Politics & Policy

Trade This In for Something Better

The U.S. Commodity Futures Trading Commission announced last week that it has opened an investigation into whether futures traders conspired to drive up oil prices. We doubt the investigation is necessary; when one considers breakneck economic development in India and China, the weak U.S. dollar and global supply as determined by the Organization of Petroleum Exporting Countries, one hardly needs the services of the CFTC to solve the mystery of the oil-price spike.

But there is a group of people conspiring to make energy more expensive for Americans. That group is the U.S. Senate, and this week it will debate a bill that would impose a cap-and-trade system on greenhouse-gas emissions. By rationing the use of fossil fuels, the bill would lead to higher coal, natural-gas, and petroleum prices, even though the prices of those commodities are already at historic highs. Everybody knows about oil prices; less well known is that the price of natural gas recently reached its highest point since Hurricane Katrina disrupted supplies in September of 2005. Coal prices have tripled in the past year due to global shortages.

In short, now would be an exceptionally bad time for Congress to make energy more expensive. Yet that is precisely what the cap-and-trade bill sponsored by Sens. Joseph Lieberman and John Warner would do. Under a cap-and-trade system, a company can only emit greenhouse gases up to a certain limit (the “cap”). If it exceeds that limit, it must purchase allowances, either from the government or from other companies that are under their limits (the “trade”).

Estimates vary, but every credible analysis of the Lieberman-Warner bill concludes that it would increase household electricity bills and the price of gasoline while creating a drag on economic growth, with the manufacturing sector bearing most of the burden. The Energy Information Administration estimates that the Lieberman-Warner bill would increase average annual household energy bills by $325 over the next 10 years and $723 over the next 20. An Environmental Protection Agency analysis of a similar cap-and-trade proposal found that gas prices would rise by 26 cents per gallon. Energy-price increases will hit manufacturers the hardest. The EIA concluded that the Lieberman-Warner bill would depress manufacturing output by 9.5 percent by 2030.

Supporters argue that this is the price we have to pay to avoid a global climatological disaster, but they have yet to adduce any evidence that the benefits of a cap-and-trade system outweigh the costs. The United Nations Intergovernmental Panel on Climate Change has estimated that under a worst-case scenario, unconstrained global warming could cause damages equal to about 1-5 percent of global economic output about a century from now. By contrast, the EIA estimates that the Lieberman-Warner bill would depress U.S. GDP by up to 1 percent a year by 2030. The bill’s supporters are asking Americans to sacrifice a lot of jobs and money up front to stave off a theoretical future crisis that wouldn’t be that much worse.

Supporters of a cap-and-trade system for greenhouse gases point to the success of a similar program the U.S. implemented to control sulfur-dioxide emissions in the 1990s, but they neglect to mention a key difference: Sulfur-dioxide scrubbing systems were already available when that system was put into place, making it relatively easy for companies to reduce their emissions. The analogous technology for carbon dioxide — a sequestration technique by which emissions are captured and buried underground — is not yet fully developed, and might not be ready for years. In the meantime, the U.S. simply lacks cost-effective and reliable sources of low-carbon energy.

Finally, supporters argue that artificially inflated carbon costs would make renewable energy sources more cost-effective by comparison, spurring their development and eventually bringing the cost of energy back down. On this point, they need to be reminded that it takes energy to manufacture the wind turbines, fabricate the solar panels and fertilize the crops for biofuel. Encouraging alternative sources of energy may be a prudent investment in reducing the risks of global warming. But the government’s means of encouraging them should not involve overly burdensome regulation.

When one looks at per capita carbon emissions, one finds near the bottom of the list poor countries like Ghana, Burkina Faso, and Mali. The fastest-growing sources of emissions — China and India — also happen to be countries where economic growth is in the process of rescuing millions from abject poverty. Economic growth requires cheap and efficient energy sources, here in the U.S. as it does abroad. Advocates of an immediate and aggressive abatement of carbon emissions have simply failed to make the case that global warming poses the kind of threat that justifies robbing so many of economic prosperity.

It is difficult to believe that at a time when the U.S. economy is struggling to adjust to record-high energy prices, the Senate is debating a bill that would make prices even higher. If you want to know why a group of responsible politicians would support such an idea, look no further than an analysis of the revenues the federal government stands to gain from a cap-and-trade program. The EIA estimates that by 2030 the federal government will be auctioning 84 percent of the program’s carbon allowances, with total revenues of anywhere from $326 billion to $853 billion. If you think that money will go toward deficit-reduction, dream on.

The Lieberman-Warner bill will probably fail, and it deserves to. But with three presidential candidates who support a cap-and-trade system for carbon, this fight is only beginning. The CFTC is investigating oil-price fixing, but where is the agency that will protect Americans from the conspiracy to drive up energy prices that’s brewing on Capitol Hill?

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