Cap & Trade: Why It's Tax & Spend
Senate plan for won't cool planet, but will raise taxes
By Shikha Dalmia

The Senate takes up the Climate Security Act this week. At its heart is the hot new anti-glob al-warming scheme, known as "cap and trade," which John McCain and Barack Obama have both embraced. But the only thing it will cool is the US economy.

In effect, the bill would impose an average of more than $80 billion in new energy taxes every year. It would also turn carbon dioxide into the new tobacco - a "vice" that Uncle Sam feeds off in the name of combating.

The bill aims to gradually cut US emission of greenhouse gases by 2050, to 60 to 65 percent below 2005 levels. (Both McCain and Obama favor even deeper cuts.) That's an even more ambitious goal than the one in the 1997 Kyoto Treaty, which the Senate condemned 95-0, as far too burdensome for the US economy.

Its mechanism for getting there is "cap and trade," which, though touted as "market-based," is anything but. In fact, it will lead to a massive government expansion.

Cap-and-trade involves setting yearly caps on emissions, and divvying up allowed emissions each year among industries in the form of carbon credits. Cleaner companies that don't use up all their credits could sell their surplus to emitters.

Making firms pay to pollute is supposed to get them to adopt more energy-efficient technologies and/or switch from fossil fuels to cleaner alternatives, thereby lowering emissions.

But it hasn't worked in Europe. Since the European Union adopted a cap-and-trade program three years ago, CO2 output is actually up several percent.

One reason is that the EU gave away the carbon credits for free - so many companies found ingenious ways to grab even more credits than their previous emissions, and the EU wound up licensing a net emission increase.

To fix that, the Senate bill would auction off some credits - a few at first, but more every year. (Half would get handed out for free, half by auction over the bill's life.) By 2050, the auctions would raise a total of $3.3 trillion in new revenues.

What will Uncle Sam do with that windfall?

If fighting climate change were its only concern, Washington would give the money back by slashing taxes. After all, the bill inflicts a lot of economic pain.

• The bill's backers claim that it will create lots of new "green jobs." But there's no credible evidence to support that. To the contrary, a study conducted by consulting firm CRA International found that, in its first seven years, the bill could cause a net loss of 1.2 million jobs.
• It also would mean higher energy costs for every American. The Heritage Foundation estimates that from 2012-2030 every household will pay on average $8,870 extra to buy energy - not including higher gasoline prices. But Congress seems disinclined to return the money.

For example, Sen. Barbara Boxer (D-Calif.) has already announced her plans for the windfall: Give a quarter of it ($800 billion) to the poor and half ($1.5 trillion) to pet Democratic projects (such as wildlife adaptation, international aid and mass transit) and special interests (such as alternative energy start-ups and auto-manufacturing retooling groups). The rest ($900 billion) she'd direct to "deficit reduction," DC-speak for "We'll do with it as we damn well please." What'll really happen if Boxer gets her way? Consider what the state and federal governments have done with their tobacco-tax windfalls. These were supposed to fund efforts to fight cigarette use and offset health-care costs that states incurred because of smoking. Instead, they now fund everything from schools to economic-stimulus packages.

In short, cap-and-trade is really just another name for tax-and-spend. Just as tobacco taxes haven't eliminated smoking, a cap-and-trade tax won't eliminate global warming. Even if the bill works exactly as promised, it would cut global CO2 concentration by only 4 percent, which wouldn't produce even a measurable drop in temperatures.

But a government that's grown addicted to a vast new source of revenue won't call of this crusade just because it's futile. To the contrary, failure will become a reason to keep the program growing. In other words, the bill won't guarantee that our children will inherit a cooler planet - only that they'll inherit a new tax.

Shikha Dalmia is a senior policy analyst at Reason Foundation. An archive of her work is here.

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