In this year’s State of the Union Address, President Obama promoted his vision of “middle-class economics.” As part of his program, he pledged to lower taxes for working families, “putting thousands of dollars back into their pockets each year.” Alas, what his budget proposal pledged to giveth, his energy policy taketh away. The industry regulations pushed by Obama’s EPA, conflict with the President’s stated budget intentions by foisting higher household energy costs that fall disproportionately on the poorest among us.
In a free market, entrepreneurs serve society tremendously by coordinating the entire market division of labor, directing scarce resources toward their most highly valued use as determined by members of society. The price system ensures that those who produce the most demanded goods in the most efficient way will reap profits, while those who fail to do so will reap losses.
Business regulations serve to hamper this beneficent market process. Regardless of any other purposes they serve, regulations constrain entrepreneurs from arranging production processes in their best, most efficient pattern. They necessarily increase costs of production and decrease the quantity of products people have available to satisfy their ends. In short, business regulation results in relative impoverishment.
Such consequences are certainly true in the area of energy industry regulation. It is naive in the extreme to think that we can painlessly solve perceived present and future problems related to the production and use of energy through regulation. The EPA’s “Clean Power Plan” mandates that by 2030 carbon emissions from the energy industry must be reduced by 30 percent compared to their 2005 levels. This is to be achieved by four building blocks: increased efficiency by existing fossil fuel power plants, increased energy production using natural gas, increased use of solar and wind sources, and customers using electricity more efficiently.
Alas, given current energy market conditions and level of technology, the Clean Power Plan will result in significant cost increases to producers. Industry experts estimate that compliance will lead to the forced shut down of 70 percent of coal-fired energy plants. By their very nature, the mandates will hasten switching from coal-fired plants to natural gas plants and wind sources before it is economically wise to do so. We dare not forget that a given production process does not become socially beneficial merely because it is technologically possible. We have the technology, for example, to produce large quantities of water in a laboratory setting, but we do not do so because it makes no economic sense. The cost of making water in a lab is much greater than obtaining water from natural sources. Similarly, it is needlessly wasteful to force energy producers to switch from coal-fired plants that are operating at a profit to another less profitable source of generation. Of course, if it is more profitable, entrepreneurs already have an incentive to be using that process. Mandating the switch forces electricity producers to consume capital. Imagine the impact on your budget of being forced to buy a new lap top computer every year before your present one wears out or becomes obsolete. That is the equivalent of what the EPA is requiring of electricity producers. Additionally, such forced transition always imposes costs associated with infrastructure, plant shut-downs, and stranded assets.
That the new EPA constraints on energy production will result in higher energy costs is nowhere near a secret. Various studies by energy economists estimate the total compliance costs to be from $174 billion to $479 billion. This is more than three times the total cost of the previously most expensive EPA energy industry regulation.
Such increased costs necessarily reduces the supply of coal-fired electricity because producers can generate less output with the same quantity of investment. Average wholesale electricity costs are anticipated to increase an estimated $25-30 billion per year. Retail electricity prices are estimated to increase from 8 to 17 percent due to the Clean Power Plan.
Such increases would continue a disturbing economic trend. For US households with gross annual incomes less than $50,000 (almost half the households in the nation), total real energy costs have increased 27% since 2001. At same time, real disposable incomes have decreased by 22%. The percentage of income spent on energy has increased significantly. In 2001 these households spent on average 12 percent of their income on energy costs. By 2014 energy expenses increased to 20 percent of disposable income.
Make no mistake, general regulation of the production of common necessities, such as energy, functions like a tax, and a regressive one at that. Lower income families are the most vulnerable to higher energy costs. While those households with disposable income above $50,000 a year spent 8 percent of their income on energy last year, those with annual incomes less than $30,000 spent 26 percent of their income on energy. Higher energy prices due to President Obama’s Clean Power Plan hit the poor the hardest, just like a regressive tax does.
On top of higher energy costs, everything else will become more expensive to produce. Higher energy prices increase costs of production. Energy regulations and their effects direct production contrary to the natural division of labor. General productivity and output, therefore, will be lower than otherwise. All of us, including the poor, end up paying higher prices for fewer goods. Increased impoverishment is exactly the opposite of what President Obama says he desire to combat.
The President recently participated in a round-table discussion considering how to reduce poverty in the United States. This surely is a laudable goal. If he is serious in this endeavor, one of the best, most direct and efficacious acts the President can take is to call off the dogs at the EPA. He should junk the so-called Clean Power Plan and halt its draconian war against the poor.
Dr. Shawn Ritenour, Ph.D. is an economics professor at Grove City College.
The views expressed here are those of the author and not necessarily those of The Susquehanna Valley Center.
Nothing contained here should be considered as an attempt to aid or hinder the passage of any legislation.