Cap and Trade Legislation Gains Momentum

the American Clean Act Energy and Security Act of 2009 passed in the U.S. House of Representatives on June 26, 2009 by the narrowest of margins (219 to 212) and, at the time of this writing, the U.S. Senate has their own version of this bill under consideration. At the center of this bill is a controversial mandate of a cap-and-trade system, under which greenhouse gas emissions in the United States would be reduced to 17 percent below 2005 levels by 2020 and ultimately 83 percent by 2050, with the help of increased usage and development of renewable resources over that time. The Obama administration has clearly made this issue a priority in the near term.

So what is a cap-and-trade system and why is it so controversial? The Environmental Protection Agency defines cap-and-trade as “an environmental policy tool that delivers results with a mandatory cap on emissions while providing emission sources flexibility in how they comply. Successful cap and trade programs provide strict environmental accountability without inhibiting economic growth, and reward innovation, efficiency, and early action.”

Under this act, the federal government would set a limit
or cap on the total volume of greenhouse gas emissions that
U.S. companies could emit each year, and companies would stay under these caps using a system of permits or allowances. Companies must have an allowance for every ton of greenhouse gas they emit, and these allowances can be bought and sold among companies based on their individual needs. The total number of allowances or permits available is set at the beginning of the cap-and-trade program and is gradually reduced over the course of the program, resulting in reduced overall emissions.

The controversy over this
type of system lies in the initial allocation of the permits and
the differing in opinion as to the cost-benefit of such a program. As for the permit allocations, it is being viewed by some as an enormous corporate giveaway, with lobbying and special interests winning out to secure these permits for some of the worst carbon offenders, including the electric power generation industry and agriculture, at the expense of other industries. The National Association of Manufacturers opposed the original House bill, citing increased costs and regulation to American manufacturers and consumers, along with severe competitive damage if the United States acts first and alone, while other global manufacturing economies do not limit their own emissions. NAM has co-conducted an analysis of this bill that showed that such legislation would result in up to 2.4 million lost jobs, higher energy prices for businesses
and consumers, and significant cumulative losses in GDP.

Many economists would agree that a cap-and-trade program will result in higher energy prices, which will show up in consumers’ energy bills and in the costs for manufactured goods, resulting in cut backs in consumer and commercial spending, leading
to cut backs in production and higher unemployment. Some have estimated that this act will initially raise the cost of living of a typical American household by anywhere from a couple hundred dollars to $1,800 per year in the early years of the program and significantly higher thereafter as the reduction percentages are ratcheted up.

Why enact such legislation? The thought by lawmakers and environmentalists is that by legislating a cap-and-trade system to achieve measured reductions of greenhouse gases, the United States would be leading the way toward addressing the issue of global warming, an environmental phenomenon deemed by many scientists as being caused by carbon emissions, and that the costs of inaction are far greater than the cost of implementation. The United States currently accounts for approximately 25 percent of global carbon dioxide production, which is not insignificant, but there are many other manufacturing economies in the world that contribute mightily to this global issue (and as they continue to develop, actually push the U.S. contribution downward).

Should the United States set out to tackle this issue alone; is the projected cost to the typical American household a reasonable imposition when the resultant reduction of worldwide emissions at the earliest target date is only around 4 percent (calculated as
a 17 percent reduction of our 25 percent carbon emission contribution) and hardly noticeable? The hope is that the commitment of the United States to fight global warming will lead to buy in from other countries and ultimately lead to a measurable reduction in global warming.

Michael A. Coakley can be reached at Email or 215.441.4600.