Is Cap-and-Trade Really a Free Market Solution to Climate Change?

Kerry Jackson
Kerry Jackson is a Fellow at the California Center for Reform at the Pacific Research Institute.

The mood was reportedly celebratory on the evening of July 17 after legislators approved a decade-long extension of the state’s carbon dioxide cap-and-trade program. But that’s not to say everyone was happy, or should be.

Assembly Bill 398 will continue the current cap-and-trade system through 2030. It places a cap on greenhouse gas emissions and allows emitters to buy allowances that permit them to release a set amount of emissions. It narrowly passed in the Assembly 55-21 with the help of seven Republican votes, and in the Senate by a single vote 28-12, needing an assist from a single GOP senator.

But some Republicans are refusing, as they should, to surrender the hard line. Senate Republican Leader Patricia Bates of Laguna Niguel said that “the world’s elites will applaud what California did . . . but it will be hardworking Californians who will pay the price.”  Her statement might sound like the heated response of someone who just lost a tough legislative battle, but her point can’t be ignored.

The first cap-and-trade law, which took effect in 2012, increased gasoline prices by 11 cents a gallon, according to the Legislative Analyst’s Office. That was just the beginning, though. The Legislative Analyst’s Office estimates the cap-and-trade extension “would raise gas prices by an estimated 63 cents per gallon in 2021, increasing to 73 cents per gallon in 2031. Under a low-price scenario, the LAO says “cap-and- trade would raise gas prices by an estimated 15 cents per gallon in 2021, increasing to 24 cents per gallon in 2031.”

So, the additional tax could be anywhere from 15 cents a gallon on top of the 12-cents-a-gallon tax that’s coming to pay for $52 billion in road repairs, or more than six times that in just 14 years. The cost per household for 2026, says the LAO, “would be in the range of roughly $150 to $550 under the two allowance price scenarios.

And, as the LAO acknowledges, the increased gasoline prices “are an intentional design feature of the program.” Lawmakers, after all, want to discourage gasoline use “to meet the policy objective of reducing statewide carbon emissions,” which we’ve been told is vitally important. But is it?

The truth about human carbon dioxide emissions is a bit different than the hype. It is not a pollutant, though the Supreme Court has astonishingly ruled that Washington can treat it as such. It is the source of life. As Patrick Moore, a Greenpeace founder, explained in a Prager University video, “all life is carbon-based and the carbon for all that life originates from the carbon dioxide in the atmosphere.”

“All of the carbon in the fossil fuels we’re burning for energy today was once in the atmosphere as carbon dioxide,” says Moore.

In the minds of some – particularly those who stand to benefit from its directives – cap-and-trade will create business opportunities that will produce jobs and economic growth in the renewable energy sector. Advanced Energy Economy CEO Graham Richard, for instance, said that thanks to the cap-and-trade extension, “California leads in the $200 billion U.S. advanced energy market, supporting more than half-a-million jobs in the state.” Gov. Jerry Brown and the Legislature, he said, have “taken action to keep the momentum going for jobs and the economy.”

But why would cap-and-trade be an economic windfall when government intrusions have never stimulated growth? If renewable energy was as promising as its proponents say it is, investors would be heavily capitalizing green companies. They don’t need government intervention through cap-and-trade nor any other government manipulation to see the business possibilities. They are driven by the profit motive.

Government decisions, however, are driven by politics, and when government favors a company, an industry or an innovation that can’t get traction in the market, the promise of economic growth is always broken. A preferred company, industry or innovation can thrive with government help – think Tesla – but the economic pie is not expanded. Government’s favorites are served bigger pieces, the rest settle for smaller slices.

Supporters also try to argue that cap-and-trade is a “market-based” solution. Though far better than a command-and-control regime, it’s about as market-based as the public schools. Governments don’t, indeed cannot, create a true market. When government intrudes on markets, or attempts to establish markets, they are skewed, coerced, bled, corrupted, and controlled. In the case of cap-and-trade, government requires businesses to buy a good they would not otherwise purchase. That’s not a market – it’s a government demand, and it’s one more that adds to the dead weight of regulation and taxation holding California back.

Kerry Jackson is a fellow with the Center for California Reform at the Pacific Research Institute.

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