Understanding Cap & Trade

Cheryl Hogue has an article entitled, "Unfriendly Skies" in the October 17 issue of Chemical and Engineering News. It is basically about an argument between international air lines and the European Union. The European Union (EU) says that when airlines fly into EU airspace, they generate significant quantities of carbon dioxide through the burning of their jet fuel. The EU says the airlines are subject to "Cap & Trade", which essentially means they must pay a tax. The airlines object because it will cost them money.


This is only a small segment of the many arguments which involve Cap & Trade in the EU. It may be interesting to review Cap & Trade, for what it really is; a government tax.

Since the end of the Cold War and the collapse of the Soviet Union, Western Europe has been continually moving toward a socialist culture. However, the bad economics of socialism is starting to catch up. We see this in the economic problems of Greece, followed by Italy and Spain. Even Germany will eventually not be exempt. I believe the existing governments will all go down to defeat as the EU is unable to meet its obligations to the population. These obligations involve government benefits of unemployment insurance, free housing, free medical care, etc.. In an effort to maintain solvency in the various governmental coffers, and the EU in total, various tax forms have been developed. The latest of these is the "Carbon Tax", which has been previously previously disguised under the term Cap & Trade.

The Obama Administration has seen Cap & Trade operating in Western Europe and has been impressed by its success, in spite of various difficulties that have emerged. The attractive aspect has been a potential source of tremendous government revenue to support a socialistic program of giveaways and maintain governmental power.

In order to sell Cap & Trade to its populations, the EU and the United States have developed a sales technique. The EU has already established the program, while the US is still toying with it. The sales technique is routine for the devious selling of all goods and services. Scare the customer into buying to avoid perilous consequences and convince him that it doesn't cost anything. Ancillary to that is the use of complexity, new terminology and scientific innuendo, so that the customer normally cannot understand what is occurring, without significant effort on his part, and usually which he is unwilling to contribute. Cap & Trade very adequately covers all these points, but it behooves some of us to try to explain it, so that the public has an opportunity to adequately understand what it is buying.

We have already covered the government motivation for instituting Cap & Trade. We now concentrate on the specific selling techniques. First, the fear factor. If government can relate carbon dioxide emissions from burning fossil fuels to climate change, with disastrous results of such climate change, the fear factor has been established. Projections for climate change can easily result in dire consequences without any proof that those consequences will really occur. A few of the proposed dire consequences of climate change are melting of the polar ice sheets with rising sea levels to flood civilized areas, eliminating ice at the North Pole which will lead to the destruction of polar bears, the development of more violent storms and tsunamis as oceans are warmed, etc.. The Obama administration has already spent many millions of dollars in research to establish such connection between carbon dioxide atmospheric concentration and climate change, but has been unsuccessful.

With respect to Cap & Trade cost to the public, yhere is general government admission that there will be an increased cost, but that will be minimal considering the advantages of eliminating the dire consequences of climate change previously mentioned.

The matter of complexity is beautiful in its development to confuse the public. However with a little attention to logic and patience. it can be understood and considered in its proper perspective. Let's use the present EU system, which is functioning, and which is probably a model for anything that the US might adopt.

The EU has surveyed the various sources of CO2 emission, which are generally electricity generating plants using coal, oil, and natural gas. Note that the objective here is to identify entities which can be easily taxed. Note also that airlines have now been added to this list. Conversely, while private automobiles generate significant carbon dioxide, it would be more complex to tax each automobile user. Apparently the thought has not yet come to EU officials that they could apply Cap & Trade to automobile manufacturers.

For the moment, consider only electricity generating plants. The EU survey has already established "normal" CO2 emissions from each of those plants. Simple addition then gives total CO2 emissions in a year. Each of the CO2 emission producers is given an EU permit to emit its "normal" amount of CO2. The next year, the EU says all emitters must reduce their CO2 emissions by 10%. Power Plant A has several choices. It can reduce its supply of electricity to its customers, install equipment to capture carbon dioxide from its emission stream, or purchase permits from other power plants who may not be using their allocation permits for one reason or another. Notice that any of these options increase costs to the producer, which passes the costs on to the consumers as price increases. At this point, the EU has not collected a nickel in taxes.

The next year, the EU says everybody must cut their CO2 emissions by 30%. The same options as previous exist for each power plant. Power Plant A takes a responsible attitude that it cannot reduce its electricity supply to its customers by 30%. Similarly, preliminary calculations on installing CO2 sequestration equipment shows it would be more expensive than the possible purchase of allowances from other permit holders. However, when it goes to the market to purchase CO2 allowances from other power plants, it finds that none are available. The EU recognizes, and has already predicted that this would occur, and allows another option, which is the purchase of an additional allocation permit issued by the EU. Since there are now many power plants that need additional CO2 allocation permits, the EU makes new permits available by auction. Let's guess that the auction price is $15 per ton of CO2. Power Plant A needs 10,000 tons of additional permit allocation to keep supplying its customers. Therefore, it pays the EU $150,000 for the additional permit. Power Plant A considers this an additional cost of doing business and passes along that cost as a price increase to each of its customers. It might be a few hundred dollars to each customer. Notice that the EU receives $150,000 and that $150,000 is paid by the electricity consumers. In effect, Cap & Trade is a use tax.

It could get worse. In the next year, the EU could say all emissions are now being cut by 50%. We go back to the auction block for new allocation permits. The auction price is now established at $50 per ton. Power Plant A needs another 10,000-ton allocation permit. This time it costs $500,000, which goes to the EU as a use tax paid by the electricity customers. However, there are the other two options to avoid this tax. That is to go out of business, or install CO2 sequestration equipment. It is only the latter which presents some semblance of control on the tax gouging by the EU. Remember also that this is the model for any similar operation in the United States. It is fraudulent to the extent that there is no clear indication that CO2 emissions must be controlled.