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Cap-and-Trade: Americans deserve better

(AP Photo/Charlie Riedel, File)

Earlier this year, Berkshire Hathaway, Inc.’s Chairman Warren Buffet, a well-known investor and supporter of President Barrack Obama, acknowledged the reality of cap-and-trade by conceding that regulated utilities would pass the additional costs down to customers. Specifically, he argued, “In the utility business, it’s going to be borne by customers.  And it’s a tax like anything else.”  This so-called “carbon tax” is yet another troubling example of climate change policies that pilfer from Americans’ rapidly declining pocketbooks. 

 

Generally, the base objective of the cap-and-trade system is to reduce greenhouse gas emissions. In reality, cap-and-trade is an unproven approach proffered as means to control pollution by providing companies economic incentives for achieving reductions in greenhouse gas emissions (e.g., water vapor, carbon dioxide, methane, nitrous oxide, ozone, and chlorofluorocarbons). Under a cap and trade system, companies are given a limit (i.e., cap) on the extent to which they can emit greenhouse gases. For example, a company limited to 100 credits could buy or trade its credits depending how close its emissions are to the imposed cap. Obviously, a company below its limit benefits, because it can sell any excess credits to other companies. By lowering its greenhouse gas emissions, a company could gain excess credits.  In a nutshell, the purchaser of credits is paying a cost for its greenhouse gas emissions, while the seller is being rewarded for having reduced emissions.  

 

The actual effect of the cap-and-trade system on greenhouse gas emissions is a point of contention, because, in part, the targeted greenhouse gas, carbon dioxide (CO²), only comprises approximately 5% of greenhouse gases—water vapor making up the vast majority of greenhouse gas volume (i.e., ±90%). In spite of this, powerful center-left policy makers are determined to reduce CO² no matter the effect on the American businesses and households. 

 

In the coming months, Congress will begin debating the extent to which it chooses to auction CO² emissions permits to the utilities and what it will do with any auction revenues.  Apparently, President Barack Obama has an opinion on where those revenues will go, since his original budget included projected revenues from a cap-and-trade system. 

 

The Energy Information Agency (EIA), the Environmental Agency (EPA), and the Massachusetts Institute of Technology (MIT) recently conducted an independent analysis and concluded that energy cots will dramatically increase. Specifically, the group estimates that the proposed budget’s cap-and-trade system will directly cause an estimated $1.27 per gallon increase for the cost of gasoline and a 68% increase in electricity costs. 

 

Also, according to a report by the George C. Marshall Institute, if Congress was to implement a cap-and-trade system similar to the Liberman-Warner approach proposed in 2008, the likely result would be an equivalent to a constant (in percentage terms) consumption decrease of about 1% each year, continuing to 2050. Under this cap-and-trade system, the average household would be subject to a permanent carbon tax increase “over time in real terms from about $1400 to $2000 during 2015-2030 and approximately $2000 to $3000 in 2030-2050.” 

 

In addition to the likelihood of significant job losses resulting from a cap-and-trade system, Americans should also expect rising energy prices.  For example, the George C. Marshall Institute report cited studies that forecasted electricity prices rising 5-15% by 2015, natural gas prices escalating 12-50% by 2015, and gasoline prices varying widely from 9-145% by 2015.

 

Additionally, Mr. Buffett pointed out that the “tax is probably going to be pretty regressive,” because many state’s public utility commissions will determine “what customers it gets passed through to.” A regressive tax is generally defined as “a tax that takes a larger percentage of the income of low-income people than of high-income people.”  However, there is a possibly that the cap-and-trade policy (e.g., cap-and-dividend or cap-and-rebate proposals) adopted by Congress would be a progressive tax (i.e., a tax where “those who earn higher incomes pay a higher percentage of their income than those with lower incomes”).

 

The European Union’s foray into the cap-and-trade system is being described as a failure by observers across the political spectrum, specifically the New York Times and the Heritage Foundation. Under the European Union (EU) Greenhouse Gas Emission Trading system, many countries’ consumer energy prices have escalated (or even skyrocketed).  The exact effect on consumer prices will not be clear until 2013, when full auctioning of EU allowances will commence.

 

Unfortunately, businesses and households in the Western states are already confronted with a dramatic economic threat presented by the Western Climate Initiative (WCI)’s proposal to require a regional greenhouse gas cap-and-trade system. The WCI members include Arizona, California, Montana, New Mexico, Oregon, Utah, Washington, British Columbia, Manitoba, Ontario, and Quebec. Alaska, Colorado, Idaho, Kansas, Nevada and Wyoming are considered “observers,” while a few member states such as Arizona and Utah are currently considering ending their WCI involvement. 

 

In early March, twenty members of the U.S. Congressional Western Caucus openly questioned the WCI’s request “to avoid deploying virtually any new fossil-fuel plants.” If Western states were to cease deployment of any “new baseload generation from fossil, nuclear or renewable hydropower,” long-term economic destabilization will likely confront the region with some state’s feeling the burden more than others. Moreover, as Senator John Barrasso appropriately surmises, “Any plan that appears to exclude baseload, twenty four hour power like clean coal, nuclear, natural gas, and hydro-power will not even come close to powering the West.” 

 

Earlier this year, Lakewood, Colorado based Western Business Roundtable (WBR) commissioned an independent economic study by Management Information Services, Inc. regarding WCI. The study established that WCI would “impose significant new costs on consumers and retard job creation in the Western U.S. over the coming decade.” What is more, the study determined there was “no scientifically measurable benefit in terms of reduced global climate temperatures as far out as the year 2100.” What will be assessable, according to Jim Sims, WBR president and chief executive officer, is that WCI would impose new costs on consumers and stunt job creation.

 

The cap-and-trade systems under the EU and WCI have been touted as model approaches for Congress to follow. Evidently, Congress would like to follow the EU and WCI’s lead by passing increased costs on to consumers while at the same time taking away their jobs. This is hardly a policy approach that will revitalize our economy by putting more money into the pocketbooks of American businesses and households. 

 

Mr. Buffet surely stated the obvious by acknowledging that the reality is nearly every American will feel the sting of the carbon tax imposed by a cap-and-trade system. The sting will not only be found in the increased cost of utilities, but also on everything from groceries to gasoline. Our elected officials should avoid adding additional burdens on Americans during our serious economic crisis and shelve cap and trade for good. 

 

(An earlier version of this article originally appeared at www.alineofsight.com.)