Cap-and-Trade Would Make American Dream a Nightmare

Cap-and-Trade Would Make the American Dream a Nightmare

by William O'Keefe

William O'Keefe is chief executive officer of the George C. Marshall Institute and a longtime energy industry consultant.

In 1984, the late historian Barbara Tuchman wrote "The March of Folly", in which she chronicled the phenomenon of governments throughout the ages pursuing policies directly at odds with their self-interest. Tuchman used the term "wooden-headedness" to describe the tendency of leaders to assess situations using preconceived notions while ignoring or rejecting any contrary signs.

History may be repeating itself. Our leaders in Washington are exhibiting signs of "green" wooden-headedness as they fight to pass a climate bill that most lawmakers have not read and even fewer understand. In spite of growing evidence that cap-and-trade legislation is economically, technologically, and environmentally counterproductive--imposing high costs to deliver, at best, minor reductions in greenhouse gas emissions--the House of Representatives recently passed legislation to implement such a program. Now, the Senate is marching down a similar road, with Majority Leader Harry Reid of Nevada indicating that he intends to pass an emissions trading bill before year's end. This cap-and-trade approach requires major producers and users of traditional energy sources to obtain permits to continue their production and consumption of these fuels. These allowances--the availability of which would be restricted by an arbitrary, government-set limit over the next 70 years--could then be traded in a market like a commodity, stock, or bond.

The main objective is to put a price on emissions, thereby creating an incentive for all segments of the economy--from corporations to consumers--to switch to less carbon-intensive fuels and technologies. But the bill now moving toward markup in the Senate doesn't show promise of achieving that goal.

One cause for concern is that, by creating a carbon trading market, Congress would effectively be giving the very Wall Street traders responsible for much of our recent financial devastation a new trillion-dollar market to exploit. Consider that the European Union carbon market has already seen widespread fraud and abuse, as well as the development of securitized financial products similar to the ones that contributed to our mortgage crisis. That's not the only component of this plan at odds with our self-interest. The projected impact on individual homeowners certainly qualifies as counterproductive.

Lawmakers have talked a big game about sheltering U.S. homeowners from the inevitably large spikes in electricity rates. Europe's experience with cap-and-trade suggests that these promises are just talk. Electricity prices for EU households have skyrocketed. If Congress tries to prevent this by restricting how much utilities can charge, these companies will have to absorb billions of dollars in higher costs. That translates into less available for investment in research and development.

Higher energy bills aren't the only downside of cap-and-trade for Americans. The House climate bill also includes expensive energy-efficiency mandates. The bill would mandate increases by 2014 in home energy efficiency 50 percent above standards set under the 2006 International Energy Conservation Code. That standard would increase by 5 percent in 2017 and every three years thereafter until 2030. It would supersede state and local building codes and impose civil penalties for builders and homeowners deemed "out of compliance."

Since World War II, homeownership has played a significant part in the American dream. But if this legislation becomes law, that dream will become a nightmare. As William Glued, an editor at Big Builder, warned, "The big problem with these targets is that while they may be feasible, they are impossible as a matter of practicality." Attaining the unprecedented, high level of energy efficiency called for in the climate legislation "would prove prohibitively expensive"--making homeownership a luxury only the wealthy could afford.

Since the House has passed this bill by a narrow margin, all that stands between America and this fate is a mere 60 votes. Fortunately, that means there's still an opportunity for the Senate to improve its version of the climate bill before it comes to that. Congress needs to adopt a simple, transparent, and straightforward emissions policy that provides companies and households alike with a direct incentive to meet tough but realistic environmental standards. Though it's unrealistic to expect emissions to be reduced to a level not seen in a century or more, the right legislation can help us slow the growth in our emissions and help developing countries significantly reduce theirs.

As the vast majority of economists have testified, a simple tax on CO2 emissions, imposed on all users, is superior to cap-and-trade. By offering a predictable price, this policy would provide an incentive for homeowners to switch to more energy-efficient technologies. A reasonable carbon tax also would create an incentive for all sectors of the economy to invest capital in more efficient energy sources. Moreover, a stable price on carbon would afford businesses the opportunity to earn a return on investment in new energy technologies--making the resulting new energy sources and technologies widely available and more affordable.

The bottom line is that the fiscal and environmental benefits of a carbon tax offer a refreshing contrast to the reckless spending taking place in Washington. And that's good news for businesses and families.

Showing great prescience, Tuchman noted at the close of her book, "Persistence in error is the problem." It is not too late to get on the right road, but that responsibility rests solely with our senators. As the late Sen. Everett Dirksen once observed, they will see the light when they feel the heat of constituents.

Read the argument for cap-and-trade, by John Podesta.

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