Cap and Trade Rules
Beware of Cap and Trade Climate Bills

By Ben Lieberman
Heritage Foundation - WebMemo #1723
December 6, 2007

America's Climate Security Act of 2007 (S. 2191), sponsored by
Senators Joseph Lieberman (I-CT) and John Warner (R-VA), is the
latest and fastest-moving "cap and trade" bill introduced in
Congress this year. All such climate change measures warrant careful
scrutiny, as they would likely increase energy costs and do
considerably more economic harm than environmental good.

A Costly Proposition

These measures would set a limit, or cap, on carbon dioxide
emissions from fossil fuel use. The effect of such a cap would be to
impose rationing of coal, oil, and natural gas on the American
economy. Each covered utility, oil company, and manufacturing
facility would be given allowances based on past emissions or some
other formula. Those companies that emit less carbon dioxide than
permitted by their allowances could sell the excess to those that do
not; this is the trade part of cap and trade. Over time, the cap
would be ratcheted down, requiring greater cuts in emissions.
Each proposal differs from the others on specifics: the stringency
of the cap, the number and type of companies covered, the ground
rules for allocating and trading allowances, and other details. S.
2191 is, in several respects, more stringent than other cap and
trade bills. Its requirement that emissions decline to 15 percent
below 2005 levels by 2020--even in the face of a growing population
and rising energy demand--sets a very difficult target.[1]

Measures like S. 2191 that target carbon emissions aggressively will
be costlier than those that give the economy more time to adjust to
the energy constraints. For example, over the long term, energy
companies may find ways to capture and store carbon dioxide
emissions underground, rather than emit them into the air, or switch
to lower-emitting alternative energy sources as they are developed.
But most experts see these advances as taking decades--much longer
than the initial targets in S. 2191 allow. In fact, these targets
may actually complicate the development of longer-term innovations,
as they will divert resources to near-term fixes.

Carbon dioxide is the unavoidable byproduct of fossil fuel
combustion, which currently provides 85 percent of America's energy.

Thus, it will be very costly to move away from this preferred energy
source, and especially doing so as expeditiously as S. 2191
requires. A study by Charles River Associates puts the cost (in
terms of reduced household spending per year) of S. 2191 at $800 to
$1,300 per household by 2015, rising to $1,500 to $2,500 by 2050.[2]

Electricity prices could jump by 36 to 65 percent by 2015 and 80 to
125 percent by 2050.[3] No analysis has been done on the impact of
S. 2191 on gasoline prices, but an Environmental Protection Agency
study of a less stringent cap and trade bill estimates impacts of 26
cents per gallon by 2030 and 68 cents by 2050.[4]

Even these cost projections may underestimate the true costs,
because they assume no unpleasant surprises. But the world has
already witnessed many unpleasant surprises with Europe's ongoing
efforts to impose a cap and trade program under the Kyoto Protocol,
the international climate treaty to reduce greenhouse gas emissions.
In fact, European efforts have racked up significant costs while
failing to reduce emissions.[5] Nearly every European country
participating has higher emissions today than when the treaty was
first signed in 1997. Further, despite ongoing criticism of the
United States from Kyoto parties for failing to ratify the treaty,
emissions in many of these nations are actually rising faster than
in the United States.

The European experience also shows the problem of cap and trade
fraud.[6] None other than Enron's Ken Lay was a strong supporter of
carbon cap and trade when the idea was first floated in the 1990s,
saying that it could "do more to promote Enron's business than
almost any other regulatory initiative." These carbon allowances
that will be bought and sold have a value estimated at $50 billion
to $300 billion annually, and the trade in them would be a huge new
business.[7] Enron may be gone, but others ready to take advantage
of cap and trade--often at public expense--are not.

The actual cost of S. 2191 is difficult to estimate--as America has
never had to deal with such severe energy constraints--but would
likely be very high.

