A "market-oriented" cap-and-trade program to reduce carbon
dioxide emissions proposed in the U.S. House of Representatives by
Henry Waxman (D-CA) and Ed Markey (D-MA) has had a difficult time
gaining support as more people recognize that it is a significant
tax on energy that will inflict a severe amount of economic
Knowing that large taxes generate large amounts of revenue,
businesses sent thousands of lobbyists to flood the halls of
Congress asking for a piece of the "climate revenue" pie. With the
majority of the energy tax revenue handed out to large
corporations, less will be made available to the public, leaving
the American consumer to pick up the costly tab.
An Energy Tax in Disguise
The goal of a cap-and-trade program is to reduce the amount of
carbon dioxide and other greenhouse gases in the atmosphere.
Absolute limits on total emissions of greenhouse gases are
established. Before those in a covered sector can emit a greenhouse
gas, they need to have the ration coupons (also known as
allowances) for each ton emitted.
Because the ration coupons will have a value--and therefore a
cost--cap and trade becomes a tax on fossil fuels that produce
greenhouse gases when they generate energy. Since 85 percent of
America's energy needs come from fossil fuels, cap and trade would
be a massive tax on energy consumption.
Although more people are beginning to see cap and trade for its
true colors, only 24 percent of Americans could properly identify a
cap-and-trade program as something that dealt with environmental
issues; in fact, more thought it was a measure to regulate Wall
Street. Members of Congress are using this
confusion and lack of awareness to their advantage, constructing
the cap-and-trade bill in hopes that the public does not recognize
it as a tax. Knowing very well the term "energy tax" will be met
with immediate public disapproval, many politicians are reluctant
to call it what it is.
How Big Is the Tax?
The Heritage Foundation's Center for Data Analysis (CDA) found
that, after adjusting for inflation, the government would collect
$5.7 trillion in tax revenue between 2012 and 2035. CDA's economic
analysis found that, by 2035, the Waxman-Markey cap-and-trade
legislation would also:
- Raise electricity rates 90 percent after adjusting for
- Raise inflation-adjusted gasoline prices by 58
- Raise residential natural gas prices by 55 percent; and
- Raise an average family's annual energy bill by $1,241.
But the $1,241 annual energy bill is just the direct increase in
energy prices that consumers face. As energy prices increase, the
cost of making products becomes more expensive. Businesses will
pass the higher costs of operating onto the consumer, which will be
reflected in the higher prices Americans pay for products.
Higher energy prices also result in a slower economy, which
means less production, higher unemployment, and reduced income. As
the higher production costs ripple through the economy, household
pocketbooks get hit again and again. When all the direct and
indirect energy tax impacts have been added up, family-of-four
costs rise by $2,979 per year on average over the 2012-2035
timeframe. In 2035 alone, the cost is $4,609.
Over the same timeframe, gross domestic product losses--the
excess burden or deadweight loss of taxation--totals $9.4 trillion.
It is important to note that these higher energy bills come after
people have to use much less energy as a result of increased
Where Does the Tax Revenue Go?
In order to get the Waxman-Markey cap-and-trade bill through the
House Energy and Commerce Committee, Members promised generous
handouts for various industries and special interests. President
Obama's budget proposal suggested a 100 percent auction of the
emission allowances, forcing companies to bid on the right to emit.
Businesses, knowing very well this would impose a severe cost on
their bottom line, sent their lobbyists to Washington to protect
them. And it worked.
About 85 percent of the allowances have been promised for free.
The biggest winners are the electric utilities, which get 35
percent of the allowances. Some energy-intensive manufacturers also
made out well. So only 15 percent of the allowances will be
auctioned, at least in the initial phase of the bill, and even that
may get promised away as the bill moves forward. Eventually the
percentage of allowances given to industry declines in future
years, and the government auctions them off to the highest
More Painful for Consumers
Free allowances do not lower the costs of Waxman-Markey; they
just shift them around. Although the government awarded handouts to
businesses, the carbon dioxide reduction targets are still there,
and the way they will be met is by raising the price of energy and
thereby inflicting more economic pain. Prices have to go up enough
to force people to use less energy, and so if anyone is bought off
with free allowances, the costs for everyone else are that much
When there is money on the table with big government programs,
lobbying by special interests is inevitable. Politics governed by
special interests typically makes things worse for the consumer,
and cap and trade is no exception. Approximately 2,340 energy
lobbyists worked on the cap-and-trade bill to lower costs for their
clients--i.e., utilities and other industries. That leaves
consumers to bear the entire cost of the price increases required
to meet CO2 targets; meanwhile, industry gets a free windfall.
Is all of this economic pain justified by gains against global
warming? Higher energy prices dramatically slow the economy. These
higher energy prices push unemployment up by 1,145,000 jobs on
average, with peaks over 2,479,000. In aggregate, GDP drops by over
$9.4 trillion. The next generation will inherit a federal debt
pumped up by $28,728 per person. All of these costs accrue in
the first 25 years of a 90-year program that, as calculated by
climatologists, will lower temperatures by only hundredths of a
degree in 2050 and no more than two-tenths of a degree at the end
of the century.
Waxman-Markey has evolved into a corporate welfare program for
businesses interested in protecting their bottom lines, making it
that much more painful for the energy consumer. And this is all
being done for a change in the temperature too small to ever
Loris is a Research Assistant and Ben
Lieberman is Senior Policy Analyst in Energy and the
Environment in the Thomas A. Roe Institute for Economic Policy
Studies at The Heritage Foundation.