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What Treasury's Climate Memo Does [And Does Not] Reveal:

A confidential Treasury Department memo from March 2009, obtained by the Competitive Enterprise Institute through a FOIA request, purports to provide evidence that the cap-and-trade proponents have grossly underestimated the cost of such a program. But does it really?

Here is the relevant portion of the document, as redacted by the Treasury Department:

While such a program can yield economic benefits that justify its costs, it will raise energy prices and impose annual costs on the order of XXXXXXXXXXXXXX dollars. At the same time, given the Administration's proposal to auction all emission allowances, a cap-and-trade program could generate annual receipts on the order of $100 to $200 billion annually. Finally, by encouraging investments in clean energy sources, climate policy could increase the fiscal cost of existing energy tax provisions, such as renewable electricity and biofuel tax credits. XXXXXXXXXXXXXXXXXXXXX.
[The Xed out portions are redacted in the memo.]

The revenue estimate above -- $100 to $200 billion -- is explicitly based upon the auction of all allowances, so it is not a fair representation of the cost of the Waxman-Markey cap-and-trade bill that passed the House. These revenues are costs to energy producers -- costs that would be passed along to consumers -- but the Waxman-Markey bill provides for giving away most of the carbon allowances, so it would generate less revenue, and thus would impose lower direct costs on emitting firms. Waxman-Markey is far more than just a cap-and-trade bill, so other provisions of the bill would cost consumers in other ways, but these are not addressed in the Treasury memo. So, contrary to some claims, the memo does not reveal a secret Obama Administration cost estimate for existing cap-and-trade legislation. [More from the Washington Post here.]

The Treasury memo may be significant in another way, however, insofar as it represents the Administration's view of its obligations under the Freedom of Information Act. Portions of the memo above providing greater detail about the Treasury Department's assessment of the potential economic impact of a cap-and-trade program were withheld. And for what reason? Notations on the memo indicate these estimates were redacted under FOIA exemption (b)(5). This exemption allows the federal government to withhold "inter-agency or intra-agency memorandums of letters which would not be available by law to a party ...in litigation with the agency." As explained by the Justice Department, this exemption applies to "those documents, and only those documents that are normally privileged in the civil discovery context." Yet the Treasury Department did not maintain that the memorandum in its entirety was exempt, just a few clauses and sentences providing more complete cost estimates. I will admit I am not a FOIA expert, but this does not appear to be a faithful application of the relevant exemption, let alone the Administration's stated FOIA policy. It also cannot help but feed suspicions that the Administration has not been candid about the potential costs of proposed climate policies. As Roger Pielke, Jr. comments: "Memo to politicians: if you have nothing to hide, then don't hide anything."

Mark Buehner:

So, contrary to some claims, the memo does not reveal a secret Obama Administration cost estimate for existing cap-and-trade legislation

So wait- the explanation is that Congress already paid off Big Energy, exempting them from the only part of this bill that could actually do what the bill is intended to do? So don't worry about it? Weeeeeeeird.

Moreover- just because the energy companies are going to get temporary free credits doesnt mean they won't raise rates now. Pricing looks forward, especially if they can convince consumers to do the same.
9.17.2009 6:02pm
Bill Dyer (mail) (www):
The redactions were, of course, based on the most important FOIA exemption: "The government doesn't have to show you the stuff you most want to see."

I can't seem to locate that in the various subsections and sub-subsections of the Act, though, for some reason. Perhaps it was redacted from the U.S. Code on a self-executing basis.
9.17.2009 6:22pm
Houston Lawyer:
Most. Transparent. Administration. Evah.
9.17.2009 6:36pm
Gabriel Malor (mail):
Jonathan, I thought people were taking the cost estimate from page 3 of the PDF where it says "Economic costs will likely be on the order of 1% of GDP, making them equal in scale to all existing environmental regulation."
9.17.2009 6:51pm
tarpon (mail):
Cap and trade, the next sub-prime scam. 'trade' get it?

