Market Analysis

Cap and Trade, or Shuck and Jive?

Congress is set to vote on an economically treacherous cap-and-trade bill. As of now, it's all talk. Let's hope there's no action.

Story Highlights:

  • Congress will vote this week on a cap-and-trade program in an effort to reduce US greenhouse gas emissions.
  • Ultimately, such regulation (disguised as a market-based solution) could cause more economic harm than environmental good.


Well, you've got to hand it to the government. They're nothing if not persistent. No matter the past epic failures in meddling with free markets, they keep trying. True to form, the government rides up like a knight in rusty armor, trying to win the hearts and minds of both environmentalist voters and free market champions with their "market-based" solution to cap greenhouse gas emissions—America's Climate Security Act.

US Coal Lobbyists Unveil Nightmarish Vision of Life After Cap-and-Trade Law
By Stephen Foley, The Independent

As a refresher, cap-and-trade programs (already implemented in Europe via the Kyoto Protocol) place limits (i.e. a "cap") on the amount of emissions resulting from fossil fuels. The government sets the limits on gas emissions and either sells or gives away permits to companies, municipalities and other organizations. Those who own permits have the right to either use them or, if their emissions are below their cap, trade them at market prices. Misapplied words like "trade" and "market prices" are an attempt to sell this as a market-based solution rather than more regulation.

The costs of these programs could far outweigh the benefits. Take, for instance, Europe's efforts in implementing such programs under Kyoto. According to a 2006 report by the European Environment Agency, Europe incurred significant costs while failing to reduce emissions (the actual intended point of the cap-and-trade schemes). In fact, the report shows nearly every participating European country has higher emissions today than in 1997, when the Kyoto treaty was signed. Also, emission levels in many of the participating countries are rising faster than in the US. However, so far Europe is avoiding terrible economic consequences because they, under an arbitrary allocation method, initially gave away more permits than were being demanded, therefore averting a large economic distortion effect (but there's been no net reduction in emissions either). If permits are sold, the idea is this raises costs for the companies buying permits, with said cost increases being passed to consumers. If permits are given away via an allocation method, organizations don't incur this cost and, in theory, don't increase prices to compensate. (However, we're pretty sure such a scenario would become a massive giveaway to political favorites.)

These programs could force delays in (or even the full scrapping of) longer-term initiatives as resources are diverted to comply with short-term government regulations. Such ventures are always and everywhere dislocating to free market efficiency, inevitably leading to higher costs and stifling the economy. And make no mistake: This is a scheme to increase revenues for the feds, who stand to gain billions from the program (remember, they're the ones selling the permits). That would be yet another inefficient routing of American dollars, as are their tax receipts. The good news is the legislation is not likely to pass this year. However, next year it could be a different story if the bill continues to gain support among politicians. (Though, in our view, in the event of a filibuster-proof majority, we wouldn't be surprised if this bill never resurfaced. We have a hard time seeing congresspeople from manufacturing-dependent states supporting this if it had a chance of being more than doomed-for-the-veto-pen political rhetoric. Recall, 95 senators vowed to vote "no" on Kyoto when it was Clinton's prerogative to send it for their approval. Ultimately, he decided not to bother.)

We all want a healthy planet, and cap-and-trade programs seem noble in their intent. But it's their unintended consequences we fear (e.g. a mass exodus of companies seeking to do business in friendlier environments). Cap-and-trade programs are a hasty solution resulting from increasingly louder cries to "do something" about the environment—NOW! However, we prefer the government keep their shuckin' and jivin' away from economics and let free markets do their job.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.