Cap-and-trade legislation raises economic concerns

By Andrew Guevara
Show-Me Institute

The federal climate change legislation currently being debated in the U.S. Senate would not only have a substantial impact on the economy of the United States, but would also have economic implications for the state of Missouri.

The American Clean Energy and Security Act of 2009 (ACES), H.R. 2454, introduced by Rep. Henry Waxman (D-Calif.), chairman of the House Energy and Commerce Committee, and Rep. Edward Markey (D-Mass.), chairman of the Subcommittee on Energy and the Environment, passed the House of Representatives late last month, and now will be considered by the Senate.

“The legislation will create millions of new clean energy jobs, save consumers hundreds of billions of dollars in energy costs, promote America’s energy independence and security, and cut global warming pollution,” Waxman said during the opening days of House committee hearings in May.

The bill aims to reduce greenhouse gases economy-wide, 3 percent below 2005 levels by 2012, 17 percent by 2020, 42 percent by 2030, and 83 percent by 2050, through a national cap-and-trade system.

The purpose of cap and trade is to limit overall emissions in an economy. Permits for carbon emissions are distributed through an allowance distribution system or a general auction. Afterward, these allowances can be traded on the open market to whichever company or entity wants to produce more emissions than their allocated permits will allow. The idea is that firms would consequently have a financial incentive to reduce their own emissions, in order to sell permits to others.

Markets in emissions permits already exist. In 2005, the European Union created the largest emissions trading market in the world, the EU Emission Trading System (EU ETS), in order to comply with the Kyoto Protocol, an international emissions reduction treaty.

However, the EU ETS may not be effective at reducing emissions. According to data posted by The Guardian, U.S. carbon emissions decreased 2 percent from 2005 to 2006, while European carbon emissions increased slightly during the same time period.

Furthermore, U.S. job growth may be slowed by a cap and trade system. Analysis by the Heritage Foundation, a Washington, D.C.–based think tank, finds that the Waxman-Markey bill would reduce gross domestic product by $7.4 trillion and result in the loss of 844,000 jobs on average, with a high-end forecast of 1.9 million jobs nationwide.

The American Council for Capital Formation (ACCF) and the National Association of Manufacturers (NAM) found similar results when they undertook analysis on a state-by-state basis for an older piece of legislation that never passed, the Lieberman-Warner Climate Security Act of 2007. That bill would have implemented a similar cap-and-trade program.

The AACF /NAM study estimated that Missouri’s gross state product would have been reduced by between $2.7 and $3.7 billion per year by 2020 and $10 billion and $11.8 billion by 2030, and that employment would have been reduced by between 23,000 and 34,000 jobs in 2020, and 57,000 to 76,000 by 2030.

Some organizations, however, interpret the same AACF/NAM data differently. The Political Economy Research Institute at the University of Massachusetts–Amherst reports that the Missouri economy still would experience economic growth after the decrease in greenhouse gases that is expected to occur as a result of cap and trade.

The report further claims that, by 2030, Missouri’s gross state product would grow 69 percent higher than 2007 levels, to $388 billion, and in that same time frame employment would grow 11.7 percent higher, to 3.21 million jobs.

Some of the bill’s critics point out that Missouri receives 84 percent of its electric power from coal-fired plants, according to the Missouri Department of Natural Resources, so the state may experience disproportionately high economic effects from a national cap-and-trade program.

“We’re a coal dependent state,” U.S. Sen. Claire McCaskill (D-Mo.) said in late May at a town hall meeting in Sedalia. “And I don’t want the people that I represent unfairly being left with the price tag for this bill because we’re a coal dependent state.”

Sean Schukar, vice president for strategic services at AmerenUE, a utility company that provides gas and electricity to many Missouri residents, predicts that if the legislation were to take effect, rates could increase as much as approximately 10 percent 2015 and then spike to as much as 40 percent by 2030.

Industry groups also have expressed concerns for the Waxman-Markey bill and how it would affect the citizens of Missouri.

“The research shows the proposals increase the cost of manufacturing goods in Missouri and the nation, making it even more difficult to compete with manufacturers in other countries,” Associated Industries of Missouri President Ray McCarty wrote in an email message.

“At a time when we are expanding our federal resources to stimulate the economy, these proposals will cause additional job losses and business closures, leading to even greater challenges.”

Despite these industry concerns, proponents of the Waxman-Markey legislation include national electric and energy companies, such as Duke Energy and British Petroleum, as well as community and environmental groups, such as the Environmental Defense Fund and the Natural Resources Defense Council.

In a letter to Waxman and Markey, Fred Krupp, president of the Environmental Defense Fund wrote, “No single bill can fully address the energy and climate challenges we face, but the American Clean Energy and Security Act is a strong step forward.”

Andrew Guevara is a graduate student at the Truman School of Public Affairs at the University of Missouri–Columbia, and a recent Show-Me Institute intern. This summer, he is interning in Washington, D.C.

Show-Me Institute intern Caitlin Hartsell contributed to this report.

This entry was posted on Thursday, July 16th, 2009 at 8:46 am. Both comments and pings are currently closed.