EPA: Cap-and-Trade Bill Could Hurt U.S. Manufacturing, Send Factory Jobs Overseas

By Matt Cover | May 22, 2009 | 3:46 PM EDT

Rep. Henry Waxman (D-Calif.)

(CNSNews.com) – According to an analysis of climate legislation performed by the Environmental Protection Agency (EPA), the cap-and-trade system favored by President Barack Obama and many congressional Democrats could potentially damage the U.S. manufacturing sector and force jobs to move overseas.
The policy, under certain scenarios, for example, “can cause domestic production … to shift abroad,” reads the EPA analysis, and result in greater greenhouse gas emissions in countries that do not have similar cap-and-trade rules.
Further, the EPA’s Apr. 20 preliminary analysis of the bill, sponsored by Reps. Henry Waxman (D-Calif.) and Edward Markey (D-Mass.), shows that the plan would reduce U.S. manufacturing capacity 0.3 percent by 2020 and by nearly 1.5 percent by 2050.
Had the bill not been revised late last week after negotiations between industrial state Democrats and Waxman and Markey, U.S. manufacturing reportedly would have shrunk 0.9 percent by 2020.
Under cap-and-trade, in general, the amount of carbon that U.S. companies can produce is “capped.” If they exceed that cap, they can purchase (“trade”) carbon allowances or permits to cover the excess emissions. 
The money generated from the purchase of those allowances would potentially be re-invested in more environmentally friendly companies and possibly also re-distributed to low-income families. 

Rep. Edward Markey (D-Mass.) (AP Photo)

However, in the latest version of the bill, only 15 percent of the allowances would be auctioned or sold while 85 percent would be distributed at no cost, drastically lowering the amount of revenue the government might redistribute.
In its executive summary of the Waxman-Markey bill, the EPA said it was assuming that the bulk of the revenue from the carbon allowances “would be returned to the people as a lump-sum rebate. Returning the auction revenues to households enables consumers to decide how best to use the value created in the program, for example, to buy more energy-efficient light bulbs, to pay for electricity bills, or to use on the consumption of other goods and services.”
“Furthermore, while the [Waxman-Markey] bill does not specify a particular method for using the value of allowances, returning the revenues in this fashion could make the median household, and those living at lower ends of the income distribution, better off than they would be without the program,” said the EPA.
“However, a policy that failed to return these revenues to consumers would lead to substantially larger losses in consumption,” it added.
This means that had the Waxman-Markey bill not been changed to allow the government to give the allowances away, cap-and-trade would have initially cost the public little, as tax rebates would have largely made up for the increase in energy prices caused by the program.
Now that the government will give most of the permits away for free, consumers will bear the brunt of the costs associated with capping greenhouse gas emissions, especially low-income Americans who generally drive less-efficient cars and live in older, less efficient houses and apartments.
As the EPA states: “A cap-and-trade policy increases the price of energy-intensive goods. The majority of this price increase is ultimately passed onto consumers. … [L]ower income households are disproportionately affected by a GHG (Green House Gas) cap-and-trade policy because they spend a higher fraction of their incomes on energy-intensive goods.”
When it comes to distribution of the carbon allowances, the EPA found that “freely distributed allowances to firms tend to be very regressive” and that “higher-income households may actually gain at the expense of lower income households under this policy.”
“This is because the asset value of the allowances flows to households in the form of increased stock values and capital gains, which are concentrated in higher-income households,” said the EPA analysis. 
Overall, “lower-income households are still disproportionately impacted relative to higher-income households,” said the EPA.
The bill, according to the analysis, also would force a 22 percent increase in electricity prices by 2030, pushing the price of gasoline above $4 per gallon by 2030 and to approximately $5.50 per gallon by 2050. Without the climate bill, the EPA projects gas prices to rise to $4.50 by 2050 and expects electricity prices to increase by only four cents between now and then.
Contrary to the claims of many Democrats and President Obama, the EPA found that the U.S. economy will not be a clean energy economy under cap-and-trade and will still primarily rely on fossil fuels for both current and new electricity production.
By 2025, for example, fossil fuels will supply 64 percent of Americans’ electricity, 21 percent will come from nuclear power, and renewables will provide only 9 percent. In fact, of all the new electricity-generating capacity built between now and 2025, only 35 percent of it will come from renewables, according to EPA.
By 2050, fossil fuels will still provide over 60 percent of energy usage, with 54 percent coming from the same coal, oil, and natural gas in wide use today. Low-carbon sources would account for 46 percent, but the vast majority of that figure would come from nuclear or clean-coal sources, not from renewables such as wind and solar, according to the EPA.