And so what does the 'climate bill' do for the climate?
9.17.2009 7:19pm
John Thacker (mail):
but the Waxman-Markey bill provides for giving away most of the carbon allowances, so it would generate less revenue, and thus would impose lower direct costs on emitting firms. Waxman-Markey is far more than just a cap-and-trade bill, so other provisions of the bill would cost consumers in other ways, but these are not addressed in the Treasury memo. So, contrary to some claims, the memo does not reveal a secret Obama Administration cost estimate for existing cap-and-trade legislation.


No, bad economics. Understandable confusion by a non-economist, but bad economics. A cap-and-trade with permits given away still raises consumer prices by exactly the same amount as if the permits were auctioned, just the companies get free corporate welfare. The only other difference is that some companies might not shut down. This is basic economics, but very unintuitive to most people.

See Greg Mankiw here and here.

Economists recognize that a cap-and-trade system [with the permits given away instead of auctioned] is equivalent to a tax on carbon emissions with the tax revenue rebated to existing carbon emitters, such as energy companies. That is,

Cap-and-trade = Carbon tax + Corporate welfare.

9.17.2009 9:52pm
John Thacker (mail):
Jonathan-- you can ask nearly any economist to explain it. The point of cap and trade is like the tax system, to raise the marginal cost of emissions, and thus cost to the consumer. If the marginal cost for the consumer doesn't go up, it's not working to reduce emissions. Imposing the cost on the consumer is the point.

Giving a lump sum rebate to the companies doesn't reduce the marginal cost, so it is only pure corporate welfare. (Unless it prevents the company from going into bankruptcy, in which case it's more complicated.)

This is a really important point.
9.17.2009 9:55pm
John Thacker (mail):
Giving away the permits to the companies is like imposing a tax on consumers and then giving all the money to the polluting companies. It's economically ridiculous.
9.17.2009 9:56pm
Guy:
Yay, a redacted memo! This means I get to put on my tinfoil hat to explain why. Obviously the government intends to allocate more money to the program than it actually costs, so that the excess money can be diverted to the DoD and spent on their program to genetically engineer psychic llamas that can spit acid.
9.18.2009 7:19am
Guy:
That would be (b)(5) by the state secrets privilege, right?
9.18.2009 7:25am
Jonathan H. Adler (mail) (www):
Mr. Thacker --

You're claims are correct in a theoretical, transaction-cost-free world. But that's not our world. The structure of the program has significant distributional impacts and, due to transaction costs and the pre-existing distribution of entitlements, will have differential effects on consumer prices. Call cap-and-trade a tax with corporate welfare -- that's fine with me, as it's a fair description -- but given that companies don't pay for their carbon emissions now, giving away allowances will have a different effect than requiring the same companies to purchase the same number of allowances.

JHA
9.18.2009 11:00am
Tom B (www):
I'm not sure on what particular privilege the government is relying. I did some work on the deliberative process privilege a year or two ago, although as a recent law school grad, I am far from an expert on anything.

Exemption 5 will cover 1) attorney work-product and 2) anything that is part of a deliberative decision-making process and is not relied on by the agency in a final decision (maybe other things, but I am not aware of those). The deliberative process privilege protects the quality of agency decisions by "permit[ing] an agency to refuse to disclose documents reflecting advisory opinions, recommendations, and deliberations comprising the process by which governmental decisions and policies are formulated." Shell Oil Co. v. IRS, 772 F.Supp. 202, 205 (D.Del. 1991) (citing NLRB v. Sears, 421 U.S. 132, 150 (1975)). The privilege only can apply to documents that are both predecisional and deliberative. The privilege is designed to protect the consultative functions of government and prevent agencies from being "prematurely forced to operate in a fishbowl." EPA v. Mink, 410 U.S. 73, 87 (1973).

So, if the Treasury ultimately rejected the estimates and other redacted parts, that info can be shielded by the deliberative process privilege. You don't want to subject tentative decisions or ideas to scrutiny because it would chill the free discussion of ideas in agency discussions. Just like how judicial deliberations are not subject to public review. If the redacted info was a final Treasury finding, then the deliberative process privilege should not protect it.

