Insight: State Global Warming Bill: A Case Study in “Madison Math”

Madison Math: The practice of fudging numbers and obscuring facts to fit a political agenda.

It’s by no means a novel concept among Madison politicians — we see frequent examples of this gimmick each time the state budget is debated. However, the supporters of Governor Doyle’s global warming legislation have taken the practice of Madison Math, and elevated it to a form of art.

Specifically, they are relying upon heavy doses of Madison Math and upside down logic in a desperate attempt to convince lawmakers that increasing taxes on electricity and adopting expensive new energy mandates will make our electric bills go down.

Intuitively, the price of a consumer good like electricity goes up when you add significant cost to its production, and then layer higher taxes on top of those cost increases.

So what is the basis for making the extraordinary claim that costs will go down? A report issued last month by one state agency boldly proclaims that adopting sweeping global warming regulations will result in lower electric bills.1

The Administration’s report does not actually assess how much these policies will cost, it merely concludes that electric bills will go down. The report suggests that despite the enormous capital cost of meeting a 25% renewable generation mandate, electric bills will go down if government taxes energy enough to reduce consumption by 2%. Higher taxes will produce lower costs — it’s Madison Math at its very best.

Because the Administration has not published the direct costs associated with the energy mandates in the global warming bill, WMC and others have attempted to quantify the costs so policymakers have a more accurate picture of what Wisconsin homeowners and businesses would be forced to pay if the bill becomes law.


25% Renewable Generation Mandate

The bill would require 25% of electricity sold in Wisconsin to come from renewable sources like solar and wind by the year 2025. The Public Service Commission (PSC) published a report2 in April of 2009 indicating that Wisconsin would need to build 400 megawatts of new renewable generation each and every year until 2025 to meet this mandate.

At a cost of $2.32 million per megawatt, the PSC assumptions suggest a capital cost of roughly $15 billion, even without accounting for significant costs to upgrade power transmission to accommodate this growth. To place the $15 billion figure into context, customers spend roughly $6 billion each year on electricity statewide. Lawmakers must decide whether Wisconsin customers should be forced to pay at least $15 billion more to build new electric generation capacity, even as our state currently has a 30% surplus in electric power generation.
Energy Efficiency Surtaxes

Wisconsin customers currently pay a 1.2% tax on monthly energy bills in order to fund government spending on programs to encourage energy efficiency and conservation. The global warming bill would replace the current tax by giving the PSC blanket authority to tax energy bills at a level that will cause a 2% reduction in consumption.

How much would energy taxes need to increase to reduce consumption by 2%? Perhaps the answer lies in a recent study3 commissioned by the PSC, and published by the Energy Center of Wisconsin. That report found that achieving a 1.6% reduction in consumption would cost $350 million per year. The report further concluded that the costs necessary to achieve a 1.9% reduction are “more than double” the cost of achieving a 1.6% reduction.

As such, achieving a 1.9% reduction in electric consumption would cost at least $700 million per year according to a report commissioned by the PSC. In order to meet the annual 2% reduction target in the global warming bill, the PSC would therefore need to assess energy taxes of at least $10.5 billion by the year 2025.
Carbon Tax

Although the global warming bill does not contain a carbon tax, the Administration’s analysis claiming the legislation will reduce electric bills assumes a $20 per ton “monetized” price for carbon, plus annual inflation.4 In other words, carbon dioxide emissions from power plants would be taxed at a rate of $20 per ton, plus inflation, under their assumptions.

How much would the $20 per ton carbon tax cost? The Governor’s Global Warming Task Force modeled future carbon emissions through the year 2024, based upon implementing all of the policy recommendations except cap and trade. The best kept secret of this debate is the fact that the Task Force’s own modeling shows carbon emissions will be higher when all of these policies are implemented (including the 25% renewable mandate) than they were in 2005.5

Applying the $20 per ton carbon tax (with a modest 1.5% annual inflationary factor) to the carbon emissions that the Task Force predicted will occur after adopting all of these policies shows that electric utilities would face cost increases of $18.9 billion between 2010 and 2025. While WMC believes there are many reasons why we will not see a carbon tax or other monetized price for carbon, the $18.9 billion figure is based upon the Administration’s assumptions, as well as the future emissions predicted by the Governor’s Task Force.
Global Warming Property Tax Hike

A little-know provision in the global warming bill allows local governments to raise property taxes by exceeding their levy limits by the amount necessary to pay for renewable energy and energy efficiency expenditures.6 Aside from being bad policy that hits taxpayers with higher costs at a time when they can least afford it, this provision is a fascinating admission by the bill’s authors. Despite the rhetoric that these polices reduce costs, the bill allows local governments to raise property taxes to pay for them. Homeowners and businesses would therefore take a “double hit” by paying more on their own energy bills, and then paying again for a property tax increase.
Conclusion

By any reasonable measure, the global warming policies proposed in SB 450 and AB 649 are tremendously expensive. The 25% renewable policy will cost at least $15 billion by 2025, and a recent study suggests energy taxes will need to increase at least $10.5 billion over 15 years in order to hit the bill’s 2% consumption reduction targets. That is a total cost increase of $25.5 billion.

If the $20 per ton “monetized price” for carbon (carbon tax) assumed in the Administration’s study becomes reality, that would add another $18.9 billion to the cost of electricity in Wisconsin. If that were the case, electric customers could be faced with $25.5 billion + $18.9 billion = $44.4 billion in higher costs between now and 2025.

How would $44 billion in higher costs for energy affect electric bills? The total cost of electricity would increase by an average of $2.75 billion every year between 2010 and 2025. If customers currently pay about $6 billion per year for electricity, a $2.75 billion annual increase will result in double-digit price hikes each year.

Only when utilizing Madison Math could a politician make the claim that double-digit cost increases each year will be offset by a 2% reduction in consumption — thus leading to lower electric bills. You simply cannot increase costs and increase taxes and expect prices to go down.

The global warming bill’s supporters have used Madison Math and dubious assumptions in an attempt to convince us all of the mathematical impossibility that adding billions of dollars to the cost of energy will result in lower electric bills. Perhaps the bigger miscalculation is their belief that voters are gullible enough to believe it.


The Insight Column is a weekly column that provides commentary and background information from WMC lobbyists on issues affecting your business. For more information on this topic, contact Scott Manley, WMC Director of Environmental Policy, (608) 258-3400 or
smanley@wmc.org .

 

1 Economic Assessment of Clean Energy Jobs Act, Office of Energy Independence,
January 5, 2010
2 Strategic Energy Assessment 2014, Public Service Commission, April, 2009
3 Energy Efficiency & Customer-Sited Renewable Resource Potential in Wisconsin, Energy Center of Wisconsin, August, 2009
4 Economic Assessment of Clean Energy Jobs Act, Office of Energy Independence,
January 5, 2010
5 Governor’s Global Warming Task Force, ICF International “Deep Reductions” Scenario,
June 10, 2008
6 Senate Bill 450 & Assembly Bill 649, Sections 23-24