Research & Commentary: Why States Should Avoid Cap-and-Trade Schemes

Published January 11, 2018

Cap-and-trade programs are systems that limit carbon-dioxide emissions. They work at the state or national level by establishing a specific amount of carbon dioxide businesses or other organizations may produce and allowing additional capacity to be bought from other organizations that have not used their full production allowance. If an entity emits above the cap without purchasing additional allowances, it will suffer a financial penalty.

Legislators in Oregon, and potentially elsewhere, are making a push in 2018 to enact cap-and-trade legislation at the state level. Advocates of these policies point to California and the nine northeastern states that make up the Regional Greenhouse Gas Initiative (RGGI) as examples of how these programs can be successfully implemented. In reality, cap-and-trade programs do little to reduce emissions and work in a manner comparable to regressive taxes, disproportionally burdening low-income households, who have less of a cushion to absorb the higher energy and gasoline costs cap-and-trade programs are designed to produce.

California’s cap-and-trade program, which went into effect in 2012, requires greenhouse-gas emissions to be reduced 40 percent below 1990 levels by 2030 and 80 percent below 1990 levels by 2050, a target that will probably not be met. Cap-and-trade has helped force one million California households to spend at least 10 percent of their household income on energy costs, a situation experts refer to as living in “energy poverty.” In some lower-income counties, as many as 15 percent of households are classified as energy impoverished.

Jonathan Lesser of the Manhattan Institute estimates the California cap-and-trade program raised residential electricity costs in the state by as much as $540 million in 2013. California’s Legislative Analyst’s Office (LAO) estimates cap-and-trade will increase gasoline prices by 15–63 cents per gallon by 2021, and by 24–73 cents per gallon by 2031. LAO projects by 2021 Californians will be spending $2 billion to $8 billion extra on gasoline. By 2026, it also estimates the increased gasoline prices will cost $150–$550 per household.

RGGI, established in 2009, requires power plants larger than 25 megawatts in capacity to purchase emissions allowances at auction for each ton of carbon-dioxide emissions they produce. There are a limited number of allowances issued, and these are gradually reduced each year.

In a Cato Institute Working Paper on RGGI released in August 2017, David T. Stevenson of Delaware’s Caesar Rodney Institute writes there are “no added reductions in CO2 emissions, or associated health benefits, from the RGGI program. RGGI emission reductions are consistent with national trend changes caused by new EPA power plant regulations and lower natural gas prices. The comparison requires adjusting for increases in the amount of power imported by the RGGI states, reduced economic growth in RGGI states, and loss of energy intensive industries in the RGGI states from high electric rates.”

Further, RGGI states have experienced a 13 percent drop in goods production and a 35 percent reduction in the number of energy-intensive goods created. In five similar states, Stevenson found there was a 15 percent increase in goods production and only a 4 percent decrease in energy-intensive manufacturing. RGGI states also had the amount of their power imported from other states increase from 8 percent in 2007 to 17 percent in 2015.

“All states have shown energy efficiency gains,” Stevenson added. “The RGGI states saw a lower improvement in energy intensity at 9.6 percent compared to 11.5 percent for comparison states, so there appears to be no RGGI-related gain in overall energy efficiency. Wind and solar energy installation was slower in RGGI states, only increasing by 2.3 percentage points, while comparison states grew by 5.5 percentage points, more than twice as fast. RGGI grants for wind and solar power only accounted for about 1 percent of all the wind and solar power added by the RGGI states. The net fuel assistance help for low income households, 15 percent of all households, only added 1.6 percent to the federal Low Income Home Energy Assistance Program, or less than $5/year.”

Legislators should avoid cap-and-trade programs, as well as other green-energy schemes like carbon taxes and renewable portfolio standards, which do little to decrease carbon-dioxide emissions and cause considerable economic harm to low-income families. Cap-and-trade programs aren’t needed; carbon-dioxide emissions are already dropping in the United States, a development that is primarily due to the recent hydraulic fracturing revolution, which many cap-and-trade supporters continue to oppose, and the switch from coal-generated electricity to natural gas.

The following documents provide more information about cap-and-trade programs, carbon taxes, and other green-energy schemes.

Less Carbon, Higher Prices: How California’s Climate Policies Affect Lower-Income Residents
This study from Jonathan Lesser of the Manhattan Institute argues California’s clean power regulations, including the state’s renewable power mandate, is a regressive tax that harms impoverished Californians more than any other group.

A Review of the Regional Green Gas Initiative
This Cato Institute Working Paper authored by David T. Stevenson of the Caesar Rodney Institute finds the Regional Greenhouse Gas Initiative has not shown any added emissions reductions or associated health benefits, has had minimal impact on energy efficiency and low-income fuel assistance, and has increased regional electric bills.

Five Myths of Cap-and-Trade
Articles supporting cap-and-trade programs rest on a number of fallacies. In this article by Todd Myers of the Washington Policy Center, Myers identifies and explores five persistent myths concerning cap-and-trade, including the belief that a cap on carbon dioxide emissions guarantees emissions reduction.

Ten State Solutions to Emerging Issues
This Heartland Institute booklet explores solutions to the top public policy issues facing the states in 2018 and beyond in the areas of budget and taxes, education, energy and environment, health care, and constitutional reform. The solutions identified are proven reform ideas that have garnered significant support among the states and with legislators.

The Case Against a U.S. Carbon Tax
In this paper from the Cato Institute, Robert P. Murphy, Patrick J. Michaels, and Paul C. Kanppenberger examine carbon-dioxide tax programs in place in Australia and British Columbia and whether similar programs would be successful in the United States. They conclude, “In theory and in practice, economic analysis shows that the case for a U.S. carbon tax is weaker than its most vocal supporters have led the public to believe.” 

The Deeply Flawed Conservative Case for a Carbon Tax
In this paper from the American Enterprise Institute, Benjamin Zycher says the “conservative” Climate Leadership Council’s (CLC) much-hyped carbon-tax proposal is “naïve” and “virtually all of the … assertions in support of its proposal are incorrect or implausible.” The CLC’s plan is “poor conceptually and deeply unserious,” wrote Zycher.

Economic Outcomes of a U.S. Carbon Tax–us-carbon-tax?source=policybot
This report from the National Association of Manufacturers evaluates the potential impacts on the U.S. economy from possible future carbon taxes whose revenues would be devoted to a combination of debt and tax rate reduction. The results take into account the varied economic effects of fossil fuel cost increases due to a carbon tax as well as the positive economic effects of the assumption that carbon tax revenues would be used to reduce government debt and federal taxes.

The Carbon Tax Shell Game
Oren Cass of the Manhattan Institute says the carbon tax is a shell game. The range of designs, prices, rationales, and claimed benefits varies so widely that assessing the actual validity of most proposals is nearly impossible to accomplish. In this article for National Affairs, Cass says the effect of carbon-dioxide taxes on emissions has proven to be insubstantial, a fact he says is ignored by the tax’s proponents when promoting its purported benefits. Cass also says carbon-dioxide taxes’ negative fiscal effects are claimed to be offset by efficiency improvements and by promising the revenues will be spent to offset the costs, but he says the same revenues are often promised to different constituencies to accomplish completely different and largely incompatible goals.


Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Environment & Climate News, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

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