The George C. Marshall Institute






Cap and Trade is a License to Cheat and Steal

by William O'Keefe
May 19, 2009

One of James Bond?s first movies captured attention with the title "License to Kill." Today, Washington, D.C., is setting the stage to compete with Hollywood in the sensational headlines market. Members of the House Energy and Commerce Committee are in the process of scripting climate change legislation worthy of being titled "License to Cheat and Steal."

This cap-and-trade bill ? actually called the American Clean Energy and Security Act of 2009, or the Waxman-Markey bill ? would mandate severe reductions in U.S. greenhouse gas emissions. Since emissions are mostly generated by energy use (heating your home, cooling your groceries, driving to work, etc.), these targets would effectively mandate energy rationing. Since these targets are not based on economic or technological realities, there can only be one outcome: much higher energy prices.

Severe limitations on emissions could easily turn well-intentioned policy into an opportunity for shady moneymaking schemes at the expense of the environment and American households.

Research indicates that implementation of a U.S. emissions market could drive up energy costs for Americans anywhere from $324 to a whopping $3,100 per year. And because low-income families spend a greater percentage of their earnings on energy, this burden would fall heaviest on those least able to afford it.

In contrast, the financial benefits would be enjoyed by Wall Street opportunists and special-interest groups. The government-regulated trade of carbon dioxide opens the door to the creation of risky financial tools like the derivatives, hedges and credit default swaps that led to our recent economic crisis and the scandals associated with it.

Anyone who doubts this risk need only look at the experience of Europe?s cap-and-trade system. Not only has it been plagued with fraud and abuse, it failed to meet its emissions-reduction targets.

The complex and cumbersome nature of the trading system makes effective oversight by both voters and regulators a daunting challenge, opening the way to influence by special interests. Media reports show that bureaucrats have allowed a major utility to write a provision for the Waxman-Markey bill, which favored a handful of companies and disadvantaged their competitors. This opportunity for manipulation skews incentives. Instead of encouraging R&D in cleaner electricity, cap and trade gives utilities a strong incentive to invest a lot of money in lobbying efforts.

As the European trading system demonstrates, this policy creates a legal gray area, equipping future Enrons and Bernie Madoffs with a license to cheat and steal.

The draft Waxman-Markey bill touted on Capitol Hill includes a provision that allows covered companies to buy emissions offsets or emissions allowances rather than reduce their actual emissions. (This is the modern-day equivalent of purchasing indulgences from the Church that allow you to buy off your sins.)

But the legitimacy of these offsets has proven difficult to verify. Europe has already witnessed companies paying themselves for offsets and firms building plants for the sole purpose of receiving tax dollars to shut them down.

The closed-door deals already being made in Washington, D.C., indicate that a U.S. system would likely suffer from the same manipulation. And once the trading begins, there will be a need for a futures market, mechanisms to hedge risks and financial instruments like credit default swaps.

With permits worth in excess of $100 billion, traders will gain handsomely and have an incentive to create mechanisms for additional financial gain, setting the stage for a repeat of the financial abuses America witnessed in the subprime crisis.

The burden all of this potential financial manipulation would be borne by Main Street, the very consumers, workers and families still reeling from the housing market fallout.

Rather than continuing to push cap and trade ? a policy that one of the nation?s leading economists, Yale University?s William Nordhaus, predicts would lead to "pandemic cheating" ? Congress should adopt a simple, transparent and effective approach to addressing climate change.

By implementing a straightforward policy, lawmakers could best serve the interests of citizens, businesses and the environment, while the James Bond fictional excesses stay where they belong ? back in Hollywood.

This article appeared in the San Francisco Examiner May 19, 2009

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