the development of more violent storms and tsunamis as oceans are warmed, etc.. The Obama administration has already spent many millions of dollars in research to establish such connection between carbon dioxide atmospheric concentration and climate change, but has been unsuccessful.

With respect to Cap & Trade cost to the public, yhere is general government admission that there will be an increased cost, but that will be minimal considering the advantages of eliminating the dire consequences of climate change previously mentioned.

The matter of complexity is beautiful in its development to confuse the public. However with a little attention to logic and patience. it can be understood and considered in its proper perspective. Let's use the present EU system, which is functioning, and which is probably a model for anything that the US might adopt.

The EU has surveyed the various sources of CO2 emission, which are generally electricity generating plants using coal, oil, and natural gas. Note that the objective here is to identify entities which can be easily taxed. Note also that airlines have now been added to this list. Conversely, while private automobiles generate significant carbon dioxide, it would be more complex to tax each automobile user. Apparently the thought has not yet come to EU officials that they could apply Cap & Trade to automobile manufacturers.

For the moment, consider only electricity generating plants. The EU survey has already established "normal" CO2 emissions from each of those plants. Simple addition then gives total CO2 emissions in a year. Each of the CO2 emission producers is given an EU permit to emit its "normal" amount of CO2. The next year, the EU says all emitters must reduce their CO2 emissions by 10%. Power Plant A has several choices. It can reduce its supply of electricity to its customers, install equipment to capture carbon dioxide from its emission stream, or purchase permits from other power plants who may not be using their allocation permits for one reason or another. Notice that any of these options increase costs to the producer, which passes the costs on to the consumers as price increases. At this point, the EU has not collected a nickel in taxes.

The next year, the EU says everybody must cut their CO2 emissions by 30%. The same options as previous exist for each power plant. Power Plant A takes a responsible attitude that it cannot reduce its electricity supply to its customers by 30%. Similarly, preliminary calculations on installing CO2 sequestration equipment shows it would be more expensive than the possible purchase of allowances from other permit holders. However, when it goes to the market to purchase CO2 allowances from other power plants, it finds that none are available. The EU recognizes, and has already predicted that this would occur, and allows another option, which is the purchase of an additional allocation permit issued by the EU. Since there are now many power plants that need additional CO2 allocation permits, the EU makes new permits available by auction. Let's guess that the auction price is $15 per ton of CO2. Power Plant A needs 10,000 tons of additional permit allocation to keep supplying its customers. Therefore, it pays the EU $150,000 for the additional permit. Power Plant A considers this an additional cost of doing business and passes along that cost as a price increase to each of its customers. It might be a few hundred dollars to each customer. Notice that the EU receives $150,000 and that $150,000 is paid by the electricity consumers. In effect, Cap & Trade is a use tax.

It could get worse. In the next year, the EU could say all emissions are now being cut by 50%. We go back to the auction block for new allocation permits. The auction price is now established at $50 per ton. Power Plant A needs another 10,000-ton allocation permit. This time it costs $500,000, which goes to the EU as a use tax paid by the electricity customers. However, there are the other two options to avoid this tax. That is to go out of business, or install CO2 sequestration equipment. It is only the latter which presents some semblance of control on the tax gouging by the EU. Remember also that this is the model for any similar operation in the United States. It is fraudulent to the extent that there is no clear indication that CO2 emissions must be controlled.

The Department of Energy Continues to Pour Taxpayer Money Down a Rar Hole

In the October 17th issue of Chemical & Engineering News, Jeff Johnson has a nice informative article on the Department of Energy's expenditures for loan guarantees and grants to promote "Clean" energy.


At the end of September, the Department of Energy awarded $4.7 billion loan support for four photovoltaic solar projects in California, $1.5 billion to install ground-level solar panels, $1.4 billion to install rooftop solar panels, $1.2 billion for a Solar Ranch, and $646 million for a thin-film solar project. This is all funded by the American Recovery & Reinvestment of 2009, which I previously strongly recommend should be repealed by Congress. In separate funding, the Department of Energy added another $1.12 billion in loan guarantees. Collectively, the Department of Energy is committing $26 billion to clean energy loans.

in addition, the Department has expenditures of $156 billion in Advanced Research Projects Agency-Energy (ARPA-E) grants to inventors and "technology entrepreneurs". The ARPA-E grant projects involve biofuel production, alternatives to rare earth minerals, storage/transport/use of thermal energy, automating the electricity grid, and grid connection of photovoltaic (solar) generated electricity. Those funds are almost equally distributed among universities, small businesses, and large business.

I have previously said and will say again that these programs are a complete waste of taxpayer money. There is absolutely no need to try to replace the traditional sources of energy, such as natural gas and petroleum with solar and wind. We have in the US large reserves of oil, natural gas, and coal. These energy sources can be tapped at costs significantly below anything that could involve solar energy or wind.

