Cap-and-Trade: Bad For The Economy & Us

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
July 14, 2009

IN THIS ISSUE:

1. The House of Representatives Cap & Trade Bill

2. EPA Suppresses Contradictory Global Warming Study

3. Senate Delays Deliberation On Cap-and-Trade

4. Conclusions – Why Is Obama Doing This?

Introduction

On June 26, the Democrat-controlled House narrowly passed sweeping legislation that calls for the government’s first limits and taxes on carbon emissions, the so-called “Cap-and-Trade” bill that President Obama has insisted on. Experts on both sides of the issue, including President Obama, agree that Cap-and-Trade will result in higher energy prices, and that means higher prices for fuel, home heating and cooling and many other things we buy from food to cars to movie tickets, etc., etc.

The Cap-and-Trade bill passed by the House (219-212), while bad enough on its own, unfortunately contained a very onerous last-minute provision that calls for a tariff on imported goods from other countries that do not adopt similar cap-and-trade policies of their own. Even Obama opposed this tariff provision, but the Democrats (and eight Republicans) passed it anyway.

China, India and other large trading partners have no interest in adopting cap-and-trade. Therefore, the US Cap & Trade bill, if passed with the foreign tariff provision by the Senate, will almost certainly result in a global trade war. Some have called it the Smoot-Hawley bill of the 21st century if the tariff provision stays in. It remains to be seen if the Senate will also pass the bill over the next few weeks, which as of this writing seems doubtful, but who knows as Obama fights hard to see it become a reality.

The reason I chose to write about Cap-and-Trade again is the fact that news has escaped in the last two weeks that a recent Environmental Protection Agency (EPA) study found that global warming may NOT be happening at all, and that global temperatures have in fact been falling slightly over the last 11 years. Most importantly, this major study was buried by the EPA until its primary author went public with the information in late June.

While this aspect of the Cap-and-Trade bill may or may not get a lot of attention in the media just ahead, it is important for my readers to understand what is really going on in this sweeping legislation. The bottom line is, it is all about intrusive government control of our lives, from what cars we can drive to how much energy we can use in our homes and businesses. It is not about carbon emissions or global warming (if it exists). It’s about expanding government and indirectly raising our taxes.

I’m quite sure that our more liberal readers and Obama supporters are ready to hit the “delete” button about now, if they haven’t already. But I encourage everyone to read on, even if you think cap-and-trade is a good idea. If it is such a good idea, then why did the EPA bury a major study which concludes that global warming may not be happening, and that regulating carbon emissions is not needed? I’m certainly curious, and maybe you should be too.

The House of Representatives Cap & Trade Bill

On June 26, the House of Representatives narrowly passed H.R. 2998, the American Clean Energy and Security Act of 2009, by a vote of 219 to 212 with eight Republicans voting for it and 44 Democrats voting against it. The complex, 1,000+ page bill mandates a 17% cut in greenhouse gas emissions by 2020 and an 83% cut by 2050, reductions that will be accomplished by putting a price on carbon dioxide through a cap-and-trade system. It mandates that at least 20% of electricity comes from renewable sources and increased energy efficiency by 2020.

Basically, cap-and-trade works as follows. The government sets a limit or a “cap” on the amount of carbon dioxide (CO2) and other so-called “greenhouse gases” that can be emitted nationally. Companies and other groups that emit such gases are issued emission permits set by the government and are required to hold an equivalent number of “allowances” (or credits) which represent the right to emit a specific amount. Most importantly, those that emit these gases will have to pay for these allowances every year.

The total amount of allowances issued cannot exceed the government-determined cap, limiting total emissions to that level. Companies that need to increase their emission allowance must buy credits from those who pollute less. The sale and transfer of allowances is referred to as “trade.” The theory is that those who emit less than their cap will be rewarded by selling their excess allowances to those who emit more, who will in turn have a monetary incentive to emit less over time. They will have to in any event, because the national “cap” goes down over time.

The foundational premise of cap-and-trade is that energy prices will rise, most likely significantly, as companies are forced to buy permits while at the same time they will be spending large amounts of money to substantially upgrade their systems to emit less greenhouse gases.

These added costs will no doubt be passed on to consumers. Since just about everything we use has some energy component to it, we will very likely see the prices of just about everything go up if cap-and-trade is also passed by the Senate.

Peter Orszag, now Mr. Obama’s budget director, told Congress last year that “Those [energy] price increases are essential to the success of a cap-and-trade program.” Earlier this year President Obama confirmed this when he said that under his cap-and-trade plan, “electricity rates would necessarily skyrocket.” They’re admitting it!

