Is CA Cap & Trade New Smoot-Hawley Act?

Wayne Lusvardi
Political Commentator

Crossposted in CalWatchdog

Nowadays almost no economists back trade protectionism. Free trade is the norm. The example of damaging protectionism most cited is the Smoot-Hawley Tariff Act of 1930. According to Wikipedia, it raised to record levels tariffs on 20,000 imported goods.

Retaliatory tariffs by U.S. trading partners resulted in both imports and exports being cut in half, a rising unemployment rate and a precipitous drop in the economy during the Great Depression.

California’s recently enacted Cap and Trade law, which will tax emissions of industry, transportation and energy starting in 2012, is a modern version of Smoot-Hawley. It will “protect” the state’s high green-power rates from out-of-state competition, while also tacking a tax on the production and transportation of all goods.

Cap and Trade as Protectionist Policy

Ever since California shifted to buying about 25 percent of its electricity from other states to meet federal EPA clean air mandates, it has lost jobs and taxes to those states.  Part of California’s Cap and Trade program involves embargoing the importation of “non-renewable” energy, including clean hydropower and relatively clean natural gas, unless the end user pays an emissions tax — called a carbon tax.

A dirty little secret of California’s Cap and Trade program is that air pollution, mostly from “dirty” coal-fired power plants, will be reduced in Utah, Arizona, Nevada, Idaho, New Mexico and Oregon — but not in California’s urban smog traps. This is one of the reasons that Cap and Trade is a Trojan horse for a “tax farming” scheme in California.

And it is why California’s legislation must be termed “global,” rather than local, in accord with AB 32, the Global Warming Solutions Act of 2006. The mainstream media isn’t about to tell Californians that they will be paying an emissions tariff to reduce pollution in Utah and Arizona or in the politically Red State portions of California, such as the Inland Empire and Kern County, where most of the wind and solar farms are.

By levying a so-called carbon tax on imported electricity, California seeks to put its mandated 33 percent portfolio of expensive renewable green power at price parity with cheaper out-of-state power.  California’s intent is to recapture the lost jobs and taxes for California to plug its roughly $20 billion annual structural state budget deficit.  But it will do so at the expense of electricity ratepayers and consumers who will have to pay for higher-priced goods, transportation and electricity.  Since Cap and Trade imposes an embedded indirect tax in the price of nearly everything, it circumvents the supermajority vote restrictions of tax limitation measures, such as Proposition 13 and Proposition 26.

What Cap and Trade Affects

According to James Fine, California’s Cap and Trade program will affect the following sectors of the economy:

Sources of Greenhouse Gas Emissions in California 2020

Source Percent
SECTOR COVERED BY CAP & TRADE
+ Transportation 37.8 pct.
+ Electricity 23.4 pct.
+ Industry 16.9 pct.
Subtotal: 78.0 pct.
SECTOR NOT COVERED BY CAP & TRADE
+ Commercial & residential 7.9 pct.
+ Agriculture 5.0 pct.
+ Recycling and waste 1.3 pct.
+ High global warming potential 7.9 pct.
Subtotal: 22.0 pct.

Source – James Fine, Phd. Environmental Defense Fund

There isn’t general information available broken down by state as to imports.  However, we can infer what California imports from the major pathways for imports to California: its roads, airports, seaports, interstate gas lines and electric transmission lines.

The largest category of imports in the United States is manufactured goods, then energy and agricultural goods.  The largest individual categories of imported goods into the United States, and presumably into California, are:

  1. Cars and trucks;
  2. Computers;
  3. Machinery;
  4. Televisions, VCR’s, electronics;
  5. Clothing.

California could be imposing an emissions tariff on all imported goods that merely pass through its seaports, airports and rail terminals for destinations elsewhere within the United States.  Again, pollution would be reduced in China, Mexico, Japan, Taiwan, South Korea and Canada; or in Utah, Arizona, and Nevada. California will be reducing industrial and transportation emissions for its trading partners, but at a price.

