The new budget has a cap-and-trade system

It's not a good idea

President Obama is set to send his proposed budget to Congress sometime this morning. The budget, $1.75 trillion, is 12% of the U.S. economy, a number not approached in generations. The abbreviation “TBD” is rife, used to explain where funding for numerous line items will come from. It’s a massive budget that includes funding increases designed to grow government.

$250 billion of the total is ear marked for potential bank bailouts. The administration hopes not to have to spend all of this money. However, in his speech to a joint session of Congress on Tuesday, the president admitted that more money would be given to the banks. Acknowledging that giving billions of dollars to mismanaged banks was unpopular, he said “I promise you – I get it.” But what he failed to acknowledge was that much of this unpopularity does not stem from, as he believes the source to be, giving money to poor money managers, but rather that many people believe it to be a principly wrong move economically. The president merely “gets” what he gets, which is not everything there is to “get.”

The budget would also make a tax cut on the middle class permanent. The administration has designated a controversial carbon cap-and-trade tax on business to pay for these permanent tax reductions, whereby business would have to buy allowances to exceed pollution limits. In theory this is not a bad system. However, upon inspection several flaws quickly become evident, exposing a counter-productive nature.

A cap-and-trade system is essentially an energy rationing tool. Each company covered would receive a quota (the administration has not announced how this quota will be determined, and by whom). Should a company use less than its quota, it is allowed to sell the remaining allowance to companies in need of more. Most cap-and-trade proposals have been designed with the idea of reducing, over time, total emissions by reducing quotas. Current regulation on emissions have, however, led companies to simply find new ways of “disposing” their emissions, such as storing carbon dioxide (CO2) emissions underground rather than emitting them into the atmosphere, avoiding cap-and-trade regulations while creating a whole new host of environmental concerns. CO2 is the unavoidable byproduct of burning fossil fuels, which fuel some 85% of America’s energy.

The concept is very simple – by reducing the supply of fuel, cap-and-trade systems raise the cost of energy. Companies will look to reduce costs to cover the increase in cost of doing business. There are two likely tactics they will take to do this. First, you can be sure that companies will pass as much of the cost on to the consumer as possible (costs are two-fold: the price of buying energy will increase, and their use of it will become more expensive). A study by Charles River Associates used in Senate hearings put the cost of a previously proposed cap-and-trade system (Senate bill 2191 introduced in 2007 by Joseph Lieberman and John Warner) at between $800 and $1500 per household per year by 2015, increasing to between $1500 and $2500 by 2050. That permanent middle class tax cut in the FY09 budget better be significant…

Second, companies will likely cut jobs. Jobs outside manufacturing will suffer as the general cost of doing business rises. Keep in mind, cap-and-trade systems include companies outside the manufacturing realm. Technology companies like Microsoft, IBM, Boeing, and Intel (some of our largest employers) are huge consumers of energy (for example, the cost of keeping computer servers cool is astronomical, requiring uninterrupted 24/7/365 air conditioning for thousands upon thousands of square feet filled with heat-producing machines). Even science labs and technology research centers require around-the-clock electricity for experiments, so large universities and pharmaceutical centers could easily be pulled under a cap-and-trade system if proportional emissions were the standard. These significant sources of economic activity would likely have to reduce payroll through job cuts and outsourcing. Charles River Associates estimated that the impact of S.2191 would be a net loss of between 1.2 and 2.3 million jobs by 2015. The bit on outsourcing is complicated by the administration’s elimination of tax considerations for companies who outsource jobs.

Opponents of this argument will say that the administration also has significant money set aside for alternative energy research. But the cap-and-trade system will be implemented long before these not-so-shovel-ready alternative energy research programs produce alternative energy, which may or may not be any less expensive than energy produced by fossil fuels.

For the real environmentalists of the bunch, one only need to look to Europe and the Kyoto cap-and-trade system they adopted in 1997: nearly every participating country has a higher emission of CO2 today than it did at the system’s inception (as reported by the EU), and emissions of many of those countries are rising faster than those of the United States, who has been criticized for not participating.

Middle class tax cuts are very nice, but paying for them by raising the costs for American industry and business is entirely the wrong way to pay for them and is as flawed as the notion disproven by Bush, but adopted by Obama, that we can issue tax cuts and spending increases simultaneously.