Cap and trade will be tax and fail

Having sneaked through the House of Representatives last week, “cap and trade” is now a Senate vote away from becoming part of our everyday lives. The experience with such CO2-cutting plans elsewhere suggests there are just two problems with it: the “cap” and the “trade.”

One does not have to doubt, as I do, claims that the complex science of the Earth’s climate is “settled” to see that this bill is a sham. True believers may like it even less, as Greenpeace’s disavowal of the bill attests.

The premise of cap and trade is that it’s a magical way to change the way we heat and cool our homes, transport people and goods, grow crops and raise livestock — that is, live our lives — with minimal pain. In reality, it is income redistribution from consumers to the firms with the most clout in Washington.

I spent part of the last few years covering Europe’s cap-and-trade scheme. Like our putative plan, it is based on the Kyoto Protocol’s conceit that a market can exist for a “good” — permits to emit carbon dioxide — that no one would want had government not created and distributed them and mandated their purchase.

The idea is that some CO2 producers will find ways to cut their emissions quickly, given the incentive to sell their excess permits at a profit to less innovative emitters. The price of permits will rise as government further restricts them, spurring everyone to be more carbon-free.

But as I said, the plan’s problems begin with the “cap.”

The 1,200-page House bill prescribes nationwide limits on CO2 emissions. It then spends thousands of words describing broadly how to divide various allowances, including such arcana as whether an entity qualifies as a “merchant coal unit” if its retail rates are set by an Indian tribe. What’s important to note is that there’s lots of wiggle room for regulators to exploit.

Now, some people argue that, if we’re going to charge for carbon emissions, it would be more fair and economically efficient to have a carbon tax levied on all emitters equally. They’re right.

But they’re wrong if they think it won’t happen because Congress fears the repercussions of passing a tax. Congress is talking openly about all sorts of new taxes right now, and in any case everyone knows that “cap and trade” is really “cap and tax.”

The reason politicians favor cap and trade over a straight tax is that it lets them influence the issuance of permits . That’s a powerful prerogative, which politicians could use to punish or reward. In Europe, the game of securing exemptions for pet companies — e.g., German car makers — is a never-ending one.

Some of the calculation might also include the risk of job, and thus vote, losses. For all the talk about the “green jobs” of the future, at bottom politicians tend to believe more strongly in the real jobs of the present.

But the costs of this maneuvering fall on less favored businesses, who soon recall that green is also the color of envy, and ultimately on consumers, who end up paying any tax on business.

Consider also that electoral politics are practically written into the bill. The first year of cap and trade would be the presidential election year of 2012, when emissions would be limited to 97 percent of 2005 levels. So, not overly draconian while Barack Obama faces re-election. Democrats have also actually scheduled emissions increases in 2014, just in time for mid-term elections, and in 2016. Clearly, they are trying to limit cap and trade’s effect on the next few elections.

As for the “trade” part, permit prices have to be predictable if they are to push CO2 emitters to innovate. Subject to wide fluctuations, Europe’s carbon-trading market hasn’t worked.

What it has been, though, is a new way for financial firms to make money out of thin air — literally, in this case. Handing traders and bankers this new fake-money printing press is effectively another bailout we’re funding.

Either cap and trade will work, and the economy will sink alongside emissions, or it won’t, and we’ll merely have a new system of corporate welfare. Either way, we don’t need it.

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[...] things were true last summer, when the cap-and-tax bill passed by the House was considered dead on arrival in the Senate. [...]