A Regressive Tax

By limiting the supply of fossil fuels, S. 2191 would raise the cost
of energy. For consumers, cap and trade means more expensive
gasoline and electricity as well as net job losses in
energy-dependent sectors. Senator Lieberman himself concedes costs
into the hundreds of billions of dollars. And as the Congressional
Budget Office has noted, such energy cost increases act as a
regressive tax on the poor.[8]

Lost Jobs

The net job losses from S. 2191 are estimated by Charles River
Associates to be 1.2 million to 2.3 million by 2015.[9] Some of
these jobs will be lost for good, due to the impact of higher energy
costs on economic activity. Others, chiefly in the manufacturing
sector, will be sent overseas. In the very likely event that S. 2191
significantly raises domestic manufacturing costs and that
developing nations refuse to impose similar restrictions, the
American economy could experience a substantial outsourcing of
manufacturing jobs to those nations with lower energy costs.

Little Environmental Gain

While the costs of aggressive cap and trade proposals are
substantial, the environmental benefits are suspect. This is true
even if one fully accepts the claim of man-made global warming. The
most ambitious measure to date is the Kyoto Protocol, but even if
the U.S. were a party to this treaty and the European nations and
other signatories were in full compliance (most are unlikely to meet
their targets), the treaty would reduce the Earth's future
temperature by an estimated 0.07 degrees Celsius by 2050--an amount
too small even to verify.[10] S. 2191 would at best do only a little more.

Indeed, a number of economists, including many who are far from
global warming skeptics, warn of overly aggressive cap and trade
measures imposing costs exceeding the benefits.[11] In other words,
the costs of implementing such measures would be higher than the
value of the global warming damage that they would prevent.

The Slippery Slope

It is a near certainty that the first climate bill enacted will not
be the last one. In fact, most major environmental organizations
have already criticized S. 2191 and other pending global warming
bills as inadequate, or as at best "a good first step." The economic
impacts of S. 2191, though substantial in their own right, could be
a mere down payment toward costlier subsequent measures.


Cap and trade bills are nothing short of a government re-engineering
of the American economy. And S. 2191, with its aggressive targets to
reduce emissions from fossil fuel use, would put the nation on a
path of serious economic harm not justified by any benefits.
Ben Lieberman is Senior Policy Analyst for Energy and the
Environment in the Thomas A. Roe Institute for Economic Policy
Studies at The Heritage Foundation.

[1]Margo Thorning, "The Impact of America's Climate Security Act of
2007 (S. 2191) on the U.S. Economy and on Global Greenhouse Gas
Emissions," Testimony before the Committee on Environment and Public
Works, United States Senate, November 8, 2007, pp. 3-4, at
[2]Anne E. Smith, prepared statement at the Legislative Hearing on
America's Climate Security Act of 2007, S. 2191, the Committee on
Environment and Public Works, United States Senate, November 8,
2007, p. 6, at
[3]Ibid., p. 9.
[4]Environmental Protection Agency, "EPA Analysis of The Climate
Stewardship and Innovation Act of 2007," July 16, 2007, p. 2.
[5]European Environment Agency, "Greenhouse Gas Emission Trends and
Projections in Europe 2006," EEA Report No. 9, 2006, pp. 17-22, at
http://reports.eea.europa.eu/eea_report_2006_9/en; and Open Europe,
"Europe's Dirty Secret: Why the EU Emissions Trading Scheme Isn't
Working," August 2007, at www.openeurope.org.uk/research/etsp2.pdf.
[6]Ibid., pp. 19-26, 46-49.
[7]Congressional Budget Office, "Trade-Offs in Allocating Allowances
for CO2 Emissions," Economic and Budget Issue Brief, April 25, 2007,
p. 2, at www.cbo.gov/ftpdocs/80xx/doc8027/04-25-Cap_Trade.pdf.
[8]Ibid., p. 3.
[9]Smith, "Legislative Hearing on America's Climate Security Act of
2007," p. 6.
[10]Thomas Wigley, "The Kyoto Protocol: CO2, CH4 and Climate
Implications," Geophysical Research Letters, Vol. 25, No. 13 (1998),
pp. 2285-2288.
[11]See William Nordhaus, "The Challenge of Global Warming: Economic
Models and Environmental Policy," September 11, 2007, pp. 8-32, at


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