While proponents of the Cap-and-Trade bill argue that the costs of such a system would be negligible, nothing could be further from the truth. In fact, by raising the cost of energy significantly, the bill indirectly leads to a massive and highly regressive tax on US consumers. Putting a price on carbon emissions is regressive by definition because poor and middle-income households spend more of their paychecks on things like gasoline to drive to work, groceries and home heating/cooling.

Proponents of cap-and-trade, including President Obama, also argue that it will result in millions of new “green” jobs for Americans. Yet if the price of energy goes up by 15-20% (or potentially much more) permanently, that will mean a serious drag on the economy and could potentially cause extensive business failures and higher unemployment than we have even now.

To understand this, let’s look at the numbers the government has admitted to. According to a report issued by the Environmental Protection Agency in April, by 2015 the price of carbon emission allowances required by the bill for industries to operate could be expected to run between $13 and $17 per ton of CO2 emitted annually. [I should note that the EPA is pushing hard for cap-and-trade (more on this later), so these estimates could be considerably low.]

Even the usually moderate Roll Call (Mort Kondracke’s publication) is firmly opposed to cap-and-trade, and on June 25 posted the following very good analysis of the EPA’s April assessment of cap-and-trade.

“The United States emits about 9 billion tons of CO2 per year. Therefore, at a rate of $15/ton fee for emission indulgences, the bill would impose a tax of $135 billion per year on the nation. Divided by the U.S. population of 300 million, that works out to a cost of $450 per year levied on every American man, woman or child, or $1,800 [per year] for a family of four. While for wealthy individuals like Al Gore such an impost [tax] might represent a mere pittance; for working families struggling hard to make ends meet it would be a very significant burden. [Emphasis added, GDH.]

But that is not even the worst part of it. As a result of the markup of carbon costs, a lot of those working families will be out of work and unable to pay their existing bills, let alone new ones. Consider: Burning one ton of coal produces about three tons of CO2. So a tax of $15 per ton of CO2 emitted is equivalent to a tax of $45/ton on coal… Coal provides half of America’s electricity, so such extraordinary imposts [taxes] could easily double the electric bills paid by consumers and businesses across half the nation. In addition, many businesses, such as the metals and chemical industries, use a great deal of coal directly. By doubling or potentially even quadrupling the cost of their most basic feedstock, the cap-and-trade system’s indulgence fees could make many such businesses uncompetitive and ultimately throw millions of working men and women onto the unemployment lines. [Emphasis added, GDH.]

A gallon of petroleum-derived liquid fuel produces about 20 pounds, or 1 percent of a ton, of CO2 when burned. But it takes about 1.5 gallons of oil to produce one gallon of refined liquid fuel. So a $15/ton tax on CO2 emissions will also cause an increase in the price of gasoline, diesel and jet fuel on the order of $0.22/gallon [others put the added cost at 77 cents per gallon]. This will not only hit consumers’ pockets, but increase transport costs throughout the economy, thereby disabling businesses and increasing unemployment levels still more. While harming the economy, such a gas tax will do nothing material toward the truly essential goal of decreasing America’s dependence on foreign oil.

Indeed, the bill’s dramatic hikes in electricity costs will have the opposite effect, since only 3 percent of America’s electricity is derived from oil, and by forcefully increasing electric power costs, the bill will actually discourage adoption of electric means of transport, including mass-transit systems today and potentially plug-in hybrid cars in the future…

But all these bad aspects of the Waxman-Markey [cap-and-trade] bill pale before its potential impact on the world’s food supply. America’s agricultural sector is one of the greatest success stories in human history. In 1930, hunger still stalked the entire globe. Not just in Africa, India and China, but even in Europe and America, the struggle to simply get enough food to live on still preoccupied billions of people. Since 1930, the world population has tripled. But instead of going hungrier, people nearly everywhere are now eating much better.

This miracle is the work of American farmers, who have not only produced huge surpluses to feed the world, but used the income gained from such good work to pioneer ever more advanced techniques that have enabled farmers everywhere to grow more. This progress is still continuing… But this miracle depends upon the availability of cheap fertilizer and pesticides, which in turn require carbon-based process energy to produce. If you tax carbon, you tax fertilizer and pesticides.

If you tax these things, you tax food, and by no small amount. A $15/ton CO2 tax would increase fertilizer production costs directly by about $60/ton, with the cap-and-trade bill’s increased transport costs inflating the burden still more. That’s enough to make many farmers use less fertilizer, and less fertilizer means less food [and much higher prices]. But to impose such costs for basic groceries on everyone else, and particularly the poor, as part of a largely symbolic effort to try to change the weather, is self-indulgent in the extreme.

In the 220 years of our republic, there may have been worse pieces of legislation enacted by Congress than the Waxman-Markey bill, but none readily comes to mind. The Senate needs to take a stand and stop this disastrous act from passing into law.”