I need to hear nothing about "clean" energy. Carbon dioxide from burning fossil fuels is well-handled by the natural environment. All efforts by the Administration to connect CO2 atmospheric concentration with climate change have failed, in spite of the millions of dollars the various government agencies have poured into research to prove otherwise.

I have also recommended previously that the Department of Energy should be eliminated. It was originally set up by Congress and can be removed by Congress. From practical considerations, the Senate will obviously vote for its continued existence and the President will support it. However, the House must go on record as having taken the initiative, and after the forthcoming elections of 2012, we will be able to see some positive action through a new Senate and President.

Eliminate Subsidies and Loan Guarantees for Energy Production & Use

Open e-mail to Rep. Neugebauer:

SUMMARY

Government should not be involved in subsidies for solar module production, nor in installation for their use.

DETAIL

The October 10 issue of Chemical and Engineering News has a nice article by Melody Bomgardner on the solar industry. She clearly points out that there two aspects to this industry, which are economically different. The first is production of solar modules, and the second is their use or installation.

We are already familiar with the bankruptcies of Solyndra and Evergreen. In addition, two German firms recently announced that they would close US factories. SpectraWatt, which is a spinoff of Intel filed for bankruptcy in August. All of these companies were unable to compete with low-priced polycrystalline silicon from China.

There are three commercial materials which have photovoltaic properties. They are polycrystalline silicon, copper indium gallium disulfide, and cadmium telluride. Calisolar is one of the few US silicon producers still trying to compete with the Chinese. First Solar is competing with its low-cost cadmium telluride. All told, strong production competition in the global solar module market pushes down prices for solar modules. This has the advantage of improving the market for installation.

However, Germany has recently been shrinking its solar subsidies and Italy has instituted a cap on payments for solar installations. Western Europe is generally deficient in oil and has attempted to increase energy availability through solar installations. The US government has been trying to mimic these European efforts, but is behind the curve. Western Europe is starting to recognize the futility of the operation, as it cuts its subsidies. The US Government is still gung ho.

Considering the oil factor, the market for solar installations in the US is significantly reduced to specialty cases, which is as it should be, since without subsidies, it cannot compete with oil us as a primary energy source. Therefore, it is ridiculous for the US government to be propping up a less efficient energy operations through taxpayer subsidies in these times of budget deficits and huge national debt.

I strongly urge Congress to eliminate all subsidies for production of solar modules and their installation, as well as stopping the administration from granting loan guarantees to solar energy companies, which must fail in a competitive in a competitive energy market.

Repeal Two Laws Requiring Use of Ethanol in Automobiles

Open e-mail to Rep. Neugebauer:

Randy,

Summary

Repeal the Energy Policy Act of 2005 and the Energy Independence & Security Act of 2007. They were ill conceived originally. They involve unnecessary government subsidies, which we cannot afford, and contain restrictions on private business development.

Detail

Congress passed the Energy Policy Act (EPAct) in 2005. It included a basket of energy issues. For the present, we wish to consider only ethanol as a replacement for gasoline in motor vehicles and its unnecessary subsidization.

EpAct defined two types of ethanol. Ethanol derived from cellulose is known as "Cellulosic Biomass Ethanol".

Ethanol derived from cellulose and ethanol derived from corn are collectively known as "Renewable Fuels". Notice that "Renewable Fuels" includes both cellulosic and corn derived ethanol, while "Cellulosic Biomass Ethanol" is a single entity. The amount of ethanol, from both sources, mandated for use in 2022 was based on a formula. No quantity was considered for the separate cellulosic ethanol.

Congress passed the Energy Independence and Security Act (EISA) in 2007. The stated purpose of the act was to move the US toward greater energy independence and security, to increase the production of clean renewable fuels, to protect consumers, to increase the efficiency of products, buildings, and vehicles, to promote research on and deploy greenhouse gas capture and storage options, and to improve the energy performance of the Federal Government, and for other purposes.

EISA requires that the total amount of Renewable Fuels added to gasoline must increase to 36 billion gallons by 2022. Of that total, 21 billion gallons must be cellulosic ethanol. Another source specifies 16 billion gallons of cellulosic ethanol, but this is not a significant difference is context. A side issue is that the EPA was given the responsibility to implement the laws, and it has translated the requirements as a Renewable Fuel Standard. However, the numbers are the same.

The National Research Council has recently investigated the progress of cellulosic ethanol production and has concluded that there is no way the requirement of EISA can be met by normal development procedures.

This leaves two options. Change the law or throw billions of dollars of government money into development, which would hopefully increase production of cellulosic ethanol to the specified level. It is certain that private capital would not consider this a viable investment.