The following is from Dep't Interior v. Klamath, 532 U.S. 1 (2001). It has a basic description and cites some cases. I believe it is the most recent SCOTUS decision on Exemption 5, but I could be wrong.


Exemption 5 protects from disclosure "inter-agency or intra-agency memorandums or letters which would not be available by law to a party other than an agency in litigation with the agency." ยง 552(b)(5). To qualify, a document must thus satisfy two conditions: its source must be a Government agency, and it must fall within the ambit of a privilege against discovery under judicial standards that would govern litigation against the agency that holds it.

Our prior cases on Exemption 5 have addressed the second condition, incorporating civil discovery privileges. See, e.g.,United States v. Weber Aircraft Corp., 465 U.S. 792, 799-800, 104 S.Ct. 1488, 79 L.Ed.2d 814 (1984); NLRB v. Sears, Roebuck &Co., 421 U.S. 132, 148, 95 S.Ct. 1504, 44 L.Ed.2d 29 (1975) ("Exemption 5 withholds from a member of the public documents which a private party could not discover in litigation with the agency"). So far as they might matter here, those privileges include the privilege for attorney work-product and what is sometimes called the "deliberative process" privilege. . . . The deliberative process privilege rests on the obvious realization that officials will not communicate candidly among themselves if each remark is a potential item of discovery and front page news.


Klamath, 532 U.S. at 8-9.
9.18.2009 11:04am
Tom B (www):
Hmm, I see now that the link to the DoJ thing has way more info than I provided. I was just so pleased that I actually knew something about the law that was on topic. Oh well.
9.18.2009 11:08am
John Thacker (mail):
You're claims are correct in a theoretical, transaction-cost-free world. But that's not our world.


OK, I'll grant that transaction costs affect how utilities will respond, and make them less likely to shift to more efficient methods than theoretical modeling would produce. However, that has the opposite implication for consumers-- it makes things more expensive for consumers.

But utilities staying with less efficient methods doesn't increase the cost-effectiveness of the program, it decreases it. Either we won't see the emissions reductions predicted, or, given that the emissions is supposed to be a hard cap, utilities will stay with their current production rather than shifting to more efficient methods. That means that the utilities will be producing less electricity for the capped emissions than they would be without transaction costs. Yes, those more-polluting methods may be cheaper for the utilities, but under a emissions cap that doesn't matter compared to the effect of limiting supply at a lower amount. Less energy supplied means higher prices for consumers. I'll grant that regulated maximum prices could mean blackouts instead.

If the granted permits are greater than the amount of emissions that would happen, then there's no effect. So there's a tradeoff of effectiveness against emissions and cost to consumers. But granting the permits doesn't make things better for consumers. It's no better to reduce the companies' costs if you do so by restricting the supply of energy.
9.18.2009 12:05pm
Guy's email account:
Hi Guys. This is Guy, and totally not a federal agent who's just shipped Guy off to Gitmo. You know when I said,

"so that the excess money can be diverted to the DoD and spent on their program to genetically engineer psychic llamas that can spit acid..."

I was totally kidding. Nevermind that. Seriously, nevermind.
9.19.2009 11:30am
Abdul Abulbul Amir (mail):

But utilities staying with less efficient methods doesn't increase the cost-effectiveness of the program, it decreases it.



What? The entire purpose of the program is to shift utilities from low cost coal to high cost wind and solar.

The whole political point of green jobs is to create jobs that cannot exist in the market but depend on government. The Dems favor almost any "solution" that has more folks dependant on government.
9.19.2009 8:55pm
Michael Kochin (mail) (www):
Cap and trade without granting permits to existing emitters is an expropriation of current owners and a capital auction of existing plant to the highest bidders. Why this is a bad idea, as well as unconstitutional, is explained here.
9.22.2009 10:09am

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