As you can easily see, cap-and-trade has enormous US and global implications, yet most Americans have little or no idea how disastrous cap-and-trade will be. It doesn’t take an economist to see that placing a significant cost on US companies that emit greenhouse gases, while most of the rest of the world has no such tax, will be very bad for the economy.

The House Democrats’ idea to impose an import tariff on foreign countries that do not enact similar measures to control their own greenhouse gas emissions is ludicrous in the first place and would lead to a potentially serious trade war in the years ahead. Hopefully, the Senate will remove that provision as President Obama has wisely requested. Better yet, the Senate does not pass Cap-and-Trade at all (more on this later).

EPA Suppresses Contradictory Global Warming Study

In the last full week of June, the Environmental Protection Agency was accused of suppressing an internal report that was skeptical of claims about global warming, including whether carbon dioxide should be strictly regulated by the federal government, according to a series of newly disclosed EPA e-mail messages.

In mid-March, less than two weeks before the agency formally submitted its pro-regulation [cap-and-trade] recommendation to the White House, an EPA center director quashed a 98-page report that warned against making hasty “decisions based on a scientific hypothesis [global warming] that does not appear to explain most of the available data.” A copy of this report was subsequently obtained by the Competitive Enterprise Institute and was posted on its website on June 25.

In a nutshell, the 98-page report questioned the long-held EPA theory that man-made greenhouse gases are a cause of global warming, and further suggested that global warming may not be happening at all. The 38-year veteran EPA researcher, Alan Carlin, pointed out in his report that global temperatures peaked in 1998 and have been falling modestly ever since. The report also suggested that cap-and-trade regulation was not needed, and probably would have little overall effect on global temperatures.

The EPA center director, Al McGartland, said in an e-mail message to Carlin on March 17: “The [EPA] administrator and the [Obama] administration has decided to move forward...and your comments do not help the legal or policy case for this decision.”

Alan Carlin, the primary author of the 98-page EPA report, said in a telephone interview with CBS News.com on June 26 that his boss, McGartland, was being pressured himself. “It was his view that he either lost his job or he got me working on something else,” Carlin said. “That was obviously coming from higher levels.”

E-mail messages released in late June show that McGartland ordered Carlin not to “have any direct communication” with anyone outside his small group at EPA on the topic of climate change, and was informed that his report would not be shared with the agency group working on the topic of global warming.

“I was told for probably the first time in I don't know how many years exactly what I was to work on,” Carlin told CBSNews.com. “And it was not to work on climate change.” One e-mail orders him to update a grants database instead.

After reviewing the scientific literature that the EPA is relying on, Carlin said, he concluded that it was at least three years out of date and did not reflect the latest research. “My personal view is that there is not currently any reason to regulate [carbon dioxide],” he said. “There may be in the future, but global temperatures are roughly where they were in the mid-20th century. They’re not going up, and if anything they’re going down.”

Carlin’s report listed a number of recent developments he said the EPA did not consider, including: that global temperatures have declined for 11 years; that new research predicts Atlantic hurricanes will be unaffected; that there’s “little evidence” that Greenland is shedding ice at increasing levels; and that solar radiation has the largest single effect on the earth’s temperature.

If there is a need for the government to lower planetary temperatures, Carlin believes, other mechanisms would be cheaper and more effective than regulation of carbon dioxide. One paper he wrote says managing sea level rise or reducing solar radiation reaching the earth would be more cost-effective alternatives.

To their credit, the editors at CBSNews.com published the results of their interview with Alan Carlin on their website on June 26 at 11:09 PM, not exactly prime-time, but at least they published it. And the editors went so far as to conclude: “The EPA’s possible suppression of Carlin’s report, which lists the EPA’s John Davidson as a co-author, could endanger any carbon dioxide regulations if they are eventually challenged in court.”

Wow! Unfortunately, few others in the mainstream media have touched this story.

There is a lot of other juicy info on this EPA suppression matter in the CBS story, but space does not permit me to elaborate. I have a link to the full CBSNews.com story in SPECIAL ARTICLES below. Be sure to read it.

Senate Delays Deliberation On Cap-and-Trade

As discussed above, the Cap-and Trade bill barely passed in the House of Representatives with a narrow margin (219-212) made possible only because eight Republicans joined in voting yes (44 Democrats voted no). Thus, politicos on both sides know that the measure will be even harder to pass in the Senate. In fact, given the political makeup of the Senate, Cap-and-Trade definitely faces an uphill battle, especially in light of the suppressed EPA report noted just above.

Knowing that he did not assuredly have the votes to pass Cap-and-Trade, Senate Majority Leader Harry Reid acknowledged last Thursday that the Senate would delay any further work on the sweeping energy legislation until after the August recess. Senate Environment and Public Works Committee Chairwoman Barbara Boxer (D-CA) announced that she was pushing back her self-imposed deadline to pass cap-and-trade legislation that squeaked through the House in late June. Boxer said senators would take up the legislation “as soon as we get back” from the August recess.

