Policymakers in Washington want to dramatically change America’s energy policy by regulating carbon dioxide emissions. Their most popular idea, included in the Waxman-Markey 2009 energy bill, is a cap and trade proposal.

Many Americans find the debate in Washington over adopting a cap-and-trade program to reduce carbon dioxide a bit confusing. It works like this: Policymakers set a cap on the amount of carbon dioxide and other greenhouse gases that can be omitted into the atmosphere. Each power plant, factory, refinery, and other regulated entity will be allocated allowances (rights to emit) six greenhouse gases. However, only a certain percentage of the allowances will be allocated to these entities. The remaining percentage will be auctioned off or distributed to other emitting entities. Most emitters will need to purchase at least some allowances at auction. Emitters who reduce their emissions below their annual allotment can sell their excess allowances to those who do not–the trade part of cap-and-trade. Over time, the cap would be ratcheted down, requiring greater cuts in emissions

Put simply, it’s a tax on energy consumption. In fact, it would act as a huge tax. If enacted, cap-and-trade will be one of the government’s largest revenue sources within the next decade. Since 85 percent of our energy demand is met through fossil fuels, increasing the costs of energy will have significant economic consequences.

Most notably, the cost of producing goods for businesses increases, and consumer demand falls for two reasons; price hikes on goods reduce demand and people have less disposable income due to higher energy prices. And since low-income households spend a larger percentage of their income on energy, higher prices hit the poor much harder.

From an economy-wide perspective, higher energy prices force businesses to make production cuts and reduce labor. Furthermore, as we see in the current recession, reduced consumer spending only exacerbates this. The overall result is increased unemployment and slow economic growth.

What about green jobs, the supposed solution to our economic woes and environmental concerns? Sure, we can use government (read: taxpayer) money to hire workers to build windmills and solar panels. There will be green job creation. But that’s only one side of the coin. Despite years of subsidies and special tax breaks, renewables provide only three percent of the nation’s energy generation. Even after taxpayer-funded subsidies, consumers must pay a premium on their energy bills for renewable energy. Consumers lose doubly, paying to fund these projects with tax dollars then paying for pricier electricity.

Circling back to the effects of higher energy prices on the economy, forcing costlier renewable energy makes the economic impact only worse. According to The Heritage Foundation’s Center for Data Analysis, job losses resulting from the Lieberman-Warner cap and trade would have surpassed 900,000 in some years. Keep in mind; this is net of any “green jobs” created. Also keep in mind; the Waxman-Markey bill is has stricter emission cut targets.


It’s also worth noting that jobs are good, but they are not the end all goal. A business could hire a person to dig a hole and fill it up for eight hours a day, but how much value is that creating for society. Most people would argue not much. The big problem is resources a firm (or the government) devotes to a project like this cannot be used elsewhere in a more productive manner. Not only could the labor be used elsewhere but the firm could have used its money on a more productive project – although if a business is hiring someone to dig and fill up a hole, they probably won’t be in business for long.

A cap-and-tax has a number of problems, which will be covered in a 10-part series of blog posts, but above all else, it’s a jobs killer.