Cap and Bribe
October 21, 2009, 4:00 a.m.
Obama offers handouts in return for Republican votes.
By Henry Sokolski
Although bipartisan support for legislation generally constitutes a political Good Housekeeping Seal of Approval, sometimes it's little more than the residue of cynical logrolling at the public's expense. A case in point is the emerging Senate "consensus" in favor of cap-and-trade legislation, which will be the subject of Senate hearings October 26. Rather than sell the legislation on its reputed environmental and economic merits, the White House and its allies are now planning to use federal largesse to buy the handful of Republican votes needed to get this legislative monster over the hump in a floor vote, possibly before the Thanksgiving recess.
Now, most Republicans support the free market and question federal interference in the private sector. This explains their skepticism about Obama's push for federal health-care reform. But in the energy sector, the White House is banking on a few Republican senators - the press has indentified Lindsey Graham (S.C.), John McCain (Ariz.), and Lisa Murkowski (Alaska) - giving up their economic principles in exchange for more federal subsidies for their preferred form of energy: super-expensive, financially risky nuclear power.
Normally, this wouldn't work. Certainly, before the Energy Department and the White House began offering billions of dollars in federal loan guarantees for the construction of new nuclear-power reactors, most Republicans understood that federal largesse for commercial energy projects was anything but free.
Consider loan guarantees. Bringing just one nuclear plant on line can cost as much as $10 billion, and supporters of nuclear power want to build scores of these plants in the next two decades. That's a lot to loan. In fact, in 2003, the Congressional Budget Office determined that "well over half" of the electric utilities pleading for such handouts would be likely to default, leaving taxpayers holding the bag for billions upon billions of dollars. There's plenty of reason to believe that this projection is all too relevant today.
In any case, this is an old saw. The last time the federal government pushed commercial-energy loan guarantees, it was for a single synfuels project, which, after years of mismanagement and technical difficulties, finally tanked, leaving the public with a bill for $13 billion. More recently, Washington's darling has been corn ethanol, supported with tax credits and direct subsidies. This has produced an even larger financial black hole. The most recent estimates have the U.S. losing roughly $10 billion on this bet for the year of 2008 alone. In fact, corn ethanol is now so uncompetitive, the only way to keep its production viable is by the federal government's dictating that gasoline producers and consumers buy and use it.
Unfortunately, none of this history has deterred enthusiasts for wind, solar power, "clean" coal, or nuclear power from demanding similar federal handouts. It ought, however, to deter Congress, which has already bailed out failed banks and automakers with well over $1 trillion in Treasury funds. After such an orgy of spending, the last thing we need is for Congress to spend more taxpayer money to support yet more multi-billion-dollar commercial ventures, many of which are sure to fail and will have to be bailed out in turn.
More important, fiscal conservatives, energy experts, the best of the environmental community, and pro-nuclear nonprofits understand that when the federal government tries to pick commercial-energy winners and losers, it not only gets things wrong, but also jacks up the cost of energy for everyone and makes it harder for the real winners and losers to emerge. Ultimately, it's not just wasteful, it's a super-regressive tax on energy innovation.
That such incentives would be used as a sweetener for cap-and-trade legislation, which itself is a massive tax on the U.S. economy, at the very time that the U.S. is suffering its worst recession since World War II, gives political cynicism a bad name. Most fiscal conservatives, no matter what they think about global warming, know that spending and taxing to reduce carbon emissions is something that can and should wait until we have gotten our economy rolling again. The best also have demonstrated that using a cap-and-trade market is far less efficient and sensible than simply imposing a tax on the carbon content of different fuels.
How, then, could Senate Republicans be seduced into supporting all of this? Simple: self-deception. Expanding nuclear power, they argue, is the answer that can't wait; it is too important to be left to market forces to accomplish. This, however, is an assertion of faith, not reason. Surely the same line of non-argument is just as valid for other risky forms of energy - e.g., solar and wind. Rather than meet this point head-on and make the case for favoring nuclear power, Senate nuclear proponents unintentionally concede the point by suing for federal subsidy "parity" with renewables. Nuclear power, they plead, should merely get the same federal handouts wind and solar power receive: Three wrongs apparently make a right.