Ohio Would End Up Paying Silicon Valley for Cap and Trade Tax

The Congressional Budget Office estimated that the average household would see its after-tax income cut from 2.7 percent (or $680) for lower-income households, to 3.3 percent (or $880) for middle-income households per year to pay for the cost of Cap and Trade.

Cap and Trade would also be geographically regressive.  As the Wall Street Journal describes it:

But the greatest inequities are geographic and would be imposed on the parts of the U.S. that rely most on manufacturing or fossil fuels — particularly coal, which generates most power in the Midwest, Southern and Plains states. It’s no coincidence that the liberals most invested in cap and trade — Barbara Boxer, Henry Waxman, Ed Markey — come from California or the Northeast….

“Cap and trade, in other words, is a scheme to redistribute income and wealth — but in a very curious way. It takes from the working class and gives to the affluent; takes from Miami, Ohio, and gives to Miami, Florida; and takes from an industrial America that is already struggling and gives to rich Silicon Valley and Wall Street ‘green tech’ investors who know how to leverage the political class.”

Cap and Trade, along with new EPA rules to reduce mercury and other substances, from the air is also a way to put “dirty” coal power plants — mostly in Red States — out of commission and replace them with “clean” solar and wind power plants that will build a “clean tech” industrial constituency for Democrats in Blue States. Cap and Trade is also a civil war to eliminate a political constituency of the Republican Party.

Tea Party Retaliation?

Ariel Schwartz is a blogger for Greenbiz.com. In her Oct. 24 article, “Why California’s Cap and Trade Program is a Big Deal,” whe wrote, “But if the new program works, it may not be long before others follow.”

What someone as naïve as Schwartz apparently is not aware of is that, if every state or region enacts a Cap and Trade law, we may inadvertently end up with an escalating domestic trade war.  What would prevent Michigan or Tennessee from tacking a pollution tax onto their automobiles?

After the mid-term elections of 2010, most of the coal-producing states have shifted toward the Tea Party.  Cap and Trade in California might galvanize Tea Party representatives in Middle America to erect trade tariffs to counter California’s Cap and Trade taxes, and might align voters with the Tea Party for the November 2012 elections.

Exporting the California Energy Crisis of 2001

What triggered the California Energy Crisis of 2001 was the federal Environmetnal Protection Agency’s mandate to clean the air in urban smog traps, or federal funds for highways and schools would be withheld.  The only way to comply with the EPA mandate was for California to mothball old, polluting fossil fuel power plants and shift to retrofitting the old plants to cleaner natural gas, or importing more power from out-of-state power plants.

California was not running out of electricity in 2001 as much as it was running out of clean sky and a way to finance paying off the old bonds and debts — called stranded assets — on its decommissioned power plants.

What is to prevent a similar set of energy crises arising in those states affected by new EPA clean air rules and California’s Cap and Trade law? What would prevent, say, Utah or Pennsylvania from tacking on a competitive tariff on all its exported products for phasing out coal power plants? Or how about if they pay off the stranded assets of the unpaid bonds and mortgages on its coal power plants made obsolescent by EPA regulations and California’s cap and trade tariff?

Cap and Trade’s Unintended Consequences

Writing in the July 26, 2009, issue of the Baltimore Examiner.com, Steve Christ asks, “Cap and Trade: A Smoot-Hawley Rerun?”

As Christ describes what happened to the U.S. economy after the Smoot-Hawley Act was enacted:

“Soon after, an economy that was merely teetering on the edge, went completely over the cliff.  A recession quickly turned into a depression. In the bill’s wake, unemployment rose dramatically for years, jumping to 16.3 percent in 1931, 24.9 percent in 1932, and 25.1 percent in 1933. Meanwhile, before the bill,  unemployment was only a mild 7.8 percent.”

The Obama administration and California have apparently not learned much from history.  In fact, they want to erase or scorn the history of the consequences of the Smoot-Hawley.

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