The Costs of Cap and Trade

COMMENTARY Environment

The Costs of Cap and Trade

Sep 14, 2010 2 min read
Nicolas Loris

Former Deputy Director, Thomas A. Roe Institute

Nick is an economist who focused on energy, environmental, and regulatory issues as the Herbert and Joyce Morgan fellow.

According to President Barack Obama, it's time to shift from the winning the war in Iraq to winning the battle against the recession at home. Unfortunately, the president's recipe for economic recovery is far from the right one.

Consider his push for a transition to carbon-free economy, most notably a cap and trade program. It may sound harmless at first, but the evidence shows that cap and trade amounts to a countrywide energy tax that would reduce Americans' income and destroy jobs. It is not the cure for America's economic illness.

The goal of cap and trade is to reduce carbon-dioxide emissions. Since 85% of our energy comes from carbon-emitting fossil fuels, one way to reduce CO2 emissions is to raise the price of energy to discourage its use. To meet the carbon-reduction targets the government wants (83% of 2005 levels by 2050), the price of energy must, as Obama said himself, "necessarily skyrocket."

According to a Heritage Foundation analysis of the cap and trade bill that passed the House last year (sponsored by Reps. Henry Waxman and Edward Markey), gasoline prices would rise by 58% (an additional $1.38 per gallon) and average household electric rates would increase by 90% by 2035 if Obama signed the bill into law. The total energy bill for a family of four would be $1,200 higher than it would be without cap and trade in place.

But it doesn't stop there. Higher energy prices drive up production costs for businesses. That, in turn, causes higher sticker prices. Since everything Americans use and produce requires energy, consumers are hit again and again. To survive the higher energy prices, companies must shed jobs. An exorbitant energy tax could force other business to close entirely or to move to other countries where the cost of doing business is cheaper.

Remember, the point of all this - ostensibly - is to boost our economy. Yet cap and trade clearly would be a net drain on the economy and employment.

Reports on cap and trade by government, and by think tanks independent, left-leaning and right-leaning, all conclude that cap and trade is an economic loser. Studies from the National Black Chamber of Commerce, The Brookings Institution, the Energy Information Administration, the Congressional Budget Office, the Environmental Protection Agency and The Heritage Foundation all found net decreases in income and employment. And the net decrease is after our government spends taxpayer dollars to build more expensive windmills and solar panels.

States that rely on coal, such as Wisconsin, would be hit particularly hard. Coal provides 63% of Wisconsin's electricity, with natural gas providing another 9%. According to Heritage calculations, Wisconsin would lose more than 33,000 jobs as soon as 2012 with cap and trade in place. That number would exceed 67,000 by 2035. Implementing Waxman-Markey would put a chokehold on Wisconsin's economic potential, reducing gross state product by $8.95 billion in 2035.

Prospects for cap and trade policy appear bleak, but Congress has other tricks up its sleeve to increase your energy bill. A renewable electricity standard, which mandates that a certain percentage of our electricity production come from wind, solar and carbon-free energy sources other than nuclear, also would raise electricity rates. After all, if electricity created by wind and other renewables were cost competitive, it wouldn't need a mandate to drive production. The fact that it does need a mandate suggests that it's too pricey to compete in the marketplace.

Contrary to the assertions that clean-energy plans will fix America's economic woes, these policies are economy- and job-killers. Everyone seems to be getting that. Why hasn't the Obama administration?

Nicolas Loris is a researcher in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

First appeared in The Milwaukee Wisconsin Journal Sentinel