Next, they contend that what we need is actually free. Specifically, they argue that the federal loan guarantees that are critical for nuclear power's future are off-budget and will all be paid back. Again, this is seductive but it can't be right. If all the loans were sure to be paid back with interest, why would the U.S. government, vice private investors, need to offer them to utilities in the first place? Because, as has already been noted, many of the loans will never be paid back.
Indeed, echoing the earlier findings of the Congressional Budget Office, Moody's, which rates private firms' creditworthiness, spotlighted this point. In a special report, Moody's warned the nation's utilities in June that their credit ratings would suffer if they invested in new nuclear construction projects. Given the poor track record of nuclear-plant builders in meeting construction schedules and budgets, and the unpredictability of the federally backed financial schemes, Moody's notified U.S. utilities that it would reduce their credit ratings if they went nuclear even if the utilities secured federal loan guarantees. Recent news that the U.S. Nuclear Regulatory Commission has rejected a revised version of the most popular new reactor design, Westinghouse's AP1000, suggests just how risky this business can be.
Against such facts, though, nuclear-power supporters tend to dig in, insisting that only an immediate, massive expansion of nuclear-power capacity can provide America with the additional power it needs without the carbon emissions that environmentalists fear. But this too is nonsense. Dollar for dollar, the quickest near-term way to add electrical generating power while reducing carbon emissions is through the expanded use of natural gas. This should hardly seem shocking: Many Republicans pleaded for more natural-gas drilling just last year.
Now the U.S. is drowning in the stuff. In fact, following skyrocketing energy prices in early 2008, U.S. natural-gas prospectors discovered so many new reserves that U.S. wellhead prices plummeted from $11 per thousand cubic feet to roughly $3 today. This supply, moreover, is so great that natural gas is projected to stay plentiful for decades. Furthermore, burning natural gas produces roughly half the carbon emissions that burning coal does, and gas can be transported and used directly to produce residential and commercial heat, whereas coal and nuclear power must be converted to electricity in processes where up to two-thirds of their energy content is lost. More important, natural gas can be used to produce electricity in plants that cost one-third to one-tenth as much to build as either nuclear or coal-fired plants, and that can be brought on line sooner. Finally, encouraging broader use of this American resource doesn't require expanding supplies so much as it requires encouraging more private-sector competition by putting an end to monopoly-friendly state energy regulations and practices. In no case should it require squandering billions of dollars on more federal handouts.
Yet another important market-driven step that could make cheaper, cleaner energy more available is to connect the nation's existing regional electrical grids and make it easier to move electricity within and outside of these established markets. This would allow all types of existing electrical generators - nuclear and non-nuclear - many of which are not currently operating at full capacity, to produce much more electricity for many more customers. As noted in the Wall Street Journal, this idea makes so much economic sense that private firms are already investing to build expensive, high-technology interconnectors without waiting for federal handouts. In fact, as a recent Massachusetts Institute of Technology study explained, what is most important for encouraging private investment in such schemes is not more federal handouts, but getting the federal government to adjust current regulations at both the national and the state levels in order to make the movement and sale of electricity easier.
There's more, but even from this short account, you would think Congress would get the message. First, slow down; stop trying to solve the next half-century's energy and environmental challenges in one heroic bill. Second, stop trying to guess which energy idea is best; stop giving federal handouts to economically risky commercialization projects, and instead support basic research and development.
Of course, Republican senators should not just be getting this message; they should be sending it. Certainly, if they did, Congress would be more likely to get right the role of the federal government in promoting cleaner energy, and to do so with a consensus based not on Republican sellouts but on buy-ins to something far more market-based.
- Henry Sokolski is executive director of the Nonproliferation Policy Education Center and serves on the congressionally mandated Commission on the Prevention of WMD Proliferation and Terrorism.
