The recent run-up in gasoline prices is inconsequential compared to the likely impact of potential "cap and trade" legislation to address global warming recently considered by Congress. But most of American business is only beginning to understand the breadth of those impacts and to think about how to protect itself from them.
Last month, the Senate was poised to take up S. 2191 (substituted by S. 2036), a bill that would have been the first to establish a national carbon trading scheme, whereby greenhouse gases are capped at a certain level and businesses must buy allowances in order to emit carbon dioxide and other climate-changing gases. If it had passed, the bill would have cut U.S. emissions to 70 percent of 2005 levels by 2050. But Senate Democrats pulled the legislation from the floor after failing to garner enough support to push the bill to a final vote. No one expected the bill to be enacted into law. It was largely viewed as a "pilot" for next year's debate when a new President will be in the White House. The presumptive nominees of both political parties have expressed support for cap and trade legislation. McCain joined with Lieberman in 2005 to cosponsor legislation for a carbon-trading system, and Obama sent a letter of support for S. 2036. Thus, either S. 2036 or something much like it is likely to be signed into law no matter who is elected president in November. (The reconsideration of the Kyoto Protocol in December 2009 almost assures that enactment will come within the next 18 months.)
The legislative maneuvering that led to the demise of S. 2191 (S. 2036) shows just how difficult it is to address the complicated issue of climate change and highlights a key point of contention among lawmakers—what are the potential economic impacts of a "cap and trade" system?
In our last CSE Update, we featured testimony on S. 2191 relating to the potential impact of carbon trading schemes on energy-intensive industries—utilities, steel, cement and aluminum. Companies in these sectors will find themselves directly impacted by the requirement to purchase tradable "carbon emission allowances." Industrial firms and businesses outside these segments will not be subject to those requirements, but will face substantial cost increases. For example, the nonpartisan Congressional Budget Office (CBO) estimated the 2012-2016 impact of S. 2191 at $90 billion per year. The National Association of Manufacturers projected about an 8% decrease in the value of industrial shipments by 2030. The adjacent boxes show estimates of the macroeconomic impacts. Specifically, NAM projected an increase in gasoline costs by 2020 of $0.43 to $1.46 per gallon by 2030, (see Chart 1) and an increase in industrial electricity prices by 2.7 to 3.2 cents per kilowatt hour (see Chart 2).
EPA economic impact analyses (see Chart 3) projected an increase in gasoline cost of the same magnitude, but projected that it would take until 2050 to be reached. Before one takes too much comfort from EPA's analysis, however, it merits note that EPA also assumed a base price of oil per gallon in 2050 of $68.11, about half of today's level.
From the private sector perspective, there really are two sets of issues that must be addressed in both the passage of climate change legislation and the extensive rulemakings that will follow. A major consideration in the implementation process will be the mechanics of the "cap and trade" mechanism—how emissions will be measured, how allowances will be priced, how the system will be policed. These questions will be the concern of the relatively few major greenhouse gas emitting industries, and economists and policy analysts. But there is another set of issues that should be of greatest concern to most businesses. These surround the question: How will the huge flow of funds to the federal government be used? The sale of emission "allowances" to energy-intensive industries means huge payments by companies in those sectors to the federal government. The CBO estimates that these will total $1.2 trillion between 2009 and 2018 alone. Where is that money to go?
Some of it no doubt will be used, and properly so, to protect energy-intensive industries from foreign competitors who do not face the same regulatory burdens. Another significant portion may go to subsidize some portion of the electorate's steadily increasing home heating and automobile fuel costs. And additional funding will likely go for new technology initiatives, support of carbon-sequestration, and to as many other purportedly socially beneficial activities as their advocates can convince Congress and regulators merit help.
Thus, even businesses who are not in a position to seek direct subsidies should be paying attention to the procedural aspects to this law. What are the criteria going to be for awarding "free" allowances? For subsidies and grants? How will applications be evaluated? What procedures will be put in place to challenge bureaucratic decisions? Answers to these and many other questions inevitably will be delegated by Congress to EPA, the Department of Energy, or some new agency or board. The level of rulemaking activity promises to be even greater than the period from 1972-1982, when the major environmental statutes—the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act (RCRA), the Toxic Substances Control Act (TSCA), and others—were implemented.
There is a lesson to be drawn here from those rulemakings. Even where the text of a statute doesn't speak directly to the particular concerns of a business or industrial segment—as is likely to be the case for most business interests subject to "cap and trade" legislation—it is extraordinarily valuable to provide guidance in the legislative history to the regulators who will be tasked with implementing these massive new programs. And even where such groundwork has not been laid, substantive and documented policy arguments are likely to face a welcome reception from administrators who are working, under great pressure, to implement the Congress' new mandates. Putting together those arguments is no easy task, and planning should be beginning now.