Hot Issue: Cap and Trade: Jobs and Power?

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I walked away from Kyoto because it would have damaged the American economy, it would have destroyed the American economy, it was a lousy deal for the American economy. – President George W. Bush, 2005

On May 12 2010, U.S. Senators John Kerry (D-MA) and Joe Lieberman (I-CT) put forward the “American Power Act ” a new, 1000-page version of last year’s Waxman-Markey cap and trade bill.  Like its House counterpart, this bill places a cap on carbon emissions for “major” polluters, requires a 17% reduction in U.S. carbon emissions by 2020, and gives favors to a variety of special interest groups.

A History of “Cap and Trade”

A central authority, usually a government, sets a cap on the amount of pollutants that an entity, usually a business, can emit.  The offending entities are issued emission permits and credits, which represent the maximum amount of pollutants the entity is allowed to emit. The majority of permits will be free, having been “grandfathered” into the legislation for existing entities. Entities that must emit more pollutants than allowed by their cap will be allowed to purchase excess credits from those entities that remain below their cap. Although these “trades” aren’t limited to business, this transfer of credits, or allowances, is referred to as a “trade.”

The 2005 Kyoto Treaty attempted to regulate six “greenhouse gas” emissions by developed nations. The Intergovernmental Panel on Climate Control (IPCC) set the emission reduction caps for the participating countries, the United States, however, opted out.  Participating countries can “trade” their allowances through the International Emissions Trading (IET), which allows countries that use less than their assigned allotted units to sell them to nations that exceed their quota.

Participating countries can also trade for carbon credits, or offsets, by sponsoring greenhouse projects in other countries. While cap and trade limits the availability of trading between entities, the offset projects are a license to print new, cheaper, and less regulated permits. All cap and trade schemes allow offset credits to be traded through “linking mechanisms,” including the EU Emissions Trading Scheme (EU ETS) and the cap and trade scheme currently moving through the U.S. Senate.

The creation of a global market for emissions trading by the Kyoto Treaty has led to multibillion dollar financial markets, such as the EU ETS, which is the world’s largest carbon market.[activate url="http://act.libertycentral.org/9/3229/help-block-epas-cap-trade/" target="_self" is_slanted="false"]

In Practice

So, how is all of this working since the Kyoto Treaty was approved in 2005?

During the treaty’s first phase beginning in 2005, the caps were set based on historic emissions data provided by the industry itself, according to Carbon Trade Watch, a project of the Transnational Institute. The Institute noted a clear incentive to inflate the data so that the industry gets an excess amount of credits and, ultimately, this is what has happened in all of the cap and trade markets, including the EU ETS (it awarded major polluters with free pollution permits called EUAs, European Union Allowances).  As a result, there was no incentive to either reduce emissions or buy permits, and the price of the permits subsequently collapsed.

The Kyoto Treaty included a second phase, set to begin in 2008, that was supposed to improve upon these disincentives from Phase I.  It initially appeared promising when, for the first time, polluters were awarded fewer permits than their actual level of emissions; but the majority of industries still had a surplus of permits.  Although many industries reduced emissions due to the EU-wide recession, they were still scheduled to receive the same amount of permits in 2009. However, the failure of the cap and trade scheme is even more apparent when offsets are taken into account.  The EU claimed that during 2008, emission reductions of 3%, or 50 million tons, from sectors including the EU ETS were achieved.  The problem is that at least 80 million tons of carbon offsets were bought as part of the cap and trade scheme.

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Winners and Losers

There are many beneficiaries of elaborate cap and trade schemes. Why?  Because free emission permits are like subsidies, and since the permits are based on historical emissions, the biggest environmental offenders get the largest subsidies. Huge profits are gained by doing what is called “opportunity costs.”  A good example is how power companies choose to meet their ETS target in the cheapest way, which is usually buying credits from the UN-administered Clean Development Mechanism (CDM), called Certified Emissions Reductions (CERs). These costs are then passed on to consumers as if the power companies chose the most expensive option, which would actually reduce their emissions. Researchers predict windfall profits to power companies during Phase II could be between $23-$71 billion and ironically enough, would be concentrated in countries with the highest level of emissions.  So what this in effect has done is created a new way industries can make consumers pay by charging them inflated costs to meet the ETS targets, while not reducing their emissions at all.

Practically, this gives further incentives to industries to continue generating high emissions.

Phase III is scheduled to begin in 2013, with renewed promises of “reform,” since the new system of permit allocation will be based on auctioning. However, the system of “banking” unused credits means that entities can carry over unused credits into 2013, thereby starting with a significant surplus. Some projections show as many as 700 million surplus permits by the end of Phase II. If entities bank their offsets as well – which is the cheapest option – this could lead to surpluses of 1.6 billion tons, enough to ensure that the ETS would not require emissions reductions for the next 7 years. Additionally, European industries claim that the EU ETS puts their businesses at risk due to strict regulations on factory emissions. Therefore, they say, it is projected that more than three-fourths of manufacturers probably will get free permits.