It will be interesting to see if that actually happens given the public backlash to Cap-and-Trade that is growing in the wake of the EPA cover-up story noted above. While Senator Boxer noted that the delay was no indication that the climate bill faces troubles in the Senate, it is clear that the Democrats do not have the votes to pass the increasingly controversial Cap-and-Trade bill at this time.

The Obama administration obviously recognized this as well in light of the very narrow passage of Cap-and-Trade in the House in the last week of June and the repercussions from the EPA story. As a result, the president abruptly shifted his number one priority from Cap-and-Trade to his healthcare reform agenda.

Senator Boxer admitted late last week that the latest intense focus on healthcare by Obama has detracted from her ability to craft a climate change bill to complement the House bill. She said, “A lot of our colleagues are on the health committee. It’s been difficult.” Thank goodness! Let’s hope and pray that the Senate does not pass Obama’s onerous Cap-and-Trade bill.

Conclusions – Why Is Obama Doing This?

The more we learn about President Obama’s Cap-and-Trade program, the more there is not to like about it. Several facts are now very clear:

1. If Cap-and-Trade is passed, the government will set a national “cap” on so-called “greenhouse gas” emissions, and that cap will be reduced every year thereafter. This will be a serious drag on the economy, no doubt about it.

2. A massive new government bureaucracy will have to be instituted to formulate, regulate and oversee this latest pervasive intrusion into the private sector. Bureaucrats will be the ones dictating how businesses that emit greenhouse gases run their operations.

3. All companies and groups that emit greenhouse gasses will also have a “cap” set by the government on their greenhouse gas emissions, and will be taxed annually on every ton of such gases they emit at a rate of $13-$17 as suggested by the EPA (but almost certainly will be significantly higher).

4. President Obama, his budget director and others in his administration have stated publicly that Cap-and-Trade will result in significantly higher energy prices, but maintain that we have to do it in the name of climate change, even though the result on global temperatures will be negligible (if any) unless countries like China, India and others also sign on – which they won’t.

5. Almost everything we consume has an energy component to it – not just fuel for our cars, trucks, buses, trains and airplanes – but also the food we eat, and virtually everything we buy, directly or indirectly. Prices for virtually everything we buy will go up with Cap-and-Trade.

6. President Obama promises that Cap-and-Trade will mean millions of new “green” jobs in new energy efficient industries. Maybe so, maybe not. But one thing is for sure – taxing carbon emissions on tens of millions of US businesses will reduce their competitiveness with foreign companies that face no such carbon taxes. Millions more US jobs are likely to be lost.

At the end of the day, we are left with the same old question I have asked often over the last six months: “Why is he doing this?” No one doubts that President Obama is a very smart man and has a lot of supposedly smart people surrounding him. They are clearly aware of all the facts I have noted above regarding Cap-and-Trade.

As I noted in the Introduction, this is all about intrusive government control of our lives, from what cars we can drive to how much energy we can use in our homes and businesses and much, much more. It is not really about carbon emissions or global warming (if it exists). It’s about expanding government and indirectly raising taxes for everyone, not just the “rich.”

As for raising taxes on the rich, the Obama administration has figured out that they can’t just raise taxes on the rich to pay for his trillions in lavish government spending. That is precisely why you’re hearing increasing talk of a Value-Added Tax that will further hike the prices of everything we buy, in addition to Cap-and-Trade. But that is a story for another E-Letter.

Finally, a note to those that always criticize me for occasionally devoting these pages to political issues. If you don’t think such political issues such as Cap-and-Trade relate to markets and investing, consider the following. If Obama is successful in getting his onerous Cap-and-Trade bill passed, it will be very good for the commodity funds I manage, since commodity prices will see another big bull market as prices across-the-board will rise substantially in the years to come.

Yet these same price increases will be bearish long-term for the economy, and for stock and bond prices, that presumably most of my readers are counting on for their retirement. Think about it. As always, I appreciate your comments (pro or con) and suggestions.

Wishing you a great summer,

Gary D. Halbert

SPECIAL ARTICLES

CBSNews.com: EPA May Have Suppressed Report Skeptical Of Global Warming
http://www.cbsnews.com/blogs/2009/06/26/politics/politicalhotsheet/entry5117890.shtml

Warming Hysteria [is] Road to Economic Ruin (excellent article)
http://www.telegraph.co.uk/comment/columnists/christopherbooker/5804831/Climate-change-The-sun-and-the-oceans-do-not-lie.html

Obama Rewrites the Cold War (in Moscow)
http://online.wsj.com/article/SB124744075427029805.html