Cap and Trade Rules
Potential Costs to America From Cap-and-Trade

By by Ross Kaminsky
Human Events
May 21, 2008

"If you’re not at the negotiating table, you’re on the menu"

If you think energy is expensive now, just wait until our next
president, working with a Democratic-majority Congress,
implements cap-and-trade rules tailored for the greatest
possible gain for special interests and the highest possible
costs to consumers and taxpayers.

On Friday, Richard Sandor, the CEO of the Chicago Climate
Exchange gave an interview which was (unintentionally, I’m
sure) a shocking look into the reality of carbon emissions
trading and the “cap-and-trade” proposals which are aimed
directly at the heart of the American economy.

The interviewer, Dylan Ratigan, asked Mr. Sandor who was
already participating in carbon trading in anticipation of a
politically-imposed “carbon cap”. Sandor’s answer was a
who’s-who of American industry: “17% of the Dow Jones…IBM,
Intel, DuPont, United Technologies. In addition to that, 11%
of the Fortune top 100…Ford, International Paper, Safeway.
20% of the top power companies…AEP, Detroit Edison, Alliant, Reliant.”

Ratigan then asked the obvious question: “Why are they buying
protection against a political cap that does not yet exist?”
Sandor’s fascinating reply: “Some of them have a hidden asset.
They’ve already made cuts. They can sell them on our exchange
and make a lot of money…. Others are there because they want
to gain a competitive lead…. Others want to be there for the
political debate. We have an expression at the Chicago
Climate Exchange: ‘If you’re not at the negotiating table,
you’re on the menu.’”

Picture the political cartoon: a table surround by wolves,
labeled such things as “Energy Trader”, “Enormo Industries”,
“Power Company”, “Radical Environmentalist”, and “Al Gore”,
drooling while staring at a silver platter on which stand
several small, cowering figures, labeled “Taxpayer”,
“Consumer”, “Rational Scientist”, and “Small businessman”.

Regarding the size of the carbon market, Sandor said that “the
carbon ‘crop’ in Europe (i.e. output of their vehicles and
factories) is 2.2 billion (metric tons)…and trades at $40 (per
metric ton). That’s over $80 billion (in total value), so the
European emissions alone are bigger than the US corn and
soybean crops combined. The US is going to be three times
that size. We’re talking about something that is…humongous.”
The risk to Americans is proportional to the size of the
dollar signs in Sandor’s eyes and the efforts by early large
participants to maneuver the system to their benefit.

When a corporation (or any capitalist) is given the
opportunity to make money by (legally) taking advantage of a
system, they will do so. One of the best ways to gain
advantage is to be involved in the early moments of the
system, guiding regulations in a way that benefits you.
Having been involved in the development of a major exchange’s
electronic trading platform, I saw first-hand how much effort
certain market participants put into influencing trading rules
in a way that would maximize their expected trading volume
(and therefore expected profits) at the expense of smaller
market participants…including public customers.

Combine that dynamic with Sandor’s description of the
potential size of the carbon market and you get a sense of to
what lengths companies will go to “game the system”. And who
can blame them? The real problem is giving them a system to
game, and the fault for that lies squarely at the feet of
politicians who buy into the junk-science arguments of “global
warming” alarmists without any consideration of the massive
economic costs Americans will bear in a Quixotic quest to stop
climate change. It reminds me of a club I once heard of: “The
Stop Continental Drift Society”, and it makes as much sense.

Economist Wayne Winegarden, partner in the econometrics firm
of Adruin, Laffer, and Moore, who wrote a paper on “The
Adverse Impacts of Cap-and-Trade Regulations” with Arthur
Laffer and testified before the Senate last year, offered some
perspective in an interview for Human Events: “Cap-and-trade
is an inferior policy to accomplish reduction in carbon
output.” (Winegarden stays away from the issue of whether such
a reduction is a valid goal, understanding that politics is
moving that way in any case and that his expertise is not in
climate science.) “However, if you’re going to try to reduce
carbon output, it should be done as a carbon tax so that the
costs are not hidden and politicians have to take
responsibility. You can’t minimize the impacts of carbon if
you’re trying to hide or lie about the effects of your
carbon-reduction policies.” ”

Dr. Winegarden notes that “Cap-and-trade has been such a
dramatic failure in Europe, including forcing even “green”
factories to fire workers. When asked whether America could
learn enough from Europe’s mistakes that we could implement a
cap-and-trade system that made sense; Winegarden’s answer was
a resounding “no”. “Cap-and-trade is the politically
expedient solution – it has great political merit but no
economic merit. We’ll be revisiting this because, like
Sarbanes-Oxley, it will create more problems than it will
solve”, not least of which will be dramatically increased
volatility of energy prices.

The potential costs to America from cap-and-trade are
enormous. The Department of Energy estimates that S. 2191, the
Warner-Lieberman cap-and-trade proposal, will increase the
cost of coal for power generation by between 161% and 413%.
DOE estimates GDP losses (see chart) over the 21-year period
they forecast, at between $444 billion and $1.308 trillion,
with particular damage to the manufacturing sector. (This
gives some hope that organized labor will, in a rare
occurrence, oppose Democratic leaders on this issue.)
Winegarden estimates that this bill could increase
unemployment by 2.7% or about 4 million jobs. In fact,
companies are already preparing to avoid increased level and
volatility of American energy prices by setting up factories
and partnerships in countries which won’t be subject to
cap-and-trade restrictions…proving with real-world behavior of
producers that no carbon-limiting regulation can succeed if it
is not universal.

In the CNBC interview, Sandor noted that he “knows” we will be
living in a “carbon-constrained world” because all three
presidential candidates support “cap-and-trade”. Given support
among Democrats for cap-and-trade, and recent history’s
demonstration that a Republican president and Republican
members of Congress are not interested in forcing any
discipline on the other, it is all but certain that something
like Warner-Lieberman would pass if John McCain were
president. Maybe, just maybe, Republicans in the House and
Senate would stand up against cap-and-trade if the president
were a Democrat. Therefore, since these proposals represent
the biggest threat to the American economy of any policy
suggestion during my lifetime, John McCain’s position on
cap-and-trade has cemented my intention not to vote for him in

As Americans are kept in the dark by gullible mainstream
media, industry and special interests are ensuing that
cap-and-trade, when it arrives, will either be as damaging as
possible to consumers, will accomplish none of its stated
goals, or, most likely, both. We taxpayers and consumers are
“on the menu” indeed.

Ross Kaminsky has been a professional derivatives trader for
over 20 years. Ross is a fellow of the Heartland Institute and
writes about political economy and current events at
Rossputin.com. He also contributes to blogs for the Denver
Post, the National Taxpayers Union and FreedomWorks among others.


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