Let's Have Cap and No Trade

By David Sokol
Tuesday, May 19, 2009

The adage that everyone wants to go to heaven but no one wants to die is on display again as the House considers a massive 932-page climate-change , introduced by Reps. Henry Waxman (D-Calif.) and Ed Markey (D-Mass.), that would establish a "cap and trade" system for carbon dioxide and other greenhouse gas emissions. Its sponsors say it will keep low- and middle-income consumers whole while the United States cuts emissions 83 percent below 2005 levels by 2050 and transitions to a clean-energy economy.

Nothing could be further from the truth.

On paper, the Waxman-Markey bill puts a cost on carbon dioxide by imposing a ceiling, or cap, on greenhouse gas emissions and then setting up a market for regulated industries -- such as the electric power sector -- to buy and sell allowances to pollute under that cap. As the cap is reduced each year, market participants will exchange allowances in a complex auction market.

If you liked what credit default swaps did to our economy, you're going to love cap-and-trade. Just read Title VIII of the bill, which lets investment banks, hedge funds and other speculators participate in the cap-and-trade market. They don't have emissions to cut; they have commissions to make.

The real hidden catch of the cap-and-trade system, though, is that it will require consumers to pay twice: first for emission allowances and then for the construction of new low- and zero-carbon power plants.

Congressional estimates of government revenue from the sale of cap-and-trade allowances range from hundreds of billions to trillions of dollars. Contrary to assurances from the bill's sponsors that utility customers wouldn't have to pay these costs for the first decade, some coal-dependent utilities would be forced to purchase more than half of their allowances when the program is scheduled to begin in 2012. Would these allowances reduce our greenhouse gas emissions? No; that would come when consumers footed a second bill -- for the cost of their utilities either to retrofit coal and gas plants to capture carbon -- something that cannot be done today on a commercial scale -- or to shut them down and build non-carbon-producing nuclear plants and wind farms instead.

In fact, to the extent that cap-and-trade auctions increase ratepayers' bills, they will impede utilities' ability to develop a less carbon-intensive infrastructure.

Markets thrive on volatility. Electricity utilities, on the other hand, are highly regulated to ensure price stability -- not volatility -- for their customers. The Waxman-Markey bill imposes a market-based (read: unregulated) trading program on a highly regulated industry that must make enormous long-term and least-cost capital decisions to reduce carbon dioxide emissions. In an unprecedented and unwise fashion, it turns American industry over to the federal Environmental Protection Agency by giving the agency the authority to change the rules on allowances every five years. Is this sound public and economic policy? I think not.

If Congress wants to achieve 83 percent reductions in greenhouse gas emissions by 2050, the electricity sector can get there, but there is no need for that first cost. Get rid of auctions, speculation, trading, new Wall Street "products" (yes, the bill allows for credit default swaps and carbon derivatives) and the trillions of dollars in government revenue that may end up being spent on other programs. Get rid of the 12 new advisory boards, committees and other institutions established under the Waxman-Markey bill. Focus instead on the most efficient and inexpensive way to cut carbon dioxide emissions.

The solution? Keep the cap and remove trading from the equation: Mandate that the industry, over the same 40-year period, simply limit its emissions to the same levels proposed in the Waxman-Markey bill. This can be accomplished with a clear plan that gives states an option: Either they participate in a cap-and-trade program or they elect an alternative compliance mechanism to reach the same greenhouse gas emission goals by working with their utilities to develop a 40-year program of shutting down aging coal plants, retrofitting plants to capture carbon dioxide if the technology becomes available, and/or building zero-carbon energy plants. More important, the carbon dioxide reductions in this proposal can be achieved while providing adequate time to plan to minimize price shock and economic dislocation. It is the states, through their public utilities commissions -- not the federal government -- that have both the interest and obligation to manage citizens' costs while transitioning to a carbon-free future.

This transformation of our entire electricity sector won't be cheap, but it would be less expensive than the double cost of a complex cap-and-trade program followed by that same transformation.

The writer is chairman of the board of Iowa-based MidAmerican Energy Holdings Co., a subsidiary of Berkshire Hathaway, which also owns an 18 percent stake in The Washington Post Co.

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