Modern production of goods entails the burning of fossil fuels, which results in the emission of a number of chemicals, CO2 foremost among them. These emissions represent a cost associated with the production process that is borne by the environment.
In externalizing these costs, producers are able to effectively subsidize the production of goods at the expense of the living systems which absorb human emissions (in some cases, to the point of saturation). Cap-and-trade aims to quantify the cost of harmful emissions (specifically, CO2) and shift it from the environment to producers.
It accomplishes this by, first, establishing a “cap,” or maximum amount of pollution internal sources can emit. This limit is determined in accordance with environmental goals. After a cap has been established, the EPA would distribute emissions allowances collectively equal to the cap amount.
Those allowances could then be traded freely amongst polluters on the open market, allowing the consumers of these allowances (again, polluters) to set their value (as with any commodity). This type of market-oriented approach would tend to allocate emissions to the most economically efficient producers (those producers which generate the highest profits from each ton of CO2 emitted). Toward that end, it seems a rather clever solution. Indeed, in pushing for a domestic cap-and-trade system, our administration would certainly have us think so.
By creating a market for emissions, one is effectively able to capture externalized costs (notwithstanding institutional competency concerns with regard to government’s ability to effectively determine an appropriate value scheme and regulate efficiently). One effect of this would be an increase in the cost of producing goods domestically. This cost increase would necessitate higher prices for domestically produced goods, which, ideally, would reflect their true cost to produce.
Transportation would also become significantly more costly, yielding increased shipping rates and gasoline prices. Electricity (being largely derived from coal) and heating oil would become more expensive as well, forcing people to conserve (mind you, this is the upside) as well as pursue the establishment of clean energy infrastructure more aggressively (though nuclear energy, not renewables, would be our primary recourse). U.S. demand for fossil fuels would significantly decline. A drop in demand means a drop in consumption. A drop in consumption means a drop in emissions. Mission accomplished.
Brushing aside the myriad issues with the above scenario (the ideal for Cap-and-trade), from the reduction in the competitiveness of U.S. goods, to the substantial job loss we would experience as employers cut costs across virtually all sectors of the economy, to the economic contraction we would suffer as budget-squeezed consumers cut back on costly goods, cap-and-trade still falls flat. The primary objective of cap-and-trade is to reduce emissions; in this respect, it fails.
Certainly, U.S. demand for oil (the single largest source of global carbon emissions) would decrease with the implementation of cap-and-trade. The problem with this is that oil is a globally traded commodity (as are all major fossil fuels). A reduction in demand from the world’s largest consumer of fossil fuels would yield a decrease in the commodity price of these fuels, effectively subsidizing their purchase by other global consumers.
Developing countries in particular, thanks to their voracious growth-induced energy requirements, would pick up the slack. These countries have radically inferior emissions standards (if any at all) to those in effect in the United States.
As such, domestic cap-and-trade would reduce the share of scarce carbon-emitting energy resources utilized by one of the world’s cleanest consumers and shift it to the dirtiest, increasing global carbon emissions substantially. In illustrating this, an examination of the United States and China proves particularly useful.
Oil is the world’s single largest source of energy, accounting for over a third of global energy production, followed, successively, by coal and natural gas (with each of the latter two providing roughly a quarter of the world’s energy).
Accordingly, oil accounts for the majority of global CO2 emissions with the United States consuming over 260 percent more of it than China (constituting roughly 25 percent of global consumption to China’s <10 percent). Coal follows oil closely in terms of its share of global CO2 emissions and here, China is the world’s largest consumer, trumping U.S. consumption by almost 24 percent.
However, China and the United States account for (roughly) 28.7 percent and 23.2 percent of the world’s Coal consumption, respectively, making the disparity decidedly less stark. With respect to natural gas, the U.S. is firmly ensconced as the world’s leading consumer, accounting for 22 percent of global consumption.
By comparison, China accounts for a mere 2.7 percent of global natural gas consumption. Though it burns substantially cleaner than coal or oil, natural gas accounts for over 20 percent of U.S. CO2 emissions, illustrating the significance of its impact.
The bottom line is, the United States consumed nearly 100 quadrillion BTUs of energy* in 2006 (the vast majority of that energy being derived from the above-mentioned fossil fuels) as compared to China’s nearly 74 quadrillion and accounted for 20.2 percent of global emissions as compared to China’s 21.5 percent.
Phrased differently, the U.S. consumed over 35 percent more energy than China while emitting more than 6 percent less carbon dioxide, despite consuming a significantly greater amount of fossil fuels. This throws into stark relief the foolhardiness of a scheme that would allow nations like China to consume a greater share of fossil fuels at our expense.
A cap-and-trade-induced suppression of U.S. demand for fossil fuels would serve only to shift the consumption of fossil fuels to less-clean nations, subsidizing disequilibrium at the cost of our economy and our environment.
*BTUs are of primary energy which includes fossil fuels as well as renewable energy sources, yet excludes energy derived from certain nuclear fuels that are not found in nature (e.g. plutonium). Note that this only further strengthens the contentions put forth in this article, as China’s share of domestic energy produced via renewable sources (hydroelectric in particular) exceeds that of the U.S., meaning less of its energy consumption (as a % of the whole) is constituted by fossil fuels.
