The cap-and-trade racket

Who says Democrats wish to take from the poor to give to the rich?

In practice, they much prefer to take from everyone to give to their friends!

In the name of environmental protection, Democrats are readying just such a transfer on a scale that would have impressed the Pharaohs. Tens of billions of dollars, possibly hundreds of billions, will be shifted from American consumers of electricity to shareholders of favored utility companies in primarily blue states. Under the leadership of uber-liberal Henry Waxman, chairman of the House Committee on Energy and Commerce, Democrats are determined to make their plan so complicated that taxpayers will not notice the flocks of dollars migrating from the middle of the country to the coasts.

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Here’s the scheme:

Waxman’s committee will write the law establishing controls on carbon emissions, considered a leading cause of global climate change. The plan, which is also favored by President Obama, is generally known as “cap and trade.”

In theory, the cap-and-trade system operates with remarkable elegance. The government sets a limit on the total amount of carbon that may be emitted in the United States – that’s the “cap.” Companies then bid to buy emission rights. Efficient companies that reduce their carbon emissions to levels beneath allowable limits can resell their unused emission rights to companies that exceed their limits – that’s the “trade.” Over time, the cap is steadily lowered, thereby reducing carbon emissions in the most cost-effective way.

As I said, that’s the theory -- at least until it meets the giant favor-selling machine knows as the U.S. Congress.

The Obama administration has estimated the revenue value of these rights, if purchased from the government by private industry, at between $680 billion and $1.8 trillion over 10 years. Let’s take the midpoint number -- $1.15 trillion. Even in the context of a budget debate that would strain Dr. Evil’s financial imagination --“It’s like saying I want a kajillion bajillion dollars” -- that’s a lot of money.

Under cap and trade, Congress creates money literally out of air. That kind of manufactured money is easily distributed to friends and supporters – who will presumably return the favor at fundraising time.

As the cap-and-trade bill has progressed through committee -- a draft is expected any day now -- more and more pollution rights have been allotted in advance to favored interests, free of charge. The final committee bill will probably give away at least 50 percent of all allotments, maybe even 75 percent. The freebies blow a huge hole in the budget plans of the White House, which has been counting on cap-and-trade payments from industry to help cover the enormous deficits the administration will run in coming years.

Congress can shrug off that problem. But the giveaway creates another issue, much more immediate: Who specifically gets how much?

This may be the first time you have encountered that question. Rest assured, however, that the prospective recipients of the $1.15 trillion have been thinking hard about it for years.

Here’s one proposal -- from the Edison Electrical Institute, the Washington lobby for America’s shareholder-owned electrical utilities. Edison proposes that 40 percent of all allotments should be given away to distributors of electric power (who would then sell or give them away to generators -- or use the allotments themselves if they happened to be integrated into the generation business, as many distributors are). These free allotments would then be subdivided by the following formula: 50 percent of allotments would be distributed according to the amount of carbon emitted, and the other 50 percent according to the amount of power produced.

Gobbledegook? Take a closer look; it’s your money.

Not all utilities produce the same carbon emissions. While many coal-fired plants produce large emissions, others rely on natural gas, which emits less carbon. Still others use hydro or nuclear power, which emit virtually none. Consequently, the Edison formula would confer huge windfalls on the non-coal companies.

Here’s how:

Suppose we have two companies providing equal amounts of electricity. One company relies 100 percent on coal; the other 100 percent on nuclear. Now suppose there is a billion dollars’ worth of allotments available to the two companies. Under the Edison formula, $500 million would be divided according to carbon emissions. Because the nuclear company has no emissions, the coal company would get all of that money. But another $500 million would be apportioned based on the amount of electricity produced. That money would be split 50-50 between the two companies.

The result? The coal company would get $750 million in allotments and the nuclear company $250 million. But remember – the coal company needs those allotments to pay for its emissions and stay in business. The nuclear company, with scant emissions, can sell all $250 million worth – reaping a lovely windfall!

In real life, there is no such thing as a power company that uses only nuclear or hydro power. Still, companies based in New England and on the West Coast use much less coal than power companies based in the middle of the country. Pacific Gas & Electric, headquartered in Nancy Pelosi’s San Francisco, relies 23 percent on nuclear and 13 percent on hydro power. Southern California Edison’s power is derived 45 percent from

natural gas and 20 percent from nuclear. Washington State’s Avista depends 52 percent on hydro and 16 percent on natural gas. Green Mountain Power in Vermont may be the “purest play” for a cap-and-trade windfall speculator: It relies 48 percent on hydro, 38 percent on nuclear, and 10 percent on gas.

The differences between states can be striking. Indiana is one of America’s most coal dependent states. It’s power generation, almost 110 million megawatts per year, produces almost 122 million metric tons of carbon dioxide. Hydro-rich Washington, by contrast, produces about 86 million megawatts of power, but only 13 million metric tons of carbon -- about 10 percent of Indiana’s total.

The free allotments may cushion the pain to Indiana power producers. They will probably bestow a big windfall upon power-producers in Washington. Consumers will almost certainly pay more. But instead of paying that money to the federal government, which could use the funds to reduce other taxes, consumers will be paying their money to happy utility shareholders, especially shareholders of utilities that serve lower-carbon states like Vermont, California, and Washington. That’s change my broker can believe in!

I should point out that the Edison Electric Institute is not some fly-by-night operation. It mounts one of the most sophisticated and well-heeled lobbying operations in Washington. The Waxman committee drafted a cap-and-trade bill in 2007 that followed Edison’s recommendations nearly to the letter. It will likely do so again in 2009.

Cap-and-trade legislation will not only be contorted to favor the Democrats’ regional loyalties. In addition, it will be skewed to favor the preferred energy sources of the Obama administration -- wind and solar. These two sources face daunting technological hurdles and unforgiving economics on their own. Consequently, the measures to promote them must be hidden from sight, since no Congress would pass the taxes otherwise necessary to make them viable.

Waxman’s committee looks likely to include a straightforward quota for wind, solar and other renewable power. Utilities will ultimately be required to derive up to 25 percent of their power from these sources -- without regard to cost or the existence of cheaper, non-carbon emitting alternatives. The massive extra cost will be spread across power bills in ways that consumers will never see.

If the Obama administration wants to move off coal, the economically rational thing to do is to focus first on conservation, then on the next-cheapest sources of power, which include hydro imported from undeveloped sites in Canada and nuclear. A clean and simple carbon tax could incentivize such a shift. But that’s not on the agenda. Why not?

Because this isn’t environmentalism. It’s a racket.