Monday, September 17, 2007

Cap-and Trade System To Control Greenhouse Gases A (Very) Bad Idea

A well-known economist, (Arthur Laffer) says a cap-and-trade system for controlling greenhouse gas emissions would harm the U.S. economy. Not only would the economy suffer, but I am sure any such efforts to limit carbon dioxide emissions would have no effect on global warming or climate change. Read what Mr. Laffer has to say about the economics of the plan.

The Adverse Economic Impacts of Cap-and-Trade Regulations
Arthur Laffer and Wayne Winegarden
September 2007

The Adverse Economic Impacts of Cap-and-Trade Regulations
A cap-and-trade scheme for controlling greenhouse gas emissions (GHGs) would impose significant economic costs on the U.S. economy and, consequently, are an inappropriate policy response to current concerns about global warming. Our analysis of cap-and-trade’s economic impacts reveals the following impacts:

• In economic terminology, cap-and-trade operates is a “quantity constraint” as the scheme establishes (or constrains) the GHGs that can be produced. As a quantity constraint, cap-and-trade regulations inherently create more price volatility in the GHG allowance market, as has already been observed in Europe. The Congressional Budget Office has also raised the price volatility issue, concluding that cap-and-trade regulations are not sound policies for addressing global warming.

• Cap-and-trade regulations would likely impose a large cost on the U.S. economy. The U.S. Energy Information Agency (EIA) estimates that overall economic growth could decline by up to 4.2 percent if a cap-and-trade system were implemented to achieve the Kyoto Protocol targets (7% below 1990 GHGs by 2008-2012). The costs to reach the ultimate goal of some GHG control proponents (e.g., reducing GHGs to 80% below 1990 levels by 2050) would be significantly greater. However, these estimates assume that the government will auction off the rights to emit greenhouse gases as opposed to simply giving these rights away, which is the
approach often discussed in the U.S. and what has actually been implemented in Europe.

• Fossil fuels (oil, coal and natural gas) provide 86 percent of our current energy needs. It is not currently feasible for the alternative energy sources to significantly expand their energy contribution sufficiently in the near-term to substitute for the demand growth, according to the EIA. Consequently, a GHG cap could effectively become an energy production cap – or an energy supply shock.

• The U.S. economy’s past experience with energy supply shocks supports the conclusions of the EIA study. During the previous oil supply shocks (energy supply shocks) of 1974-75, 1979-81 and 1990-91, the economy declined, unemployment rose, and the stock market declined in value.

• Based on the energy efficiency responses to the energy supply shocks of the 1970s, the U.S. economy could be 5.2 percent smaller in 2020 compared to what would otherwise be expected if cap-and-trade regulations are imposed. This equates to a potential income loss of about $10,800 for a family of four for the initial Kyoto GHG reduction target.

• Technical difficulties in measuring and verifying the validity of traded GHG allowances imply that the global market will be inefficient, and subject to manipulation and fraud. Government regulations that fail to delineate future GHG control levels add more uncertainty. These uncertainties raise further questions regarding the efficacy of the cap-and-trade regulations.
When evaluated as a whole, cap-and-trade regulations are likely to impose significant economic costs on the U.S. economy. These costs argue against implementing cap-and-trade regulations as a response to concerns about the potential contribution of GHGs to global warming.

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