O’Keefe: Is Kerry-Lieberman Simply Trading Places’ With Waxman-Markey?
“One minute you’re up half a million in soybeans and the next, boom, your kids don’t go to college and they’ve repossessed your Bentley.” That’s the commodities market as explained by broker Louis Winthorpe III in the 1983 film “Trading Places.” Almost two decades later, it’s worth contemplating how Dan Aykroyd’s character would perceive the Senate’s latest cap-and-trade bill — legislation to create a $2 trillion U.S. emissions market that would likely dwarf other commodity trading.
[IMGCAP(1)]Though the name and sponsors of the newly introduced American Power Act vary from previous cap-and-trade proposals, the fundamental components and, therefore, the fundamental problems remain the same. Commodity prices are famously unstable, and complex markets are notoriously susceptible to manipulation and fraud. So while it’s fine for Winthorpe to risk his luxury car on the ups and downs of oil juice futures, Washington lawmakers should carefully consider whether they’re willing to leave our entire economy vulnerable to such an unpredictable system.
The bill by Sens. John Kerry (D-Mass.) and Joe Lieberman (ID-Conn.) would charge the Commodities Future Trading Commission with the responsibility of regulating emissions permit trading. Though the CFTC is the natural choice, the commission lacks the resources and insider knowledge necessary to effectively regulate such a vast market. The federal government would need to provide additional resources for such an oversight task, a cost that would fall squarely on the shoulders of already over-burdened taxpayers. And even this would not assure the elimination of fraud, manipulation and price volatility. One of the nation’s leading economists, Yale University’s William Nordhaus, predicts a cap-and-trade system would lead to “pandemic cheating.”
Kerry and Lieberman’s attempts to curtail this expected gaming would offer the same relief as applying a Band-Aid to a broken leg. The bill would limit emissions trading to only the regulated participants in the markets at publicly regulated exchanges — a move that obstructs individuals from affecting volatility but fails to eliminate broad changes across the entire market. Moreover, the new market would still provide a breeding ground for futures, derivatives and other risky tools like the ones that contributed to the 2008 financial meltdown. On top of that, external factors, such as weather and economic activity, that no agency can control would also drive volatility.
If all this sounds familiar, it is because these were the same problems that arose the last time Congress debated a carbon market bill.
Another case of cap-and-trade déjà vu stems from the Senate bill’s myriad handouts. The American Power Act is a case where Washington’s pork propensity has turned a well-intentioned policy into a special interest bonanza at the expense of the environment and American families. All of its giveaways would be paid through wealth redistribution or deeper deficits. Without tax and entitlement reform, those goodies will make our disastrous fiscal situation worse. Whether in environmental initiatives or other legislative efforts, it’s imperative that we stop heading down the road of countries such as Greece whose fiscal problems are now generating political instability.
Another concerning aspect of cap-and-trade schemes is their emissions offset programs — the modern-day equivalent of purchasing religious indulgences to “offset” moral transgressions. Though legitimacy of existing carbon offsets has proven nearly impossible to verify, the new American Power Act fails to detail its oversight protocols. In fact, the bill conveniently fails to detail such a program at all. That’s a significant omission, especially considering the bill’s goal to cut 2 billion tons of carbon would undoubtedly spike demand in offsets.
To further illustrate the fact that Kerry-Lieberman is the same ol’ cap-and-trade proposal merely wrapped in new dressings, look no further than one of the bill’s biggest supports: the Obama administration. The White House news release supporting the Kerry-Lieberman bill referred to the legislation as the “American Clean Energy and Security Act” — the name of last year’s Waxman-Markey bill that passed in the House.
Clearly, it’s time for Congress to take up a fresh idea.
A straightforward carbon tax is a policy option that has strong support among economists, industry leaders and environmentalists. By assigning fees based on the carbon content of particular fuels and then recycling those revenues back to taxpayers, this program offers a politically viable, economically sound way to address the climate change risk.
That’s the kind of policy America needs, but that is not what Washington is offering. Still. In light of the newest climate bill, H. L. Mencken’s famous saying could be updated as “nobody ever went broke underestimating the ability of Congress to deliver on its promises.”
William O’Keefe, CEO of the George C. Marshall Institute, is president of Solutions Consulting Inc.