The nuts and bolts of cap and trade

Mark W. Hendrickson's picture

The purpose of cap and trade (C&T) legislation is to reduce Americans’ consumption of fossil fuels — coal, oil, and natural gas — and to speed up the transition to alternate forms of energy, such as wind and solar power.

The “cap” part would be a legislated limit to the quantity of carbon dioxide that Americans would be permitted to put into the atmosphere from the burning of fossil fuels.

The government would then issue permits that it would sell or give (details are being worked out) to businesses who could then either emit CO2 up to the amount stipulated in their permit, or, if they can curb CO2 emissions below that amount, could sell or “trade” the permit to the highest bidder in the after-market.

The stated overarching goal of proposed C&T is to save the planet from human-caused climate change, which C&T proponents attribute to human emissions of greenhouse gases, primarily CO2 from fossil fuels.

These proponents truly believe (despite considerable scientific disagreement) that such measures are necessary to save the earth.

Others have a political agenda: If government can regulate energy consumption, then government has great control over economic activity and people’s lives — an irresistible lure to central planners, social engineers, utopian visionaries, and megalomaniacs.

Still others have economic incentives: companies that generate electricity from non-CO2 sources, such as nuclear and hydropower, would gain a windfall cost advantage against their competition; alternative energy businesses would stand to receive billions of dollars in additional subsidies; and Al Gore, who met behind closed doors with congressional leaders to plan the C&T strategy earlier this year, has reportedly invested millions of dollars in alternate energy companies and stands to profit enormously from C&T-generated government subsidies.

Opponents of C&T are more concerned about its massive costs — both economic and political. In January 2008, candidate Barack Obama stated plainly that under his C&T plan, electricity prices would “necessarily skyrocket” as utilities using fossil fuels would pass along the costs of CO2 permits to consumers.

Significantly raising the cost of power would not only hammer Americans’ utility bills, but would make it more expensive for businesses to power their operations.

This would shut down marginal businesses and leave the survivors less competitive against foreign businesses — especially since China and India, for example, have announced they won’t curtail CO2 emissions at all.

Indeed, from an economic standpoint, the C&T bill should be titled the “Raise the Cost of Living and Ship Jobs Overseas Act of 2009.”

Even though studies cited by advocates of C&T show that American CO2 reductions would shave only a few hundredths of a degree off future temperatures, they still believe that this is worth the considerable costs.

Thus, when the House of Representatives approved cap and trade legislation at the end of June, a majority rejected proposed amendments that would have limited the program’s economic damage by suspending C&T if gasoline rose to $5 per gallon or unemployment reached 15 percent.

Most Americans aren’t concerned about global warming and certainly don’t want to get poorer (especially now, at a time of acute economic distress), so one might think that C&T legislation would be doomed. But this is where things get really interesting:

Originally, government was going to sell the CO2 permits, raising hundreds of billions in revenue. Now, though, congressional leaders are reshaping the program to give permits to various utility companies in exchange for their endorsement of the plan (and perhaps their lobbying dollars).

So much C&T money is now slated to be given to Big Business that members of Team Obama admit that this program could become the largest corporate-welfare program ever.

So, will C&T pass in the Senate so that an eager President Obama can sign it into law? Probably not, if the bill is openly and deliberately debated.

However, Senate Majority Leader Harry Reid may duplicate what House Speaker Nancy Pelosi did to get a C&T bill through the House — rush it through before members could read it, and bestow billions in favors to “persuade” undecided members to support it.

Despite the overall negative impact of such a bill, the special interests — both environmentalists and corporations — may still prevail.

The Obama/Pelosi/Reid axis will not initially get as much revenue or as deep cuts in fossil-fuel consumption as they would like, but if they can establish the principle that the government should decide how much energy Americans can consume, they will celebrate.

We the people, though, should reckon the cost to our liberty.

If this principle becomes law, we may face a day when a federal bureaucrat will grant permission to Al Gore to jet around to preach the evils of CO2 emissions while denying Joe Sixpack the right to fly cross-country to see his girlfriend once a month.

Might we emulate the Brits, who currently are devising a “para-police” force to monitor energy consumption?

There is much at stake in the C&T debate. This is one of the major issues of our time. Become informed.

[Dr. Mark W. Hendrickson is an adjunct faculty member, economist, and contributing scholar with The Center for Vision & Values at Grove City (Penn.) College.]

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