Cap and Trade: The government’s new pet market

Encore Online (Wilmington, NC), June 29, 2009

While most Americans are distracted by the situation in Iran and the vital current healthcare debates, Barack Obama and his friends in Congress are attempting to rush through one of the most draconian realignments of energy policy in the nation’s history. This legislation proposes a cap on carbon emissions with permits that are tradable between companies. Known as “cap and trade,” it’s better described as “cap and tax.”

The decision by Congress to go with a cap-and-trade system over a more straightforward carbon tax attempts to delude the American people into thinking that this is a market-based approach—when, really, it is an aristocratic-based approach.

Cap and trade would allow the industries that produce pollution to have a government-granted cartel over their respective industries. Just like other infamous cartels, including OPEC on oil and the AMA on doctors, this is bad news for the American people since it all drastically increases the cost of energy. This means that new companies that want to enter the market will have to buy credits that have already been auctioned off.

For the average American, that means higher prices on energy, higher unemployment due to increased costs upon these companies, and even reduced economic output for the whole country causing a decrease in the average American’s income. Each of these cartels creates high barriers to entry for new competitors. For example, “If somebody wants to build a coal-powered plant, they can; it’s just that it will bankrupt them because they’re going to be charged a huge sum for all that greenhouse gas that’s being emitted,” as Obama stated on the campaign trail. Even though it will be hard for a new company to set up shop in the energy industry, after this, the profits from this exclusive cartel will be given to Congress and not to the companies to reinvest into possible innovative efficiencies. This will only add more money to the congressional budget that will undoubtedly be handed out to special interests, undoubtedly in the form of ever-burgeoning “entitlements.”

For the average American, that means higher prices on energy, higher unemployment due to increased costs upon these companies, and even reduced economic output for the whole country causing a decrease in the average American’s income.

One Tax Foundation study found that cap and trade would eliminate at least 965,000 jobs, cause a $37.8 billion decrease in household earnings, and a decrease of $136.8 billion decrease in economic output. Proving that this policy is wrong for America and anti-market in nature. As economist Robert Murphy said, “The number of permits is an arbitrary scarcity imposed by government fiat.”

Making it obvious, cap and trade is not a real market-based solution but, rather, a market-biased problem. In markets there exists a division of labor of information; for example, one person knows how to put together a car, another to drive the car through taxi routes and another to fix the car. Because of specialized information, the energy companies know what’s better for their respective industries than the government bureaucrats. That is why when Los Angeles tried their own local version of cap and trade they wound up issuing more permits than there was pollution. This effectively did nothing, and the city had to wait five years before the pollution would reach the cap level. When it finally hit the cap, the prices exploded. Because of the complexity of any and all industries in America’s economy, it is impossible for the Obama Administration to attempt to centrally plan the nation’s energy sector. As Austrian economist F.A. Hayek once said, it is impossible for one individual “to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know.”

While these bumbling bureaucrats play around with one of the most important sectors of the economy, the prices will continue to rise upon individual consumers. As anytime the government imposes a higher cost upon a business, the costs trickle down into higher prices. The American people will be forced to spend more of their hard-earned income on energy and less on other items even more basic to the “Hierarchy of Needs.” Not to mention that the poor, on average, already spend more of a percentage of their income on energy, causing the effect of these new costs on them to be the highest.

Central planning was wrong for the Soviet Union. In fact, it is wrong for America. Unfortunately, some—at the very highest levels of political power—seem unable to learn the lessons of history. Hence, we will all be forced to repeat its mistake.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

Scroll to Top