We have steered clear of cap and trade and the debate on this subject almost entirely. But if the bill(s) floating through Congress become law, or if President Obama finds a way to sign it into law as part of the budget process, it probably makes sense to analyze what will become one of the largest sources of revenue for the US government. When considered in that light, we’d be hard-pressed to think of how this could not seriously impact manufacturing in general along with metals buyers and those in the metals industries in particular.
Obviously, the purpose of such a system, to reduce greenhouse gas emissions, starts with good intentions. We will not, however, in this piece or likely in others analyze the merits of the science behind global warming or deteriorating atmospheric conditions, (as we apparently should call it). But we will go on record as saying many respected organizations, scientists and think tanks have said no carbon cap and trade system will make enough difference to matter. But let’s make an assumption that such a system does matter and if implemented flawlessly (unlike the European system) will effectively reduce carbon emissions to pre-1990 levels, the target of the legislation. How should we think about the policy ramifications of the bills in Congress and more important to our slice of the world – its specific impact on us as both consumers and buyers of metal?
Let’s start with the general ramifications since many of these have received much attention. We see two major criticisms of a cap and trade plan with at least half a dozen other significant ramifications. Without a doubt, the biggest criticism relates to the fact that when implemented, cap and trade acts as a tax. By some estimates, the US government will receive on the low-end $366b annually (according to a study done by MIT) and on the high end, $1.9t. To be clear, the taxes get paid by corporations but individual consumers end up footing the bill in the form of higher prices. The exact dollar amount of that cost per individual remains the subject of intense debate. We subscribe to the analysis conducted by the Weekly Standard using $3128 per household. The point here relates to the fact that no matter how this system gets implemented, consumers will feel an impact.
The second criticism of cap and trade and right now, perhaps the bigger one relates to the very real and negative impact to GDP. We have seen little research published defending cap and trade and its impact on GDP. Instead, world-re-known economists such as Arthur Laffer believe GDP could decline by 4.2%, according to this recent press release. You may recall Arthur Laffer from an economics class. He pioneered the concept of the Laffer Curve which essentially states that an increase in the rate of taxation does not necessarily increase taxes collected.
One element missing from the current cap and trade debate involves a means or measure of assessing the impact of carbon emissions on the economy. In a second study on cap and trade, the George C. Marshall Institute study entitled: A Cap and Trade System v. Alternative Policies to Curb U.S. Greenhouse Gas Emissions suggests a good measure of the impact of any policy on GDP involves what the author calls the GHG Intensity measure of GDP. In other words, policy makers should examine and measure actual greenhouse gas emissions against GDP.
In a follow-up post later today, we will specifically examine some of the problems with Europe’s cap and trade system and discuss why and how that system could affect US metals industries and companies that purchase metals.