Will Cap and Trade Cost American jobs?

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Global Trade, Macroeconomics

An interesting article in the New York Times charting progress on the cap and trade greenhouse gas emissions climate bill explains how consensus has been maintained by the granting of free allowances to emitters to mitigate the cost of implementing the bill’s limits. The caps would gradually tighten over time. But the allowances would allow those parts of the country most reliant on heavy carbon emitting industries to reduce the financial impact ” effectively subsidizing states that rely on coal fired energy at the expense of those blessed with hydro-electric power sources. The gulf is huge. Washington state for example emits 0.15 tons of CO2 per megawatt whereas Indiana emits nearly 1 ton per megawatt.

So as the bill takes one step closer to reality, we thought a closer analysis of how the government would address the fallout for manufacturers would be an appropriate topic for MetalMiner. For make no mistake though we are in favor of the environment, and most would agree that reducing carbon emissions is in the long term interests of all of us, there will be winners and losers from such a massive government intervention in the dynamics of the economy. The whole purpose of cap and trade is to place a financial burden on emitters to force them to change. This means raising prices over time.

The financial implications for CO2 emitters will progressively impact up to 2015 at which point all the allowances will have been given away. The electricity industry would get 35%; local natural gas distributors, 9%; “trade exposed” industries, 14.2%; then oil refiners, automobile manufacturers and energy companies investing in carbon capture and storage split another 6-7%. Trading could result in a price of between $15 and $20/ton of CO2 according to the US EPA, so the sums involved are around $80 to 108 billion per year.

To quote the NY Times article, Oil refiners and manufacturers of chemicals, paper, cement and metals will be vulnerable. So will companies that face tough U.S. or foreign competition that make it hard to pass on higher energy prices. Any industry active in internationally traded goods or products where the price is set on world markets by competitors who are not subject to cap and trade ” think steel, aluminum, copper, nickel, etc etc will feel an impact. Companies facing rising costs due to higher energy and/or costs associated with direct cap and trade penalties will face the greatest competition as foreign suppliers are able to undercut them. In addition they will have the greatest incentive to move manufacturing overseas to locations where CO2 emissions are not taxed. Primary metal production was highlighted by the Holmes Hummel report as one of the four most at risk categories. There are two possible outcomes:

  • Manufacturers of basic metal products could move production overseas. The Carbon Leakage Prevention Act seeks to prevent this by compensating companies that face competition from overseas via an output-based rebate program. US based emitters would receive a rebate set around the industry average for every ton of metal they made in the US.
  • The other is that a tariff is applied to imported goods from countries that do not operate a CO2 cap and trade system. The drawback is that products made from carbon intensive materials ” automobiles made from steel ” would benefit from this system as domestic automobile makers were forced to pay higher costs for their steel compared to their overseas competitors. The result could be either for those metal consuming manufacturers to move overseas or for lawmakers to impose tariffs on all steel containing products coming into the USA. What a nightmare that would be.

As an article by the Heritage Foundation observed, the introduction of a cap and trade system has the tendency to invoke protectionist policies and is fraught with possibilities for law makers to pad their pet industries or areas with special concessions.

Primary metal producers are much more likely to seek protection or subsidy behind output-based rebate programs or import tariffs. But downstream consumers such as autos, white and capital goods, in fact any US manufacturing firm that consumes metal is likely to be among the biggest losers, particularly if they face international competition or currently enjoy a level of export business. Inevitably taxing CO2 emissions will cost American jobs, may be not as many as some detractors suggest but for some consumers shifting future investment to overseas plants may be the only answer.  Cap and trade alone will not be the deciding factor, energy costs, availability of raw materials, and so on will all play a part in plant location. Hopefully, the gradual introduction of the effects will give firms time to adjust and time for the developed world to persuade the developing world of the need to adopt comparable regimes ” thereby keeping the playing field as level as possible.

–Stuart Burns

Comments (8)

  1. LP says:

    Pardon my ignorance here, but does the cap and trade affect the developing nations?

    As a tree hugger, I like the concept but only if it is on a level playing field.

    Also, do these industries have the capability to innovate efficiently and bring down their CO2?

  2. stuart says:

    No the cap and trade is a policy entered into by country or region – US or Europe say, hence the problem. If the US moves too fast or too far it will inadvertently ship jobs overseas.

  3. AntonioSosa says:

    By increasing taxes and the cost of energy, cap and trade will kill our few remaining companies or force them to move to free countries. Cap and trade will transform the U.S. into a socialist/communist country like Venezuela, where no companies can make a profit and unemployment and poverty are destroying a once prosperous country.

    Cap and Trade would be the equivalent of an atomic bomb directed at the U.S. economy”all without any scientific justification, said famed climatologist Dr. S. Fred Singer.