The key point is that we don't need ethanol as an automotive fuel. Since the two laws were passed, we have significantly increased our petroleum reserves and private industry is available to tap it. If the Dept of Energy will allow drilling permits. Gasoline from petroleum is always cheaper than ethanol from any source, and we need to scrap all considerations of ethanol use as a major constituent of motor fuel.

The answer to the cellulosic ethanol production dilemma is obvious. Repeal EPAct and EISA and simultaneously remove restrictions on crude oil production, so that private industry can get on with its job of providing the public with cheap automotive fuel.

Shut Down the US Department of Energy

The October 3 issue of Chemical & Engineering News has an article by Jeff Johnson entitled, "DOE Plans Shift in R&D Direction".

The US Department of Energy has an annual budget of $26 billion. My comment is that the Department of Energy has accomplished nothing with its previous annual budgets and the Department of Energy should be disbanded.

However, looking at the details of Jeff Johnson's article, the present annual budget for research at the Department of Energy is $3 billion. About 50% is for development of clean electricity sources, 19% for improving building and industrial efficiency, 5% for improving the electric grid, and 26% for supporting transportation. Note that the $3 billion does nothing to actually improve these items. The expenditure is only for studies.

Obama has now appointed a select committee of "scientists", which recommends that the research budget should be increased from the present $3 billion, which is a little over 10% of the total DOE budget to 20%. Obama's "scientific" committee recommends more attention (money) to improve vehicle efficiency, electrification of automobiles, deployment of alternative fuels, enhanced building and industrial efficiency, modernization of the electrical grid, and increased deployment of clean energy sources.

This committee is obviously following the Obama party line of ignoring our great potential for continued and increased use of gas and oil, while it fritters away our tax assets on "pie in the sky studies" followed by real losses, such as Solyndra and a larger one yet to come.

My recommendation is to eliminate the Department of Energy, which will eliminate not only its $3-6 billion "studies" budget but also the larger $30 billion annual expenditure of the whole agency. I have written separately on how this can be done.

House Committee Hearings on Continuance of the Department of Energy

Open E-mail to Rep. Neugebauer:

Randy,

I would like you to set up House Committee hearings concerning continuance of the Department of Energy.

Start with the fact that the present annual budget of the DOE is $27 billion. $11 billion each go to Nuclear Security and Energy & Environment. The other $5 billion goes mostly to "Science".

Congress established the DOE in 1977. It was primarily based on the oil crisis of 1973 from the Arab oil embargo. The intent of the DOE was to establish an energy plan, which would make the US less vulnerable to variable oil supply from Arab countries.

The questions that the Committee should now be asking Sec. Chu are:

1. Is our economy now less vulnerable to variable supply from the Arab countries than it was 34 years ago?

2. If it is, what part did the DOE play in the change? Did the improved drilling technology of private companies have a more significant effect? Did and does the DOE help those private companies in any way? If so, how?

3. If our economy is still significantly vulnerable to variable oil supply from Arab countries, what is the DOE now doing about it?

4. The average DOE budget was $20 billion per year over the past 34 years, which totals $680 billion. What did the American public get for its $680 billion?

I'm sure there are other questions that the Committee will develop. Chu will try to defend his position by the use of gobbledygook, meaning pie-in-the-sky predictions of the great things yet to come.

The fact remains that we should be closing down the Department of Energy as a basic money waster. It has accomplished nothing significant in the past, and there is no reason to believe it will be different in the future. I believe we are now less dependent on Arab oil than we were in 1973, but that is the result of positive action on the part of private drilling companies, in spite of DOE regulations to minimize that production particularly through permit control. I will only mention the Splendora and other solar energy fiascos.

We obviously need to maintain Nuclear Security. That responsibility should be transferred to the Department of Defense, where it belonged in the first place. The DOD can the have the responsibility to see that the program is being operated efficiently.

Will we eventually run out of gas and oil? Obviously we will, but exploration even with DOE interferences has continued to increase our reserves. Private industry has all the incentives it needs to supply energy, and we can depend on it to utilize all technology necessary for continued supply in one form or another.

Fire DOE Sec. Chu

EIN News says, "Chu Takes Responsibility for a Loan Deal That Put More Taxpayer Money at Risk in Solyndra Energy Secretary Steven Chu acknowledged making the final decision to allow a struggling solar company to continue receiving taxpayer money after it had technically defaulted on a $535 million federal loan guaranteed by his agency. (washingtonpost.com)".

I'm amazed that anybody in the Obama administration will take responsibility for anything.

Now that Chu has taken this step, let's build on it. This latest half billion dollar mistake is on top of all of the other errors he has committed as head of the Department of Energy. Fire him!

We plan to shut down the whole department anyhow. It has contributed materially to our 4 1/2 trillion dollar debt and every day continues to make it worse.