Don't cap access to affordable energy

Human Events, Aug 20, 2001 by Ebell, Myron

Liberal Proposals Worse Than Kyoto

President Bush is persisting in his admirable determination to keep the United States out of the United Nations' Kyoto global warming treaty, despite intense pressure from European leaders and fierce media criticism. But now Senators John McCain (R.-Ariz), Joseph Lieberman (D.-Conn) and James Jeffords (I.Vt.) are pushing Congress and the administration to adopt policies that would be worse in their economic effects than the treaty itself.

Supported by an odd assortment of environmental pressure groups and some major corporations that stand to make a profit (at. least in the short term), these senators have called for unilateral reductions in carbon dioxide emissions through what is called a capand-trade system. Cap and trade would work by setting a cap on total emissions, auction allowances to emit carbon dioxide to energy producers, and then permit them to trade these allowances between themselves. The argument for cap-and-trade is that emissions trading is a more cost-effective way of reducing total emissions than a straight limit or a tax on carbon-based fuels.

That may be true. Using similar market mechanisms has in many cases lowered the costs of government regulations. But this should not conceal the fact that the end result is still the same as a tax on coal, oil and natural gas-to force Americans on to an energy starvation diet.

In June, the non-partisan Congressional Budget Office (CBO) published a study analyzing various cap-and-trade proposals. The CBO's conclusion couldn't be any clearer: "[T]he economic impacts of cap-and-trade programs would be similar to those of a carbon tax: Both would raise the cost of using carbonbased fossil fuels, lead to higher energy prices, and impose costs on users and some suppliers of energy."

Although the CBO doesn't put a price tag on any of these proposals, several private economic forecasting firms have estimated that reducing carbon dioxide emissions to the level required by the Kyoto Protocol would cost consumers $300-400 billion a year, or $3,0004000 for each American household. For purpose of comparison, the Bush tax cut passed by Congress averages $130 billion a year. It should be recalled that Senators McCain and Lieberman voted against the tax cut because it was too big.

Of course, the cap could be set higher than the Kyoto limits, so it wouldn't cost as much as $300 billion a year in higher energy prices. But there is an unfortunate side effect of all quota systems that would force costs up over time. As the author of the CBO study, Dr. Terry Dinan, said at a July 30 congressional briefing sponsored by the Environmental and Energy Study Institute, "[T]he potential for rent seeking would be great" with a cap-andtrade program. "Rent seeking" is the highbrow term that economists use to describe the way special interests try to profit from government regulations by creating loopholes and gaming the system.

The federal peanut program is a good example of how rent seekers maintain their government-granted privileges. Holders of licenses to grow peanuts have successfully resisted reform or repeal of the program for decades through intense lobbying in Congress. They are willing to spend whatever it takes to maintain the system because without it their licenses will become worthless.

A cap-and-trade system that creates value for not producing energy would create a similar class of beneficiaries determined to maintain and increase the value of their holdings through political pressure. But we're not talking peanuts here. Since three-quarters of America's energy comes from carbon-based fuels, the profits derived from not producing energy could be worth hundreds of billions of dollars. And so the political power wielded by the corporations that hold carbon dioxide allowances would be colossal.

Many people in Washington, D.C., who are involved in politics keep repeating that the government must "do something" about global warming. But before agreeing and then deciding that a cap-and-trade scheme to reduce carbon dioxide emissions is the least harmful idea out there, we should ask whether the goal is good. A cap-and-trade program, just like an energy tax, would have no appreciable effect on the potential long-term problem of global warming, but it would reduce energy supplies and therefore raise energy prices. The lives of less-well-off Americans especially, would become darker, less comfortable, and less mobile.

The Bush Administration and the House of Representatives are pursuing a path radically different than the one advocated by Senators McCain, Lieberman and Jeffords. On August 2, the House passed an energy bill containing key elements of the President's energy plan. The goal of this important initiative is to get government regulations out of the way, so that private enterprise and technological innovation can continue to provide consumers with abundant and affordable energy. For those of us who use energy, that's the right way to go.

Mr. Ebell is director of global warming policy at the Competitive Enterprise Institute.