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Yes: Plan would send prices soaring and put a huge burden on consumers

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Mark J. Perry
February 7, 2009
EDITOR’S NOTE: The writer is addressing the question, will the proposed cap-and-trade plan to reduce emissions have a chilling effect on the economy?

At a time when proposals for higher taxes are politically unpopular, Congress is coming up with other strategies to raise the revenue at the expense of the American public.


Key congressional committees are expected to begin debating legislation that would impose mandatory limits on greenhouse-gas emissions. If Congress succeeds, the typical American will not be victimized as a taxpayer, but as a consumer.


The proposed legislation would create a European-style market-based system that caps the maximum allowable amounts of carbon dioxide from power plants, manufacturers and vehicles.


If companies emit more than their cap allows, they must buy “carbon permits” on the market from companies that have extra ones. This “cap-and-trade” system is designed to give companies an incentive to reduce emissions, but unknowing consumers would be “taxed” through higher home energy bills and the rising costs of fuel, food and consumer products.


House Speaker Nancy Pelosi has vowed to hold a floor vote on cap-and-trade legislation before negotiators meet later this year in Copenhagen under U.N. auspices to work toward a new international climate change agreement.


“Cap and trade is there for a reason,” the San Francisco Democrat said recently. “You cap and trade so you can pay for some of these investments in energy independence and renewables.”


What this really means is that by collecting such fees from utilities and other companies, Congress would be placing an unfair burden on consumers’ shoulders to reduce carbon emissions.


Some members of Congress are actually recommending an almost open-ended collection of fees from companies. The assumption is that firms like utilities, whose only source of revenue in many cases is the ratepayers, are a bottomless pit of funding.


Consumers should pay their fair share of the cleanup, but the proposed fees far exceed that. The frightening part is that we still do not have a credible cost estimate for the cleanup effort.


Worse yet, Congress is preparing to spend tens of billions of dollars on renewable energy sources and improvements in energy efficiency in the hope they will replace fossil fuels. But solar, wind and geothermal energy cannot provide the large amounts of “base-load” electricity that our economy requires.


On the other hand, nuclear power, natural gas and clean coal can do the job, but environmentalists have closed down these solutions.


When Europe launched its system in 2005 as a way to meet its targets under the Kyoto Protocol, it cast itself as a leader in the fight against global warming. But Europe’s first three years of cap-and-trade have not worked as intended. Emissions have risen instead of fallen. And cap-and-trade has imposed a significant cost on their economies from lost competitiveness, lost jobs and lost investment.


If we’re not careful, carbon cap-and-trade in the United States could be disastrous, especially if it is linked to Europe’s system.


Importantly, no concrete plans are in the works to require China—the world’s leading emitter—and other developing countries to reduce their greenhouse-gas emissions.


Although the United States and the other leading industrialized countries have set a goal to cut emissions by 50 percent by 2050, developing countries such as China and India have not accepted mandatory caps on carbon emissions.


If we penalize our own companies for carbon emissions, why should we exempt companies in developing countries from that requirement? In effect, by collecting fees from American companies—with the cost ultimately borne by consumers—we are subsidizing our foreign competitors at our own expense.


It’s time we developed a fair system by first recognizing that greenhouse gas controls must be implemented globally: No one nation can do much on its own to reduce climate change. And we need to gauge the real costs involved in reducing carbon missions, and then set a clearly defined limit on what American consumers should pay.


Mark J. Perry is a professor of finance and economics at the Flint campus of the University of Michigan. Readers may write to him at UM/Flint, 350 David M. French Hall, Flint, Mich. 48502-1950 or e-mail him at mjperry@umich.edu.

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