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Cap-and-Trade’s Economic Impact

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Cap-and-Trade’s Economic Impact

Interview in The Council on Foreign Relations

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A cap-and-trade system necessarily harms the economy because
it is designed to raise the cost of energy. Given the current economic crisis,
an expensive energy policy is a bad idea.

Almost all acts of economic production are powered by
combusting fossil fuels (coal, oil, and natural gas), a process that emits
greenhouse gases thought to cause global warming. A cap-and-trade system is
simply a mechanism to put a price on emissions in order to compel businesses
and consumers to emit less. That is, it's essentially an emissions tax. But
greenhouse gas emissions are virtually synonymous with energy use, so it's
actually a roundabout energy tax. In fact, economists agree that the simplest,
most efficient way to reduce emissions is a direct tax. Politicians, however,
are terrified of the "t-word," which is why they have embraced a
cap-and-trade system.

The numbers are staggering. President Barack Obama's
recently unveiled cap-and-trade plan would raise $645 billion in revenue from
the government-run emissions auctions over eight years. Everyone would feel the
pinch. Businesses would compensate for higher production costs and diminished
markets by slashing jobs. Consumers would have to pay more for energy and
energy intensive goods.

Expensive energy is bad enough, but the real danger of a
cap-and-trade policy is a global trade war. A cap-and-trade system would give a
competitive advantage to industries in countries that aren't subject to a de
facto energy tax. Jobs would flow overseas, but so would emissions, a dynamic
known as "carbon leakage." To prevent this, a broad coalition of
industry, labor, and environmental groups have expressed interest in a tariff
that would tax the emissions content of imports from countries without
stringent climate policies. Naturally, these countries would retaliate if such
a tariff were enacted. Protectionism deepened the Great Depression, just as
climate protectionism would worsen the current recession.