Obama offers handouts in return for Republican votes.
By Henry Sokolski
Although bipartisan support for legislation generally constitutes a political Good Housekeeping Seal of Approval, sometimes it's little more than the residue of cynical logrolling at the public's expense. A case in point is the emerging Senate "consensus" in favor of cap-and-trade legislation, which will be the subject of Senate hearings October 26. Rather than sell the legislation on its reputed environmental and economic merits, the White House and its allies are now planning to use federal largesse to buy the handful of Republican votes needed to get this legislative monster over the hump in a floor vote, possibly before the Thanksgiving recess.
Now, most Republicans support the free market and question federal interference in the private sector. This explains their skepticism about Obama's push for federal health-care reform. But in the energy sector, the White House is banking on a few Republican senators - the press has indentified Lindsey Graham (S.C.), John McCain (Ariz.), and Lisa Murkowski (Alaska) - giving up their economic principles in exchange for more federal subsidies for their preferred form of energy: super-expensive, financially risky nuclear power.
Normally, this wouldn't work. Certainly, before the Energy Department and the White House began offering billions of dollars in federal loan guarantees for the construction of new nuclear-power reactors, most Republicans understood that federal largesse for commercial energy projects was anything but free.
Consider loan guarantees. Bringing just one nuclear plant on line can cost as much as $10 billion, and supporters of nuclear power want to build scores of these plants in the next two decades. That's a lot to loan. In fact, in 2003, the Congressional Budget Office determined that "well over half" of the electric utilities pleading for such handouts would be likely to default, leaving taxpayers holding the bag for billions upon billions of dollars. There's plenty of reason to believe that this projection is all too relevant today.
In any case, this is an old saw. The last time the federal government pushed commercial-energy loan guarantees, it was for a single synfuels project, which, after years of mismanagement and technical difficulties, finally tanked, leaving the public with a bill for $13 billion. More recently, Washington's darling has been corn ethanol, supported with tax credits and direct subsidies. This has produced an even larger financial black hole. The most recent estimates have the U.S. losing roughly $10 billion on this bet for the year of 2008 alone. In fact, corn ethanol is now so uncompetitive, the only way to keep its production viable is by the federal government's dictating that gasoline producers and consumers buy and use it.
Unfortunately, none of this history has deterred enthusiasts for wind, solar power, "clean" coal, or nuclear power from demanding similar federal handouts. It ought, however, to deter Congress, which has already bailed out failed banks and automakers with well over $1 trillion in Treasury funds. After such an orgy of spending, the last thing we need is for Congress to spend more taxpayer money to support yet more multi-billion-dollar commercial ventures, many of which are sure to fail and will have to be bailed out in turn.
More important, fiscal conservatives, energy experts, the best of the environmental community, and pro-nuclear nonprofits understand that when the federal government tries to pick commercial-energy winners and losers, it not only gets things wrong, but also jacks up the cost of energy for everyone and makes it harder for the real winners and losers to emerge. Ultimately, it's not just wasteful, it's a super-regressive tax on energy innovation.
That such incentives would be used as a sweetener for cap-and-trade legislation, which itself is a massive tax on the U.S. economy, at the very time that the U.S. is suffering its worst recession since World War II, gives political cynicism a bad name. Most fiscal conservatives, no matter what they think about global warming, know that spending and taxing to reduce carbon emissions is something that can and should wait until we have gotten our economy rolling again. The best also have demonstrated that using a cap-and-trade market is far less efficient and sensible than simply imposing a tax on the carbon content of different fuels.
How, then, could Senate Republicans be seduced into supporting all of this? Simple: self-deception. Expanding nuclear power, they argue, is the answer that can't wait; it is too important to be left to market forces to accomplish. This, however, is an assertion of faith, not reason. Surely the same line of non-argument is just as valid for other risky forms of energy - e.g., solar and wind. Rather than meet this point head-on and make the case for favoring nuclear power, Senate nuclear proponents unintentionally concede the point by suing for federal subsidy "parity" with renewables. Nuclear power, they plead, should merely get the same federal handouts wind and solar power receive: Three wrongs apparently make a right.
