Potential Costs to America From Cap-and-Trade

“If you’re not at the negotiating table, you’re on the menu”

If you think energy is expensive now, just wait until our next president, working with a Democratic-majority Congress, implements cap-and-trade rules tailored for the greatest possible gain for special interests and the highest possible costs to consumers and taxpayers.

On Friday, Richard Sandor, the CEO of the Chicago Climate Exchange gave an interview which was (unintentionally, I’m sure) a shocking look into the reality of carbon emissions trading and the “cap-and-trade” proposals which are aimed directly at the heart of the American economy.

The interviewer, Dylan Ratigan, asked Mr. Sandor who was already participating in carbon trading in anticipation of a politically-imposed “carbon cap”. Sandor’s answer was a who’s-who of American industry: “17% of the Dow Jones…IBM, Intel, DuPont, United Technologies.  In addition to that, 11% of the Fortune top 100…Ford, International Paper, Safeway.  20% of the top power companies…AEP, Detroit Edison, Alliant, Reliant.”

Ratigan then asked the obvious question: “Why are they buying protection against a political cap that does not yet exist?” Sandor’s fascinating reply: “Some of them have a hidden asset.  They’ve already made cuts. They can sell them on our exchange and make a lot of money…. Others are there because they want to gain a competitive lead….  Others want to be there for the political debate.  We have an expression at the Chicago Climate Exchange: ‘If you’re not at the negotiating table, you’re on the menu.’”  

Picture the political cartoon: a table surround by wolves, labeled such things as “Energy Trader”, “Enormo Industries”, “Power Company”, “Radical Environmentalist”, and “Al Gore”, drooling while staring at a silver platter on which stand several small, cowering figures, labeled “Taxpayer”, “Consumer”, “Rational Scientist”, and “Small businessman”.

Regarding the size of the carbon market, Sandor said that “the carbon ‘crop’ in Europe (i.e. output of their vehicles and factories) is 2.2 billion (metric tons)…and trades at $40 (per metric ton). That’s over $80 billion (in total value), so the European emissions alone are bigger than the US corn and soybean crops combined.  The US is going to be three times that size. We’re talking about something that is…humongous.” The risk to Americans is proportional to the size of the dollar signs in Sandor’s eyes and the efforts by early large participants to maneuver the system to their benefit.

When a corporation (or any capitalist) is given the opportunity to make money by (legally) taking advantage of a system, they will do so. One of the best ways to gain advantage is to be involved in the early moments of the system, guiding regulations in a way that benefits you.  Having been involved in the development of a major exchange’s electronic trading platform, I saw first-hand how much effort certain market participants put into influencing trading rules in a way that would maximize their expected trading volume (and therefore expected profits) at the expense of smaller market participants…including public customers.

Combine that dynamic with Sandor’s description of the potential size of the carbon market and you get a sense of to what lengths companies will go to “game the system”. And who can blame them? The real problem is giving them a system to game, and the fault for that lies squarely at the feet of politicians who buy into the junk-science arguments of “global warming” alarmists without any consideration of the massive economic costs Americans will bear in a Quixotic quest to stop climate change.  It reminds me of a club I once heard of: “The Stop Continental Drift Society”, and it makes as much sense.

Economist Wayne Winegarden, partner in the econometrics firm of Adruin, Laffer, and Moore, who wrote a paper on “The Adverse Impacts of Cap-and-Trade Regulations” with Arthur Laffer and testified before the Senate last year, offered some perspective in an interview for Human Events: “Cap-and-trade is an inferior policy to accomplish reduction in carbon output.” (Winegarden stays away from the issue of whether such a reduction is a valid goal, understanding that politics is moving that way in any case and that his expertise is not in climate science.) “However, if you’re going to try to reduce carbon output, it should be done as a carbon tax so that the costs are not hidden and politicians have to take responsibility. You can’t minimize the impacts of carbon if you’re trying to hide or lie about the effects of your carbon-reduction policies.”  ”

Dr. Winegarden notes that “Cap-and-trade has been such a dramatic failure in Europe, including forcing even “green” factories to fire workers. When asked whether America could learn enough from Europe’s mistakes that we could implement a cap-and-trade system that made sense; Winegarden’s answer was a resounding “no”.  “Cap-and-trade is the politically expedient solution – it has great political merit but no economic merit. We’ll be revisiting this because, like Sarbanes-Oxley, it will create more problems than it will solve”, not least of which will be dramatically increased volatility of energy prices.

The potential costs to America from cap-and-trade are enormous. The Department of Energy estimates that S. 2191, the Warner-Lieberman cap-and-trade proposal, will increase the cost of coal for power generation by between 161% and 413%. DOE estimates GDP losses (see chart) over the 21-year period they forecast, at between $444 billion and $1.308 trillion, with particular damage to the manufacturing sector. (This gives some hope that organized labor will, in a rare occurrence, oppose Democratic leaders on this issue.) Winegarden estimates that this bill could increase unemployment by 2.7% or about 4 million jobs. In fact, companies are already preparing to avoid increased level and volatility of American energy prices by setting up factories and partnerships in countries which won’t be subject to cap-and-trade restrictions…proving with real-world behavior of producers that no carbon-limiting regulation can succeed if it is not universal.

In the CNBC interview, Sandor noted that he “knows” we will be living in a “carbon-constrained world” because all three presidential candidates support “cap-and-trade”. Given support among Democrats for cap-and-trade, and recent history’s demonstration that a Republican president and Republican members of Congress are not interested in forcing any discipline on the other, it is all but certain that something like Warner-Lieberman would pass if John McCain were president.  Maybe, just maybe, Republicans in the House and Senate would stand up against cap-and-trade if the president were a Democrat.  Therefore, since these proposals represent the biggest threat to the American economy of any policy suggestion during my lifetime, John McCain’s position on cap-and-trade has cemented my intention not to vote for him in November.

As Americans are kept in the dark by gullible mainstream media, industry and special interests are ensuing that cap-and-trade, when it arrives, will either be as damaging as possible to consumers, will accomplish none of its stated goals, or, most likely, both. We taxpayers and consumers are “on the menu” indeed.