Thursday, May 21, 2009

Cap and Trade: The $9.6 Trillion Growth Killer

The Obama administration and its congressional allies seem prepared to sacrifice the American economy on the altar of global warming. Specifically, the Waxman-Markey cap-and-trade proposal represents a crusade to drastically diminish carbon emissions in the United States.

I'm not going to debate the scientific arguments; instead, I want to make it abundantly clear that the purported benefits of this plan do not justify its excessive costs.

The purpose of cap and trade is simple: to reduce CO2 emissions by issuing permits that ration the amount of emissions a producer may generate. This gives each company an incentive to implement new technologies to reduce their emissions so it can sell its leftover permits to less efficient companies.

These permits are worth money, so their use diminishes their value (just as depleting a Starbucks gift card of its credits diminishes its value). The logical implication is that using a permit levies a cost upon its user. In order to achieve compliance with permit restrictions, the user must reduce production (and lose revenue), increase efficiency (an extra cost), or purchase another user's remaining credits (an extra cost). No matter how you look at it, this plan is expensive.

The Cost
The Heritage Foundation just released a study estimating the cost of the Waxman-Markey cap-and-trade proposal to be $9.6 trillion in lost GDP over the next twenty-five years. I repeat—$9.6 trillion in economic loss.

The Heritage report reasoned that the economy would respond to cap and trade as it would respond to an energy crisis: "The price on carbon emissions forces energy cuts across the economy, since non-carbon energy sources cannot replace fossil fuels quickly enough. Energy prices rise; income and employment drop."

How bad would this be? According to the report: a 55-90 percent increase in energy prices; an annual $1,500 increase in family electric bills; a $596 annual increase in gasoline prices; an average annual loss of 1,105,000 American jobs; and national debt increase of $29,150 per person. All within the next twenty-five years.

This program will also invite the government to further direct the American economy. The cap-and-trade program will empower the bureaucrats who administer it, and this will open the door to new forms of corruption.

As Thomas Sowell notes in Basic Economics, "bureaucrats' ability to create delay often means an opportunity for them to collect bribes to speed things up . . . . This in turn means higher prices to consumers, and correspondingly lower standards of living for the country as a whole." If you think it's hard regulating the money received by public officials, imagine trying to keep tabs on the bribes received by anonymous bureaucrats!

Arthur Laffer and Stephen Moore pointed out in The End of Prosperity that "bureaucrats will be regulating all sectors of the industrial economy and all activities of every business in America." Intrusive government entanglement is not far fetched, since the White House is now effectively telling General Motors how to run a car company.

The mere administrative compliance costs may also be staggering. As Laffer and Moore quipped, "[i]f you think the IRS is heavy-handed and intrusive, wait till companies have to comply with the new Green Police."

Of course, it's unclear how much of this accounts for American companies that will duck these insane requirements by moving their operations overseas, and taking their economic contributions and tax revenues with them.

The Benefit
The costs are tremendous, so what is the benefit? Apparently, not very much.

Climatologist Chip Knappenberger recently concluded that if Waxman-Markey yields an 83 percent emissions reduction by 2050, "the temperature reduction is nine hundredths of one degree Fahrenheit, or two years of avoided global warming."

In other words, the government is sacrificing trillions of dollars to reduce the temperature by less than one degree? Seriously?

Maybe each of us should purchase a T-shirt that reads, "We lost $9.6 trillion, and all I got was this lousy T-shirt."

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