The American Clean Energy and Security Act of 2009 sponsored by Reps. Henry Waxman (D-California) and Edward Markey (D-Massachusetts) recently passed out of committee and is now before the full House of Representatives. The centerpiece of the Waxman-Markey Bill is cap and trade, a mechanism devised to penalize the use of hydrocarbon fossil fuels based on their emissions of carbon dioxide (CO2). Carbon dioxide is thought by many to be a major contributor to global warming.

Under cap and trade, a government body sets a limit on the permissible total amount of a pollutant by issuing credits. In Waxman-Markey, one credit is allotted for one metric ton of CO2 emissions. Industries or utilities that pollute more buy CO2 credits from those that pollute less. In theory, the credit price will be established by market forces and is designed to reduce emissions through the process of penalty and reward.

Coal emits around 210 pounds of CO2 per one million Btu of energy produced. Natural gas emits around 115 pounds, and motor fuels and heating oil emit about 150 pounds per million Btu. The goal is to make dirty, usually cheaper fuels like coal, more costly and thereby utilized less. In Waxman-Markey, the money raised by the sale of CO2 credits (and controlled by the U.S. government) is designated for tax breaks, grants, and other forms of financial rewards for suppliers of renewable energy with no CO2 emissions.

The Europeans established a similar CO2 market (ETS), which began trading in 2005. Ten Northeastern U.S. states started trading CO2 in late 2008 under the name the Regional Greenhouse Gas Initiative (RGGI). Both the ETS and RGGI have seen lower than expected trading volume and CO2 prices. ETS prices, which have ranged from dollar equivalent of $6.50 to $40, are currently trading around $15 per ton of CO2 emissions. RGGI prices have ranged from $3 to $3.50.

The Obama administration and the Waxman-Markey bill officially state that they expect the U.S CO2 market to trade in a per credit range of $15 to $20. However, a study done by Massachusetts Institute of Technology examined a 2007 cap-and-trade bill sponsored by then-Senator Obama. This bill projected cap-and-trade revenues of $366 billion per year by 2015 which is over four times the revenue in currently projected and equates to CO2 prices from $70 to $100.

Table 1 shows the effect cap and trade will have on hydrocarbon fossil fuels using CO2 credit prices of $10, $20, $70, and $100. Under this range of credit prices, the June 2009 costs for gasoline, diesel, and heating oil would increase from a little as 17 cents per gallon to over $1 per gallon. Natural gas costs would increase by 12 percent with a $10 credit price. If the credit price rose to $100, natural gas cost would rise by 126 percent. The price increase for coal would range from 26 percent to 268 percent more than today’s prices.

Natural gas and coal are the two primary fuels used to generate electricity. Across the different regions of the U.S. and even state to state, the fuel mixture to generate electricity can vary widely. New England for example uses 50 percent coal, 25 percent natural gas, and 6 percent oil. The fuel mix in the typical Midwestern state is 85 percent coal, 3 percent natural gas and 2 percent oil.

Table 2 shows the comparative effect CO2 prices will have on a residential kilowatt-hour of electricity in New England and the Midwest. These examples give us a good estimate of what typically could happen to electricity rates in a coal-intensive region and a natural gas-intensive region, although utilities do have some flexibility for switching fuels and using renewables.  

The electricity rates in New England would increase from 4% at $10 for CO2 to 42% at $100 for CO2. In the Midwest, the electricity rates would range from a 10% increase at $10 for CO2 to a 106% increase at $100 for CO2.

How long it will take cap and trade to have a beneficial effect in the switch to renewable energy sources and not just remain, in effect, a large regressive tax is anyone’s guess. If renewables are truly as advertised—clean, unlimited, and free—it would seem they would take over all by themselves and not require complex and expensive schemes like cap and trade.  

In 2007 AIER hosted a conference where a group of world-class speakers with a wide range of viewpoints and expertise in global warming were brought together to discuss the prevalent data and talking points. We compiled these presentations, including a lecture concerning cap and trade, into our book The Global Warming Debate. This publication is available for $15 from the AIER bookstore.

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