Earlier today we posted a piece on carbon cap and trade legislation currently pending in Congress. We discussed two of the most significant ramifications of the proposed legislation including the tax ramifications and also the potential negative impact on GDP. Several prominent congressmen and business leaders have shared their opinions of the legislation.
Politicians such as John Dingell (D-MI) and Charlie Munger, Vice Chairman of Berkshire Hathaway certainly raise doubt as to the efficacy of such a system. Perhaps one of the most insightful pieces on cap and trade relates to this article from The Washington Post in which author Steven Mufson examines some of the unintended consequences of Europe’s cap and trade system. Written over two years ago, his points remain relevant today. He cites higher power prices as the effect that has aroused the most outrage. Utility companies had charged customers for all of the allowances given to them by the government (despite the fact the government gave them free to the utilities) instead of only those in which the utility companies had to purchase. Without over complicating the situation, a fine balance exists between actual emissions, caps and allowances. If an on-going balance among all three does not occur, bizarre price discrepancies arise which create price distortions and disincentives to emission reduction. Other problems include some plants not having to reduce output at all while others actually turned off so as to only operate during the hours in which the firm had bid and received the lowest rate. This can lead to longer days, which in turn creates less energy efficiency. But the real problem with the European system and ultimately the US system rests upon the treatment of imports from countries without a similar cap and trade system. We have discussed this issue a few times, most recently here where we point out that any duty or tariff changes could spark trade wars. This issue in and of itself should give pause to policy-makers. If a cap and trade system becomes the law of the land, how will the US handle imports? Will we inundate the Department of Commerce with hundreds of anti-dumping cases? Without addressing the question of imports at the outset, we could have major international trade disputes not only on the import side but on the export side too, especially if other countries view any import scheme as a violation of WTO rules. Any test case should include carbon intensive products and we would suggest steel to start!
The impact of cap and trade will do more than what we have covered in these two posts. Higher metal prices become certain as producers’ costs increase. We have no reason to suspect those prices would not get passed along the supply chain. Higher prices of course stifle demand. But perhaps of greater impact to all manufacturers ” the combination of lower demand and/or new outsourcing will create job losses. We have seen several reports suggesting substantial losses to optimistically, slow job growth. The only “new” jobs we can envision involve government regulators, traders/speculators and green jobs but those jobs would likely not replace the lost jobs.
Instead, why doesn’t the US government implement Warren Buffet’s import certificate plan? That would wipe out our trade deficit without negatively impacting GDP.
What do you think about cap and trade?