Ramifications of Cap and Tax

Treasury Memo: Cap and Trade Would Devastate U.S. Industrial Base

Tuesday, September 22, 2009 7:11 PM

By: John Rossomando

President Obama's cap-and-trade plan could deliver several blows to the U.S. economy, according to a Treasury Department memo that one observer described as "damning."


The country could lose 1 percent of its gross domestic product, face accelerated outsourcing of manufacturing jobs, and experience energy rationing if cap and trade became law, according to the memo, which the Competitive Enterprise Institute obtained under the Freedom of Information Act.


“The memo was damning particularly . . . by pointing out what opponents of cap and trade have long said is the point of cap and trade, and has been proven by Europe’s experience,” said Christopher Horner, a senior fellow at the institute. "You will chase off energy intensive industries — meaning manufacturing jobs. The memo singles out steel, cement, chemical . . . glass, plastic, and ceramics — the same ones that have been clobbered in Europe by this.


“This is the largest outsourcing scheme in history, not just in theory, but in practice,” he said.


The memo, prepared after Obama’s Feb. 24 speech to a joint session of Congress, details Treasury's analysis of the economic impact of cap and trade, which ties climate change to business practices.


The United States gained steel jobs from Spain because the manufacturer's costs under the European Union’s cap-and-trade program chased the jobs to Kentucky, Horner said. However, that foreshadows how cap and trade could cost the United States jobs that move abroad, he said.


The report concludes that cap and trade could result in the loss of the U.S. market share in the global economy.


The administration expects cap and trade to double the economic costs of all environmental regulations to the economy, and Horner said the 1 percent reduction in GDP would “institutionalize recession.”


Cap and trade could generate between $100 billion and $200 billion in federal revenue each year and would increase the cost of existing energy tax provisions, according to the memo.


The Treasury official who wrote the memo suggests using either a carbon tax or a cap-and-trade system that would price carbon at either a fixed tax rate or at a variable market price of emission allowances. The price would be set at a level where firms and consumers would experience enough financial pain to compel them to reduce their emissions.


“Cap and trade has one purpose, and that’s axiomatic, and that is to increase the cost of energy,” Horner said. “The president’s proposal — and that’s what the Treasury is talking about — would cause electricity prices to skyrocket [because] the cost of energy is embedded in everything, so you are talking about a very economically damaging proposal.


“Unless it really hurts, you are not going to really change your lifestyle.”


The memo also estimates that auctioning carbon allowances would generate $300 billion annually and could be used to offset taxes on labor and capital.


These internal revenue estimates stand in stark contrast to the Obama administration’s public statements concerning cap and trade.


“They are only vowing in their budget proposals, both in February and just three weeks ago in August, that they plan through selling all the ration coupons to raise only $65 billion,” Horner said. “The key is [they are] admitting privately what they won’t admit publicly.”


Cap and trade is a tax scheme, Horner said, noting that even Obama budget director Peter Orszag repeatedly wrote reports and testified that cap and trade is a tax when he ran the Congressional Budget Office.


“It quacks like a tax, looks like a tax, and does everything else like a tax,” Horner said. “The problem is cap and trade is too high of a tax.”


Horner speculated that the Treasury admission could impact the votes of certain senators such as Sens. Lamar Alexander, R-Tenn., and Lisa Murkowski, R-Alaska, who have sat on the fence regarding cap and trade. It also could affect the votes of some moderate House Democrats if cap and trade goes back to the House for a final vote.


The liberal Center for American Progress believes a large shift of U.S. jobs abroad is unlikely as a result of cap and trade because much of the world already has far more stringent environmental rules than the United States does.


“Unlike the United States, the rest of the world is actually already governed by a climate treaty,” said Brad Johnson, a climate researcher with the Center for American Progress. “And the entire European Union has not only committed to act, they have committed to essentially redouble their efforts if the U.S. joins. Other nations have already enacted things that are above and beyond what the United States is considering to enact.”


The free trade policies of the Reagan, Clinton, and both Bush administrations have had a far greater negative economic impact on the American manufacturing base than cap and trade would have, Johnson said.


“The idea that the reform of the energy sector — that closing this huge pollution loophole and increasing regulatory oversight over the energy markets — would do harm in a way that hasn’t been done by our current system . . . I find hard to stomach,” Johnson said.

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