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June/July 2009

By Bruce Wright

Is Cap and Trade Coming?

A Comptroller estimate indicates that CO2 cap and trade could cost Texas anywhere from 164,000 to 400,000 jobs by 2030.

Proposed regulations
will be the subject of
intensive debate.

It will either “create millions of clean energy jobs” – or “force more industries to leave America.” It’s a complex and contentious issue, and one that seems likely to be the subject of intensive debate over the next few years.

It’s a regulatory mechanism called cap and trade.

Ratcheting Down

The federal and state governments have used various cap and trade systems to target atmospheric pollutants for many years. Since 1993, for instance, Texas has used its Emissions Banking and Trading program to target atmospheric pollutants such as volatile organic compounds and nitrogen oxide.

In theory, at least, such systems are fairly straightforward. Government sets an overall limit of emissions of some pollutant – the “cap” – and then issues permits that allow regulated businesses to emit a set amount of the pollutant. Owners of these permits can buy and sell them – the “trade.” Businesses that acquire more permits than they use can sell their surplus to other entities that need them.

The government then ratchets down the cap over time, with progressively tighter limits on total emissions. The falling cap creates a market that forces companies to find ways to decrease their share of emissions – or lose ground to competitors that do.

Capping Legislation

While previous cap and trade schemes targeted conventionally recognized pollutants, proposed federal legislation would use the system to target “greenhouse” gases, predominately carbon dioxide (CO2), which are thought to contribute to global warming. At present, the federal government does not regulate or restrict CO2 releases in any way.

In April 2007, however, the U.S. Supreme Court ruled that the U.S. Environmental Protection Agency has the authority to regulate greenhouse-gas emissions. About six months later, a bill calling for a national greenhouse-gas cap and trade system was introduced in Congress.

While that bill failed to receive approval, new legislation passed by the U.S. House of Representatives – the American Clean Energy and Security Act of 2009 – would establish a cap and trade system intended to cut U.S. carbon emissions by 83 percent below 2005 levels by 2050. The bill’s intent is to discourage the use of nonrenewable, polluting energy sources and encourage their replacement with cleaner renewables.

No Pain, No Reductions

These goals would not come without some pain, although supporters and detractors offer wildly different views of the economic impact of CO2 cap and trade. The Institute for Energy Research, for instance, estimated that the 2007 CO2 bill could cost up to 4 million Americans their jobs and double the price of gasoline.

In June/July 2009, the nonpartisan Congressional Budget Office estimated that achieving even a 15 percent cut in CO2 emissions would cost the average U.S. household $1,600 through higher energy prices.

Supporters tend to take a longer view. U.S. Rep. Edward Markey (D-Mass.) says the 2009 legislation would “create jobs by the millions, save money by the billions and unleash energy investment by the trillions.”

The Electric Reliability Council of Texas (ERCOT), which manages the electrical grid for about 75 percent of the state, estimates rolling back greenhouse gas emissions to 2005 levels by 2013 would raise the average Texan’s electric bill by $27 a month.

“We’re both the nation’s leading energy producer and consumer, due to our climate and our industrial sector along the Gulf Coast,” says Cary Dupuy, a natural resources policy advisor for the Comptroller’s office. “So Texas will be affected significantly by any policy that caps greenhouse gas emissions.”

An estimate prepared for the Comptroller’s office by the University of Texas at Austin’s Bureau of Economic Geology indicates that CO2 cap and trade could cost Texas anywhere from 164,000 to 400,000 jobs by 2030, depending on the terms of the legislation. “We’re continuing to follow these proposals, and will update our analysis as legislation moves forward,” Dupuy says. FN

For additional cap and trade analysis and information on its potential impact on Texas, visit the Texas Comptroller’s Cap and Trade profile.

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