    Those brainwashed to the point of wanting to destroy the economy to “prevent global warming” are behaving like the most primitive human beings who were duped into believing that human sacrifices would ensure them good weather. Human beings don’t have the power to control climate! And killing the economy will not help the environment. Poor countries can’t protect the environment. Just look at Haiti!

    More and more scientists and thinking people all over the world are realizing that man-made global warming is a hoax that threatens our future and the future of our children. More than 700 international scientists dissent over man-made global warming claims. They are now more than 13 times the number of UN scientists (52) who authored the media-hyped IPCC 2007 Summary for Policymakers. http://www.climatechangefraud.com/content/view/3562/218/

    Additionally, more than 30,000 American scientists have signed onto a petition that states, “There is no convincing scientific evidence that human release of carbon dioxide, methane, or other greenhouse gases is causing or will, in the foreseeable future, cause catastrophic heating of the Earth’s atmosphere and disruption of the Earth’s climate.” http://www.petitionproject.org

    We pray that honest leaders “ both Democrat and Republican – are able to save us from Obama’s criminal global warming/cap-and-trade scam.

  4. LP says:

    While I appreciate your passion and Al Gore’s enthusiasm, I feel like the truth is somewhere in the middle.

    I believe man has four choices:

    1. Do nothing, it’s revealed as a hoax in the future and we lose nothing.

    2. Do something, it’s revealed as a hoax and we lose a lot money but we eventually recover.

    3. Do something, spend a ton of money, prevent global warming and continue to innovate. The earth is greener and we have fancy cars hydrogen/electric carbon fiber cars and magic poop diapers that spontaneously combust.

    4. Do nothing, face massive climate issues, destroy a vast portion of the earth’s population and take hundreds of years to recover, if at all.

    Based on my thoughts, numbers 2 and 3 might be the cheapest options. I think it would be unwise for us to put all our eggs in one theory. I like hedging. It costs money to hedge but it worth averting a huge headache.

    My personal feeling is that we should do something but it should be a coordinated effort by all. If others are not will to participate, we should still do enough to make a meaningful difference without having to destroy or save the world by ourselves.

    The simple fact is that the US is the most energy consuming and pollutant country in the world. We have 10 percent of the world’s population but consume 25% of the world’s energy resources.

    You may say so what. I say it’s a matter of national security. If we reduce our consumption for depleting resources, move towards renewable resources and we can minimize our exposure to the countries that may hold most of the chips at the table. Keep in mind that the US exports $400 – $600 billion dollars a year to buy crude oil. I’m not sure what Europe exports but I’m sure it’s nothing to sneeze at.

    The point is that we can consume responsibly, avert potential disaster, develop sustainable practices and in turn innovate. I don’t see it being so bad. So it’s doesn’t matter which theory is right. I just don’t want to spend $4 a gallon on oil and live on a heaping mound of trash.

  5. Kurt says:

    In response, let me quote energy writer Ed Hiserodt, who commented to readers who thought it ludicrous that he would imply that global warming caused by CO2 is not a threat:

    “Some readers have questioned my position denying anthropogenic (human-caused) global warming (AGW), in particular the link between carbon dioxide and rising global temperatures. These critics might first consider that my position does not ask them to enact new cap-and-trade taxation, worry endlessly about their carbon footprint, or make major changes in their lifestyles. So I suggest it is not incumbent on me to prove CO2 is not causing global warming, but for the alarmists to prove that it is.

    Let us look at the evidence they bring to the table to prove their position:
    ¢ The graphs in Gore’s Inconvenient Truth purport to show a CO2/temperature relationship and indeed do so. But an examination of the data shows that warming precedes increases in CO2 by an average of 800 years. The huge thermal flywheel of the oceans requires long periods of time for temperature rises to occur. When oceans do warm, CO2 is expelled since warmer water can hold less of the gas.
    ¢ There is general agreement that if CO2 is causing the warming trend, there should be a hot spot at about 10 km over the tropic. This signature is missing, causing even many IPCC scientists to abandon the AGW hypothesis.
    ¢ Most of the rest of the climate-alarmists’ case rests on computer climate models. But none of the models predicted the cooling trend of the last eight years of 1 degree C per century as shown by satellite measurements. In fact, there is not one computer model that can even replicate past changes in global temperature, let alone predict future ones. Plus, all increases in temperature are completely consistent with natural processes and warming taking place since the Little Ice Age, and Earth has not even yet reached its 3,000-year average temperature.

    In other words, there is NO proof whatsoever that AGW has had an effect on the warming trend, which began at about the time of the Civil War, that brought us out of a 400-year Little Ice Age.

    The effects ” actual or imagined ” of this trend should not be confused with causation. Tales of polar bears, coral reefs, glaciers, etc. only take the spotlight off the real question: where is the evidence of AGW?

  6. You made some good points there. I looked on the internet for the issue and found most individuals will consent with your blog.

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