By Iain Murray
Special to the Examiner
When the President proposed his budget, he tried a gambit aimed at foisting a new energy tax on the American people without serious debate in Congress. It would have come in the form of a “cap and trade” scheme whereby companies that emit greenhouse gases would have to pay the government for permits to do so. Conservative estimates suggest that this disguised tax would have raised energy costs by $3000 per household as companies passed on the costs. The gambit failed, so now Congressional leaders like Henry Waxman and Edward Markey are proposing a cap-and-trade scheme which has been designed in part by the energy companies it will affect. Already, however, there are signs that the thieves are falling out.
It might surprise people to learn that companies are colluding with government in this endeavor. After all, Al Gore and others have spent a decade claiming that energy companies oppose any action aimed at lowering greenhouse gas emissions. What Al and his friends in Congress miss, however, is that companies love income streams guaranteed by government (it is so much easier than having to go through the difficult business of persuading people to buy your product). The biggest companies have discovered that cap and trade provides just that sort of guarantee, which is why they are circling Congress like bees round a honey pot.
Here’s how it works. In a simple cap and trade scheme, government announces a cap on emissions and allocates permits to companies proportionately based on their historic emissions. If the company emits less greenhouse gases than it has permits for, it can sell the excess to other companies who need to emit more (perhaps because they have been successful and are employing more Americans, for instance). Companies who have emitted less make money from the trades, while those who have had to buy more permits pass on the costs to their customers. The cap reduces each year, meaning fewer permits. Theoretically, this system encourages companies to emit less.
As the cap reduces, the permits go up in value. They therefore become an important source of income to companies that can make simple emissions reductions. On the other hand, they become a burden on companies that find it more difficult. Significant wealth transfers accrue to the “carbon cartel” from households and companies outside the cartel. This is what has happened in Europe, where big utilities have enjoyed windfall profits as a result of their cap and trade scheme. Household energy bills have skyrocketed and small companies that emit greenhouse gases, including hospitals, have seen their bills increase too.
That, however, is just the start. Industry lobbyists, such as their umbrella group the US Climate Action Partnership (USCAP, which includes BP America, Ford, Shell and environmental groups like the Natural Resources Defense Council and Environmental Defense Fund) have also been pushing hard for the inclusion of “offsets” in the Waxman/Markey bill. These offsets work just like the sort of offsets Hollywood stars use to justify jetting around the world to complain about greenhouse gases – they pay someone else to reduce emissions for them. It has already been demonstrated that these offsets are open to fraud and abuse – an investigation by the Financial Times suggested that companies in the developing world were being paid millions of dollars for emissions improvements that cost a few thousand, while some companies were being formed just so they could be shut down to claim the offsets.
The Waxman/Markey bill, to its credit, recognizes this problem and proposes a scientific review board to assure the quality of offsets allowed under its program. USCAP is annoyed by this. Its spokesman, from the environmental group the Pew Center on Global Climate Change, told the Carbon TradeEx expo in Washington, “The fact that the science advisory board would have to be involved would really slow things down.” It should also be noted that the bill allows for 2 billion tons of offsets each year, which is greater than the amount of emissions reductions required each year under the act. So the fact is that the so-called cap on emissions might not result in any reduction in US emissions at all. Indeed, the offset allowance is so generous that US emissions might increase.
What the Waxman/Markey bill does is to create a new set of financial derivatives to be traded around the world. It is approved of by big business because they see ways to game the system to their advantage. The burden of the system will fall on the households that the businesses pass their costs on to and smaller businesses that get caught up in the net of the bill and are unable to game the system to their advantage. Yet it also acts as a serious distortion on the energy market. Companies may decide that the trading of these derivatives is a better source of income than their core business. In fact, that is precisely what Enron had in mind when it was lobbying for the Kyoto Treaty a decade ago. We may well end up swapping subprime housing instruments for subprime carbon instruments. Neither the economy nor the environment is likely to benefit from that.
Iain Murray is Senior Fellow in Energy, Science and Technology at the Competitive Enterprise Institute in Washington DC and blogs at http://www.openmarket.org.
