Despite the promised environmental benefits of the proposed Cap & Trade legislation, there's no denying it will inhibit business growth.
What is Cap and Trade?The American Clean Energy And Security Act of 2009, more commonly known as “Cap and Trade,“ passed the House of Representatives on June 26th on a largely party-line vote. The Senate is currently working on a similar version of the bill, and President Obama has stated publicly that he hopes to sign Cap and Trade into law this year. Although many Senators from both parties are under mounting pressure from energy companies, businesses and consumers to oppose such legislation, the seating of Sen. Al Franken in the chamber provided Democrats with a filibuster-proof majority. This makes it likely that the legislation will at eventually make it to the floor for a vote, perhaps as early as this fall.
Cap and Trade involves utilizing legislation and regulation to curb the release of pollutants and greenhouse gas emissions, specifically carbon dioxide. If enacted, the legislation would set up a complex accounting and trading scheme whereby companies would buy and sell emission permits and/or credits. The goals of the bill are noble; after all, who is
for pollution? But like anything in business, there is a cost-to-benefit ratio. The downside of Cap and Trade is that it is intended to move consumers off carbon-based fuels by increasing prices through higher taxes and strict regulation of growth.
Using taxes to disincentivize some practices and offering tax breaks to incentivize others is nothing new. Common examples are sumptuary or "sin" taxes on alcohol and tobacco and tax write-offs for energy star appliances and charitable giving. Still, Cap and Trade goes far beyond anything currently on the books.
How Does Cap and Trade Work?The House version of Cap and Trade would force companies to reduce their carbon emissions by 17% by 2020, and 83% by 2050, when benchmarked against 2005 levels. To facilitate this reduction, federal agencies would cap the amount of carbon (and other pollutants) that companies can release into the environment, based on the averages in their particular industries. In a way it’s similar to the varying salary caps used by the NFL, NBA and NHL to level the playing field. In sports, the franchises that maintain space beneath the cap are more flexible with regards to making strategic changes involving personnel. Under Cap and Trade, businesses that stay under the cap will be better positioned to make strategic changes involving operations and growth.
Companies will be required to decrease emissions by a certain percent each year against the benchmarked average, or “Cap.” Companies that don’t make operational changes that result in emission reductions will be penalized and will have to purchase offsets from companies that have exceeded their reduction requirements. That’s where the “Trade” part comes in. Reductions in carbon emission will become an asset and commodity that is traded between companies and is taxed by the government.
How Will Cap and Trade Affect Business?Despite the spin emanating from politicians and special interest groups, this new regulatory scheme is a thinly-veiled tax on business that would hit manufacturers and distributors particularly hard. Imagine that ten years from now, your top competitor is brought down by unsustainable debt. As a result, they’ve put most of their assets on the market, assets that would allow your company to absorb a decent percentage of their market share in a short period of time.
Under Cap and Trade, you would have to offset the increase in emissions that would result from the expansion in operations and distribution. Even if it was legal for your company to increase emissions by such an exorbitant amount in one year, it would certainly be prohibitive to business have to pay for the assets as well as the offsets. One solution might be to spread your incorporation of the ailing company’s assets across several years, but that does little more than create an accounting scheme that would slow business growth. And depending on the final markup of the bill, there may be limits on what percentage of carbon reductions can be made up by purchased offsets (versus organizational reductions) each year, thereby limiting corporate growth to a predictable percentage of existing operations.
How Would Cap and Trade Affect the Economy?Another damaging aspect of Cap and Trade is that the emission reductions required per year are not rooted in reality. During the first few years of regulation, most firms will find it easy to reduce their carbon output. There are many strategies and programs out there today that will achieve the necessary results with minimal up-front investment. But the fact remains that around 85% of our energy use today is based on carbon-emitting fossil fuels. The ability to switch to alternative energy sources in the short term is both limited and expensive. Despite the ability for companies to continue improving their operations, they will still be required to get under the cap or pay the price. This will happen every year, whether there are technological breakthroughs in clean energy production or not.
Once the regulations outpace the available solutions, there will be less carbon to trade. As the price for this commodity increases, many companies will go out of business. Since the healthy companies won’t be able to afford to take on the emissions associated with expansion, many of them won’t buy out their former competitors. The increased prices resulting from the higher cost of doing business will be passed on to customers, who will already be paying higher prices for goods and energy. The economic cost that may result from this attempt to micromanage industrial growth is projected to be in the trillions of dollars of lost GDP.
Proponents of Cap and Trade argue that the legislation will be amended as needed to protect our economy. While we can be hopeful that they are right, the important question is whether the damage will have been done by then. Opponents argue that the sheer number of pollution allowances being promised to energy producers in exchange for their Senators' support for the bill will negate the goal of the legislation, making it all cost and no benefit to American taxpayers. They also argue that the inflexibility of Cap and Trade legislation and the stymieing effect it will have on our economy will inevitably lead to nationalistic “Buy American” clauses that will only exacerbate the problem. In fact, we’ve seen calls for
such provisions already. And we won’t even get into the dangers of patronage, graft and fraud that would be endemic in such a restrictive economic environment.
Is Carbon Regulation Inevitable?This scenario we’ve described above is purely theoretical and based on the premise that the Senate will pass Cap and Trade. There's no guarantee that such sweeping new regulations will be adopted this year or during this administration.
What we do know is that Europe has already adopted a complex carbon trading scheme, and it seems inevitable that America will eventually adopt some form of regulatory oversight. As European companies seek to impose the same barriers to profitability on their American counterparts, we'll likely see this issue start to dominate at various world trade forums. In fact, European diplomats are already
advising American officials on the successes and failures they’ve experienced on the continent. So the question seems to be whether carbon regulation will happen sooner, rather than later, and what that program will look like when it is signed into law.
Of course, Cap and Trade may turn out to be only a minor thorn in the side of American industry, but no one would make an honest argument that it will be financially beneficial to anyone besides carbon accountants and the federal treasury. To put it simply, there’s an upside to Cap and Trade, but it’s dwarfed by the unavoidable downside.
Where Can I Find More Information?Because Cap and Trade is a politically-charged issue, we would like to offer the following resources that approach the issue from varying perspectives:
Labels: Green, Legislation, Logistics, Sustainability
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