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Energy Cap and Trade is a bad policy
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The liberal democrats in congress have been pushing a Cap and Trade bill that they believe would reduce carbon emissions over time. It would basically work by rationing the amount of carbon emissions allowed. This effectively means limiting the amount of fossil fuels that can be burned each year. That is the cap part.
The trade part of the bill is to allow companies that have emission allowances to trade them for money with other companies that need to burn more fuel. This way the market would allow emissions by the companies that would produce the most economic benefit and take away from companies that would produce the least economic benefit.
The problem is that it might not actually work as desired. For example, assume that I am a steel producer. I receive an emission allowance under the plan to consume energy to produce steel. I could make a lot of money by selling that allowance to another company. What if I sold my allowance and moved my steel production to a country like China or even Brazil that did not have caps. If the cost to produce the steel overseas is no greater than the amount that I would receive for selling the allowance, then economically I am better off. The net result is no decrease in emissions, but a lot of US jobs will be lost to overseas workers.
Another problem is that as our economy grows (assuming it starts growing again) it will need more energy to function. A cap would reduce this growth. Obama says his economic program will create millions of new jobs to eventually lower our unemployment rate. If a cap reduces growth, then how is he going to create these jobs?
A cap is like a tax on energy. It artificially raises energy prices. I know some liberals see higher energy prices as a good thing because it reduces the amount of energy consumed. The problem is that it creates a lot of pain. Low income people will feel the pain the most since energy consumes a higher part of their income. The demand curve for energy is very inflexible, at least in the short run. That means that small reductions in consumption can result in big increases in prices. [The economic utility of energy and global warming] Remember the pain of $4.00 per gallon gasoline. Add to that higher electricity costs, higher bus ticket prices, higher costs to heat your home…
How high will energy costs go? It really depends on how much the economy grows and how much energy we can get from environmentally clean sources. Since sources like wind and solar only contribute a couple of percentage points to our overall energy use, it will not be very much anytime soon. If the economy stagnates, then the price may not rise very much, but that is not what is desired from our economy.
I think it will be very hard for this legislation to get through congress. At least I hope so. There are much better ways to reduce our carbon emissions that would not have the high costs and anti-growth aspects that the currently proposed legislation has. Here are some of my ideas:
- Stop building new coal fired power plants. The Obama administration has made moves in this direction. We have plenty of natural gas which can produce electricity cleaner and with half the carbon emissions. This is our bridge to a future many years from now when all of our electricity can be produced from clean sources.
- Start building nuclear power plants to augment and replace coal fired plants. Not only would be get dependable base load electricity, but the investment now would create jobs where the investment would pay real dividends in the future. The current stimulus bill is full of spending that increases consumption now, but pays no dividends later (counting salt water mice in San Francisco to see if they are endangered).
- Create a small carbon tax with the money going to fund clean energy development. [Carbon tax to pay for renewable energy] I am looking at a tax rate of about $0.02 per gallon of gasoline. That would raise about as much as we can reasonably spend now on new green energy projects and would probably not be noticed with $2.60 per gallon gasoline. The carbon tax could easily be expanded to cover the carbon energy content of imported goods so as not to create an incentive to move production off-shore. Production would have a tendency to move to the places with the most carbon efficient energy, which we hope will be in this country.
- Implement the Pickens plan. Provide incentives to increase the use of natural gas as a transportation fuel and accelerate the development of wind power to replace natural gas consumption for electricity production. This has the added benefit of reducing our consumption of imported oil which now costs this country about $1 billion per day.
It will take a long time to decrease and stop burning fossil fuels. At this point we should focus on increasing our production of carbon free energy from all sources and substituting more carbon efficient energy sources like natural gas for less carbon efficient sources like coal and oil. That will start us moving in the right direction without hurting our economy.
