March 13, 2008

By Alex Mills

Cap and trade is a catchy name for a government-run program that in theory reduces greenhouse gases that cause the Earth’s temperature to rise.

A bill introduced by Sen. Joseph Lieberman (I-Conn.) and John Warner (R-Va.) creates a cap-and-trade system with the oversight of four new federal bureaucracies to implement, monitor, track and redistribute dollars from the auction of energy allowance (EA). Additionally, seven federal agencies will be involved in the system (Department of Energy, Treasury, Interior, Agriculture, Secretary of State, Defense and the Director of National Intelligence. The Environmental Protection Agency will be the lead agency

Why so many? Because the complicated system devised by Lieberman and Warner has a multitude of check & balances in an attempt to make the newly created cap-and-trade system credible and free from fraud and abuse. You see, Europe has already tried to implement a cap-and-trade system and it was a miserable failure.

The U.S. Congress, however, is determined to punish companies, industries and utilities that burn fossil fuels (coal, oil and natural gas) by enacting a cap-and-trade

system.

Rep. Rick Boucher (D-VA), Chairman of Committee on Energy and Air Quality, was quoted in Roll Call, a newspaper that reports on the happenings in Washington D.C., that there is a 50-50 chance of a major cap-and-trade bill becoming law this year. If it doesn’t happen in 2008, he puts the chances of passage at 80% in 2009.

Boucher points out that all three of the Presidential candidates – McCain, Clinton and Obama - support the cap-and-trade concept.

“A cap-and-trade program is now inevitable,” Boucher said. “The view of the industry is that it’s better that it happen now rather than later, so the sooner they can make decisions about long-term capital investments,” Boucher said.

The Roll Call article quoted one committee member that environmental groups may push to delay enactment this year in order to get a more stringent bill in 2009. “They want a world we can’t survive in – no expansion of nuclear or coal,” Rep. John Shimkus (R-IA) said.

However, concerns from economists have caught the attention and concern of many congressmen. If the cap-and-trade system is implemented in the U.S. only, American businesses would be at a competitive disadvantage. Nations, such as China and India, without a cap-and-trade system will not have to cope with the additional cost of compliance and purchase of emission allowances. The already fragile U.S. economy would be put to the test to see if it could absorb the higher energy costs.

The concept behind cap-and-trade system seems simple enough, but the devil is in the details. The federal government would create a market for carbon emissions and emitters would have to purchase emission allowances. In theory, the market of buying and selling would encourage companies to become more efficient in preventing carbon emissions. In effect, producers and users of coal, natural gas and crude oil will be slowly put out of business as their costs rise and other fuels, such as wind and solar, become more competitive.

In reality, the cost of the primary source of energy in the U.S. would become more complicated and volatile. Fossil fuels account for 85% of all electric and transportation use in the U.S. Creating a new system that adds to the uncertainty of availability and price would be detrimental to the economy.

The Energy Information Administration predicts that in year 2020 there will be no change in the energy mix.

The big winners in such a complicated and new trading system obviously would be large businesses that could hire trading experts and establish departments that would specialize in trading of emission allowances.

Small businesses would be squeezed between rising energy costs and increased operating expenses.

The bill itself recognizes that many will lose their jobs as it provides funds for retraining of displaced workers.

“We haven’t even established that there is a problem that we can do something about,” Rep Joe Barton (R-TX), ranking minority member of Energy and Commerce Committee said. “All the industry groups that are signing on are signing on because they think they can make money or game the system.”

Even though the concept of reducing greenhouse gas emission seems admirable, the consequences of such a complicated and unwieldy system could cause serious harm to the economy. Should American’s be asked to risk their standard of living for something that hasn’t been identified, yet?