Background
The state’s Legislative Commission on Global Climate Change,1 (LCGCC) is considering a cap and trade program for carbon dioxide (CO2) emissions. The cap and trade program is one of many recommendations that were provided to the Commission by a North Carolina Department of Environment and Natural Resources (DENR) advisory group called the Climate Action Plan Advisory Group (CAPAG).2

What is a Cap and Trade Program?
There are many different ways a cap and trade program can work, but, generally, the government would set a cap on the amount of carbon dioxide that could be emitted. The parties regulated by the cap would have to hold an allowance for each measurable unit, likely a ton, of carbon emissions. These allowances could be sold to other parties that are seeking allowances.

An Energy-Rationing Scheme
A cap on carbon emissions would be a cap on energy use since most carbon emissions come from the use of fossil fuels (i.e. coal, natural gas, and oil). According to the United States Energy Information Administration (EIA), fossil fuels account for 86 percent of total energy consumption.3

A Myth: Cap and Trade is Market-Driven
All too often a cap and trade program on carbon emissions is “sold” to the public as a market-based solution.4 In a cap and trade program, the government, not the market, would decide to cap carbon emissions. The fact that there can be trading of carbon allowances does not somehow make the whole approach market-based. There would be no cap or need to trade carbon allowances in the first place if not for government interference with the market.

The alleged purpose of a cap and trade program is to reduce carbon emissions by creating a limited supply of carbon allowances — in other words, to create scarcity (supply would not meet demand). When there is scarcity, prices will increase until they are in equilibrium with demand. As a result, the costs of carbon emissions and energy will artificially rise.

Hurts the Economy
The EIA analyzed the impact that the Kyoto Protocol cap and trade program would have on the United States. The Kyoto Protocol, an international treaty that the United States has not ratified, seeks to reduce carbon emissions by seven percent below 1990 levels. According to the EIA’s 1998 analysis, meeting this goal would have meant up to a 4.2 percent loss in Gross Domestic Product (GDP) in 2010.5

Another analysis done by well-known economist Arthur Laffer and his econometrics firm Arduin, Laffer and Moore found:

Assuming that consumers respond to the higher energy costs from cap and trade regulations so that our energy efficiency growth accelerates to an average of 2.7 percent per year, total economic activity would be 5.2 percent lower in 2020 than the baseline scenario [if there were no cap and trade regulations]…

Due to the reduction in economic growth, by 2020 every man, woman, and child would be about $2,700 poorer than the baseline scenario — or about $10,800 for a family of four.6

Hurts Consumers and the Poor
The nonpartisan Congressional Budget Office (CBO) has consistently released research discussing the negative effect a cap and trade program would have on consumers and the poor.7 In a recent CBO brief:

Researchers conclude that much or all of the allowance cost would be passed on to consumers in the form of higher prices. Those price increases would disproportionately affect people at the bottom of the income scale [a regressive tax]. For example … the price rises resulting from a 15 percent cut in CO2 emissions would cost the average household in the lowest one-fifth (quintile) of the income distribution about 3.3 percent of its average income. By comparison, a household in the top quintile would pay about 1.7 percent of its average income. That regressivity occurs because lower-income households tend to spend a larger fraction of their income than wealthier households do and because energy products account for a bigger share of their spending.8

Some Examples of Higher Energy Costs

  • Higher gasoline prices
  • Higher electricity prices for all sectors of the economy
  • Higher heating prices in the winter
  • Higher prices for consumers when buying almost any good or service
  • Higher costs for government — the government also is a consumer of energy

Bottom Line
A carbon dioxide cap and trade program would be an energy-rationing scheme that disproportionately hurts consumers and the poor. Punishing people for traveling, warming their homes, or turning on lights is irresponsible and inhumane.

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Daren Bakst, J.D., LL.M. is the Legal and Regulatory Policy Analyst for the John Locke Foundation.

1 For more information on North Carolina’s Legislative Commission on Global Climate Change, please go here

2 For more information on the CAPAG, please visit:
http://ncclimatechange.us
3 “Table 1: U.S. Energy Consumption by Energy Source,” Renewable Energy Annual 2005 Edition, United States Energy Information Administration (release date July 2007). Please visit: http://www.eia.doe.gov/cneaf/solar.renewables/page/trends/table1.html

4 See e.g., North Carolina Climate Action Plan Advisory Group Draft Report, at p. 4-8 (2007).

5 “Impacts of the Kyoto Protocol on U.S. Energy Markets and Economic Activity,” United States Energy Information Administration, Report#:SR/OIAF/98-03 (1998). Please visit: http://www.eia.doe.gov/oiaf/kyoto/kyotorpt.html
6 Arthur Laffer and Wayne Winegarden, “The Adverse Economic Impacts of Cap-and-Trade Regulations,” Arduin, Laffer, & Moore Econometrics, September 2007.
7 See e.g. Terry Dinan, “Trade-Offs in Allocating Allowances for CO2 Emissions,” Economic and Budget Issue Brief, Congressional Budget Office (April 25, 2007); Terry Dinan, “Shifting the Cost Burden of a Carbon Cap-and-Trade Program,” A CBO Paper, Congressional Budget Office (July, 2003); To see more CBO publications on the issue, please visit: http://www.cbo.gov/publications/bysubject.cfm?cat=19
8 Terry Dinan, “Trade-Offs in Allocating Allowances for CO2 Emissions,” Economic and Budget Issue Brief, Congressional Budget Office (April 25, 2007).