Monday Morning Comment: Cap & Trade Charade

July 13, 2009: Two weeks ago the House narrowly passed the American Clean Energy and Security Act otherwise known as the cap-and-trade legislation which is designed to curb emissions of carbon dioxide.

The legislation mandates that government set acceptable limits for carbon dioxide emitting industries and then require them to buy permits. A fixed number of permits would be auctioned each year and the permits would be tradable, so firms that found ways to emit less than they were permitted for could sell unused permits to firms who couldn't meet the federal limits.

The program is based on the theory that those who can easily reduce emissions most cheaply will do so, achieving the pollution reduction at the lowest possible cost to society.

The policy objective is to gradually reduce carbon emissions by 17% (from the level in 2005) by 2020 and by 83% by 2050 all while generating billions of dollars through permit sales to fund government programs including renewable energy research.

On a vote of 219-212 the bill passed the House after Democratic House Leaders weighted the bill down with just enough loopholes and giveaways to gain enough votes for passage. 

The House’s climate bill is a 1,200 page Christmas tree with unrelated giveaways and appropriations including 300 pages that were added in the final hours. The bill is so complex that even Carol Browner, the president's "energy czar," admitted that she hadn't read the bill.

There are several significant problems with what passed out of the House.

The legislation depends heavily on the use of “offsets”  to lower the cost of the legislation. Offsets are where a polluter can avoid cutting their own emissions by investing in activities across the globe that take carbon dioxide out of the atmosphere. That means instead of the coal plant reducing its emissions, it could use offsets to invest in farmers who are adopting more environmentally friendly practices or investing in reforestation projects in Nicaragua.

Although the ultimate goal is to reduce the total carbon footprint, this option is open to abuse and varied interpretation about just how much Co2 is being removed from the atmosphere.

In addition, a key part of the intent of the legislation is to create green jobs in the United States. This puts the goal of sustainable domestic jobs at odds with the concept of international offsets or domestic carbon offset projects that wouldn't be sustainable but for the subsidy.   

Another looming problem is that originally Co2 permits were to be auctioned, which according to President Obama's budget would have raised $650 billion to fund health care reform and investments in renewable energy.

Instead, the House wrote the legislation to give away 85% of the permits for the first ten years.

Giving away permits means the loss of federal revenues which throw Obama's budget projections out the window. Second, it means that the permits will not go to those companies who value them most (permits are auctioned in Europe) but to those whom lawmakers favor. 

Electricity-distributors would get the largest share, with the rest divided between energy-intensive manufacturers, natural-gas distributors, auto manufacturers and states with renewable-energy programs. In addition, U.S. oil refineries received only 2 percent of the permits even though they account for much more of the total carbon dioxide emissions produced by the United States.

Last week, Shell Oil testified before the Senate Foreign Relations Committee that they were short changed. "Shell is particularly concerned that the current allowance value allocated to the U.S. refining sector in the (House) bill does not cover direct emissions as fully as other sectors are covered," said Steven Fries, the company's chief economist.

Also, a last minute provision that was added just before the House vote, calls for tariffs on goods from countries that do not limit greenhouse-gas emissions. There are concerns that this is in violation of current free trade protocol and could start a trade war with countries like China and India, who so far have seemed uninterested in adopting similar emission restrictions.

The bill’s supporters argue that China and India will come on board only if America sets a good example. This is hard to believe. Both have emerging economies that have been impacted by the global economic melt down and neither one appears to host any sense of urgency to curb carbon dioxide emissions.

The biggest issue with the legislation is the lack of honesty that is coming from Capitol Hill.

While many have argued that the best possible way to curb emissions is through a straight forward carbon tax, Congress is trying to dance around the true cost with the cap and trade approach.   

In analyzing the cost to consumers in the year 2020, the Congressional Budget Office came up with a figure of $175 per year, per family. However, not only does the CBO's estimate exclude the effect on economic growth but it also ignores the fact that 2020 is when consumers costs begin to increase due to the end of the free federal permits. 

Even President Obama, while speaking to the editorial board of the San Francisco Chronicle when he was a candidate, stated that electricity costs would "necessarily skyrocket" as a result of capping emissions levels, and that his job as president would be to convince the public and Congress that benefits outweigh costs.

Industry supporters of the bill including Duke Energy, point out that the legislation directs state regulators to make sure electricty -producing utilities that receive free poluution permits pass along the savings to customers.

But others argue that by mandating cost savings be passed on to consumers instead of requiring those savings go towards plant improvemens will lead to less conservation while leaving firms with less cash to make necessary plant improvements to reduce emissions by 2020 when they'll no longer receive the permits for free. 

Supporters of the bill also say it will spur the creation of green jobs while lessening our dependency on foreign oil.

However given the cap and trade bill that just passed the House; filled with giveaways and potential for abuse, it's hard to see sustainable green jobs being created by an unsustainable piece of legislation.