A $50 billion free lunch.
That’s effectively what Columbia Business School climate economist Gernot Wagner was trying to sell to the Senate Budget and Appropriations Committee this week, which included two pushback-free sponsors of the Climate Superfund Act.
But in explaining that the controversial bill, which retroactively penalizes New Jersey fossil fuel companies $50 billion for legally providing an essential product, will not cost consumers any more at the pump or in the home, Wagner didn’t exactly paint a full picture.
In a recently published paper titled “You Can’t Tax the Past Without Pricing the Present: The Hidden Costs of Climate Superfund Laws,” University of Pennsylvania Law School professor Jonathan Klick filled in the missing color.
“Politicians excel in promising free lunches,” Klick wrote.
“The introductory economics lesson that has never been falsified is that those free lunches always come with a cost.”
FLAWED ARGUMENTS
But that didn’t stop Wagner from contending that only “global markets set gas prices,” effectively stating that fossil fuel companies would just swallow a $50 billion retroactive hit for what is likely an unconstitutional policy.
“The arguments that these costs will not be passed on are flawed,” countered NJBIA Deputy Chief Government Affairs Officer Ray Cantor. “They do not account for the fact that 14 states, and perhaps more, are considering similar legislation.
“They ignore the fact that it is likely that these assessments will be imposed again in the future, and they equate the economics of worldwide prices for a barrel of oil to the cost at the pump.”
Klick also said that even the concern of climate superfund laws in other states – and two have already been passed in New York and Vermont and are currently held in litigation – is enough to raise prices.
“What these advocates fail to grasp is that these superfund laws put producers on notice that similar fines and taxes are sure to continue into the future,” Klick wrote.
“This knowledge raises all firms’ expected marginal costs going forward, leading to price increases both in theory and in fact.
“Further, these increases will apply to any firm looking to do business in the covered markets, so there will be no unaffected competitors around to bid down prices. Consumers will see higher prices as a result of the state climate change superfund laws,” Klick wrote.
In New York, advocates for the Climate Superfund Act utilized a letter from Nobel Prize-winning economist Joseph Stiglitz that said “strong market forces….will deter any cost shifting by covered companies.”
Stiglitz added that the companies impacted by the bill “can easily afford these costs.”
Klick took issue with Stiglitz’ take, as well as an Institute for Policy Integrity analysis which said the same thing.
“The fundamental problem with the Stiglitz and Policy Integrity Institute’s analysis is a failure to recognize that expected marginal costs are endogenous to state policy,” Klick wrote.
“That is, the passage of the state climate change superfund laws in New York and Vermont (and likely the anticipated passage in a number of other states) puts sellers on notice that they will eventually be fined for their current production despite its legality, which means they will build these expected fines into their current marginal costs which raises consumer prices in the present.”
THE MIDDLE-CLASS HIT
Ironically, Wagner also told the committee in his testimony that the legislation’s only adverse impacts would be on shareholders of oil companies.
Cantor pounced on who that really is in the real world: the middle class.
“The owners of fossil fuel companies are pension funds and the middle class,” he said. “The inflammatory argument that fossil fuel companies can easily pay for these charges out of their profits misses the point of who has invested in these companies.
“Public pension funds and middle-class retirement accounts account for nearly half of all ownership of fossil fuel companies. John D. Rockefeller doesn’t own Standard Oil anymore. Your constituents do. Imposing exorbitant costs on these companies will hurt the middle class both at the pump and in their 401(k)s.”
Klick, in his report, concurred.
“The reality is that counted among the shareholders of ExxonMobil and Chevron are numerous middle-class residents of New York and Vermont,” he wrote.
“What’s more, the public pensions in both states have billions invested in the industry, such that any assessments that are not passed through to consumers will be borne by teachers, cops, and firefighters, to say nothing of the innumerable people counting on their 401(k)s and 403(b)s for their retirements.”
