The Competitive Edge -- Cap-and-Trade Would Be a Major Mistake

U.S. manufacturers face significant cost disadvantages if current proposals are enacted.

The hot political issue this summer is controlling greenhouse gas (GHG) emissions. The leading proposal is to start a program to cap domestic emissions and allocate those emissions via a trading system. There are innumerable problems with this approach, not the least of which is the likely devastating impact on U.S. manufacturing. The proposals on the table in the United States aim to reduce carbon emissions on a per-capita basis to levels below those in 1790.

Cap-and-trade has been employed in Europe and is failing its modest 2012 goals. Too many permits were allocated, and prices did not rise enough to discourage consumption. This suggests that the industrial planning involved in cap-and-trade is very hard to get right, as it always is. Moreover, the congressional plan now being debated would mandate that a large portion of the reduction be achieved by renewable sources, excluding nuclear power. To meet the 2050 targets for renewables would require a 2,300% increase in their production, which appears unlikely since we have seen only 40% growth from these sources since 1970, even with generous subsidies.

More pertinently in the robust American democratic system is the thorny problem of rent seeking. Every interest group will try to get as many carbon credits as possible, either to resell or to protect their own production levels or style of life. The political bantering already has commenced in Congress, with an opening offer of giving 35% of credits without charge to the electric power industry and smaller credits for the auto and metals industries. The politically powerful agriculture sector, which emits potent GHGs such as methane and nitrous oxide, will be protected as well. This would be disastrous for most manufacturers, because the burden for GHG reductions then would be even heavier for the non-favored industries. Even if emission permits were equitably distributed, the chemicals industry would see increased production costs of 15%, and other producers such as the metals industries, corn milling, paper mills, glass containers and cement would see increases of 26%, 38%, 22%, 32% and 134%, according to research by MAPI economists Garry Vaughn and Don Norman. Increased production costs for manufacturers, especially in the absence of comparable carbon controls among Asian and other developing countries, would put manufacturers at an even deeper cost disadvantage in global competition than they are currently. If we try to combat this by imposing carbon tariffs on imports, then we risk a massive trade war that could cut access to the worlds fastest-growing economies.

If our democratic process determines that we want to pay the enormous cost to reduce carbon emissions, there are much better ways to accomplish this than cap-and-trade. Fuel switching is the most obvious. We have colossal reserves of natural gas that could power more electricity generation and ground transportation. A doubling in the use of natural gas-fired electricity could meet total carbon reduction targets proposed for 2020, as could building 45 new nuclear plants. Other technologies such as carbon sequestration and enhanced energy efficiency also could contribute to a solution that utilizes the United States huge reserves of coal and natural gas.

Another simple (in concept but not execution) solution would be a carbon tax. While being nearly as harmful to manufacturers as cap-and-trade, a uniform carbon tax would eliminate most of the highly politicized rent seeking and industrial policy inherent in cap-and-trade. It has the additional merit of making abundantly clear the high costs of reducing carbon emissions by 83%. If we are to choose the path of serious carbon controls, the least we can do is to give Americans an honest view of what it will cost them.

Dr. Duesterberg is president and CEO of the Manufacturers Alliance/MAPI, an executive education and business research organization in Arlington, Va.

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