How Capitalism Will Save Us (42 page)

As congressional economist Ike Brannon points out, “society cannot spend an infinite amount of money to protect and extend each person’s life.” Hard as it may be for some to accept, “choices have to be made.”
²³

C
ap-and-trade regulation is supposed to be a “market-based” way to control industrial emissions of carbon dioxide (CO
₂
), thought by many to cause climate change. Here’s how the system is supposed to work: Government sets a “cap” on how much carbon dioxide can be emitted each year. Each company or institution is then granted a predetermined number of permits. Companies that need to produce more emissions can buy permits from others that don’t need them. Another way to distribute permits is for the government to simply auction them off. This avoids the politically charged process of determining the number of permits granted to each company or institution—and the auctions raise bundles of money. Either way, say proponents, carbon emissions are controlled, while a market is created that allocates the right to pollute according to need.

One congressional proposal under consideration would require CO
₂
emissions to be reduced to 83 percent of their 2005 level by 2020, with further reductions thereafter. Meanwhile, cap-and-trade programs have been under development in several states. One such effort is a multistate cap-and-trade program for greenhouse-gas emissions, the Regional Greenhouse Gas Initiative (RGGI), covering Connecticut, Delaware, Maine,
Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont. RGGI is expected to begin capping emissions in 2009. California is actively considering the feasibility of a similar cap-and-trade program for CO
₂
emissions.

Politicians are enamored of cap-and-trade because it is, in essence, a big tax increase that would rake in tens of billions of dollars each year. But the Real World problem with a cap-and-trade system is that it significantly boosts the cost of energy. Prices of CO
₂
-intensive products—including gasoline, electricity, and many industrial products—would soar. Dispassionate experts estimate that a national program could
double
electricity prices. Gas prices are expected to skyrocket almost 75 percent—or higher. Experts such as economist Martin Feldstein predict the cost of living for the average household will shoot up by $1,600 a year.

When all the
indirect
costs of a national program—such as higher taxes and slower economic growth—are added up, the Heritage Foundation estimates that the cost of living for a family of four, starting in 2012, will increase by some $4,300. And it will only go higher with the future CO
₂
restrictions that are expected.

In Europe, the Emissions Trading Scheme (ETS) was put into effect in 2005 based on carbon emissions levels (caps) established by the Kyoto Protocol of the late 1990s. It is emerging as a major failure. European manufacturers have bitterly complained that the extra costs are making them uncompetitive, thus forcing them to consider moving facilities elsewhere.

Soundly based market initiatives can actually work. The problem with cap-and-trade is that it is a poorly conceived idea masquerading as a market solution.

The market for carbon emissions credits did not develop spontaneously, like the market for the pencil. It was dreamed up and imposed on people by bureaucrats. In other words, without government it would not exist.

In a sense, a marketplace is commerce’s equivalent of an ecosystem. In economics, as in biological science, it is extremely difficult to successfully reproduce what spontaneously evolves in nature. In the early 1990s, oil billionaire Edward Bass poured $150 million into a miniature version of the world’s ecosystem in the desert near Tucson, Arizona—Biosphere 2. It was essentially a giant, airtight terrarium that was supposed to contain the earth’s ecosystem in miniature—an ocean stocked
with fish and a dense forest in an oxygenated atmosphere that was supposed to be self-sustaining.

The idea was to create a self-sufficient environment where people, plants, and animals could survive without help from the outside world. The problem was that the scientists in charge of the project, some of whom had national reputations, couldn’t possibly know all the conditions and components of a fully self-sufficient ecosystem. Starved for the right amount of oxygen, the fish in the ocean died. CO
₂
levels in the air became too high. The big terrarium was overrun with an infestation of desert cockroaches. Several years after its much-publicized launch, Biosphere 2 was widely acknowledged to be a momentous failure.

Government attempts to create a cap-and-trade market for CO
₂
permits are a little like the efforts of the scientists who tried to create Biosphere 2. There are inevitably distortions and unintended consequences because a handful of bureaucrats simply can’t know all the workings of a marketplace “ecosystem.”

Cap-and-trade failed in Europe because the market and its values were dreamed up by bureaucrats and were essentially arbitrary. Member states of the EU allocated permits free of charge to companies based on how many the government believed they needed. This arbitrary system resulted in an oversupply of permits. Politics polluted the allocation process. Large companies lobbied for more permits than they needed, only to sell them at a profit. Smaller organizations less effective at lobbying got too few permits and had to pay more than their fair share of fees. A December 2008 article in the
New York Times
reported:

Despite the immense expenditures, data are suggesting that the European program may even have had a negative effect on the environment.
A 2007 report by the London-based think tank Open Europe found that across the EU, emissions from installations covered by the ETS actually rose by 0.8 percent.

Thus experts, such as highly regarded economist Martin Feldstein, believe that a U.S. cap-and-trade program is not likely to work any better:

Even if a nominal benefit is achieved, Feldstein says that cap-and-trade will devastate the economic lives of Americans. The higher taxes, higher prices, and slower growth, he predicts, will kill the nation’s chances of recovery from the 2009 recession. Everyone wants clean air. But cap-and-trade means diverting massive resources—billions of hard-earned taxpayer dollars and job-creating capital—into a government-created, politically driven artificial market that is, at best, an economic version of the Biosphere.