Next, they contend that what we need is actually free. Specifically, they argue that the federal loan guarantees that are critical for nuclear power's future are off-budget and will all be paid back. Again, this is seductive but it can't be right. If all the loans were sure to be paid back with interest, why would the U.S. government, vice private investors, need to offer them to utilities in the first place? Because, as has already been noted, many of the loans will never be paid back.
Indeed, echoing the earlier findings of the Congressional Budget Office, Moody's, which rates private firms' creditworthiness, spotlighted this point. In a special report, Moody's warned the nation's utilities in June that their credit ratings would suffer if they invested in new nuclear construction projects. Given the poor track record of nuclear-plant builders in meeting construction schedules and budgets, and the unpredictability of the federally backed financial schemes, Moody's notified U.S. utilities that it would reduce their credit ratings if they went nuclear even if the utilities secured federal loan guarantees. Recent news that the U.S. Nuclear Regulatory Commission has rejected a revised version of the most popular new reactor design, Westinghouse's AP1000, suggests just how risky this business can be.
Against such facts, though, nuclear-power supporters tend to dig in, insisting that only an immediate, massive expansion of nuclear-power capacity can provide America with the additional power it needs without the carbon emissions that environmentalists fear. But this too is nonsense. Dollar for dollar, the quickest near-term way to add electrical generating power while reducing carbon emissions is through the expanded use of natural gas. This should hardly seem shocking: Many Republicans pleaded for more natural-gas drilling just last year.
Now the U.S. is drowning in the stuff. In fact, following skyrocketing energy prices in early 2008, U.S. natural-gas prospectors discovered so many new reserves that U.S. wellhead prices plummeted from $11 per thousand cubic feet to roughly $3 today. This supply, moreover, is so great that natural gas is projected to stay plentiful for decades. Furthermore, burning natural gas produces roughly half the carbon emissions that burning coal does, and gas can be transported and used directly to produce residential and commercial heat, whereas coal and nuclear power must be converted to electricity in processes where up to two-thirds of their energy content is lost. More important, natural gas can be used to produce electricity in plants that cost one-third to one-tenth as much to build as either nuclear or coal-fired plants, and that can be brought on line sooner. Finally, encouraging broader use of this American resource doesn't require expanding supplies so much as it requires encouraging more private-sector competition by putting an end to monopoly-friendly state energy regulations and practices. In no case should it require squandering billions of dollars on more federal handouts.
Yet another important market-driven step that could make cheaper, cleaner energy more available is to connect the nation's existing regional electrical grids and make it easier to move electricity within and outside of these established markets. This would allow all types of existing electrical generators - nuclear and non-nuclear - many of which are not currently operating at full capacity, to produce much more electricity for many more customers. As noted in the Wall Street Journal, this idea makes so much economic sense that private firms are already investing to build expensive, high-technology interconnectors without waiting for federal handouts. In fact, as a recent Massachusetts Institute of Technology study explained, what is most important for encouraging private investment in such schemes is not more federal handouts, but getting the federal government to adjust current regulations at both the national and the state levels in order to make the movement and sale of electricity easier.
There's more, but even from this short account, you would think Congress would get the message. First, slow down; stop trying to solve the next half-century's energy and environmental challenges in one heroic bill. Second, stop trying to guess which energy idea is best; stop giving federal handouts to economically risky commercialization projects, and instead support basic research and development.
Of course, Republican senators should not just be getting this message; they should be sending it. Certainly, if they did, Congress would be more likely to get right the role of the federal government in promoting cleaner energy, and to do so with a consensus based not on Republican sellouts but on buy-ins to something far more market-based.
- Henry Sokolski is executive director of the Nonproliferation Policy Education Center and serves on the congressionally mandated Commission on the Prevention of WMD Proliferation and Terrorism.