Russia is an unmistakable winner when it comes to cap and trade.  When Russia signed the Kyoto Treaty, it was given an annual emissions limit based on the astronomical pollutants being pumped out by the outdated, filthy Soviet factories. Since then, Russia’s industrial base has only used a fraction of its allowances. One analyst reports that “Russia must be singled out as a potential threat to the ability of the market to produce a meaningful carbon price.” Russia is one of the world’s biggest suppliers of coal, gas, and oil and, if we submit to cap and trade, we could end up paying Russia for fuel – and then paying them again for the right to burn it.

What About the Jobs?

The new cap and trade bill will, in the words of Sens. Kerry and Lieberman, “transform the American economy.” It seems that transformation will, indeed, occur with the implementation of the Senate bill. In a brief posted on May 5, 2010 and prepared by Bruce Arnold of the Congressional Budget Office’s Microeconomic Studies Division, the CBO analyzed the research on the effects that policies to reduce greenhouse gases would have on employment and concluded that total employment during the next few decades would be slightly LOWER than would be the case in the absence of such policies. In particular, job losses in the industries that shrink would surpass employment gains in other industries.

According to the Coalition for Affordable American Energy, the Obama Administration’s cap and trade legislation could result in the loss of more than 3 million jobs by 2030.  Additionally, the legislation could cost the average American household an additional $2,100 annually. The Coalition study finds that natural gas and electricity costs would increase by more than 50 percent and motor fuels costs by 78 cents per gallon. The combined effects of increased energy costs and restrictive regulations would force industries to relocate and/or reduce productivity, again leading to the loss of American jobs.

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Of this inevitable job loss, Diana Furchgott-Roth writes:

Not only does the bill penalize American firms through higher costs of production, it causes jobs to be created abroad through required investments in wind turbines and solar panels, now commonly manufactured in China. But carbon-intensive sources of energy such as coal and oil, which are disfavored by the bill, are produced domestically and employ American workers.

Sen. John Barasso (R-WY) echoes Furchgott-Roth’s sentiment:

Families in Wyoming and across America have made it clear: They want more jobs, cheaper energy and lower taxes. This bill doesn’t reflect these important priorities, [and] in fact it does exactly the opposite.

The America’s Power Act will do nothing to create jobs and, as many sources note, will actually destroy many existing jobs in the energy manufacturing industry.

Picking American Winners and Losers

Carbon trading legislation picks many winners and losers.  Unfortunately, most of Americans will be on the wrong side of the equation since, as President Obama said in 2008, “Under my plan…electricity rates would necessarily skyrocket.” And Time Magazine recently reported that:

The bill contains $54 billion in loan guarantees for up to 12 nuclear plants; heavy industrial emitters would receive free carbon allowances to help them adjust to life under the cap; carbon limits would not be phased in until 2013; and manufacturers would not be subject to the cap until 2016.

Kerry and Lieberman’s intended “sale of indulgences” is becoming increasingly more transparent by the list of supporters: BP, Shell Oil, ConocoPhillips, Duke Energy, and the Edison Electric Institute.  Corporations are getting behind the bill because they understand the ripe opportunities it presents for rent seeking and increasing their bottom line.

The bill would allow expanded offshore oil and gas drilling, but with tight restrictions: states could veto offshore drilling in a neighboring state and opt out of drilling within 75 miles of their own shores. States that do allow drilling would retain 37 percent of the federal royalties from oil and gas development.

Several environment groups have expressed opposition to the bill because of these corporate giveaways. The Center for Biologoical Diversity released a memo criticizing the Senators for “pandering to the fossil fuel industry.” Friends of the Earth, even calls the bill “dangerous,” aserting that it will “scrap crucial tools for solving the climate crisis while locking in billions in polluter payouts.”  Finally, Rep. Jason Chaffetz (R-UT) raises serious questions about Franklin Raines, former Fannie Mae CEO, and the money he could make from the implementation of a cap and trade scheme.  Apparently, “Raines, when he was a CEO, he and a couple of other Fannie executives also did something very strange: Applied for patents on residential admissions trading programs.”

Conclusion

This bill ultimately places a cap on carbon emissions for “major” polluters, requires a 17% reduction in U.S. carbon emissions by 2020, and gives favors to a variety of special interest groups. In the words of Congressman Chaffetz, there are “billions upon billions of dollars at play” with the America’s Power Act.[activate url="http://act.libertycentral.org/9/3229/help-block-epas-cap-trade/" target="_self" is_slanted="false"]