Growing Cap-and-Trade on the Tax Farm

President Obama has called for a determined effort to free America from the hold of the international oil cartel. As his prime measure to achieve this, he has advanced a proposal to create a “cap-and -trade” system to limit carbon emissions. While the president’s stated objective is indeed worthy and in fact critical to the future of the nation, unfortunately, as a means to achieve it, a carbon cap-and-trade system is a complete non sequitur. The cap-and-trade mechanism is primarily a method of constricting electricity production. The United States only gets 3% of its electricity from oil. Thus taxing electricity will do nothing to free us from dependence on foreign petroleum. Quite the contrary. To the extent that electrified transport offers an alternative to oil, such as subways, trolleys, and trains actually do today and electric cars might hypothetically do tomorrow, taxing their motive power can only make the situation worse.

The defenders of the cap-and-trade proposal, however, have advanced the proposition that strictly speaking, cap-and-trade is not just a tax, as its mechanism contains features not included in a conventional taxation system. In this they are correct. Cap-and-trade is not just a tax. It is worse than a tax. It is a modern version of tax farming.

Tax farming was a practice followed by the Persian and various other ancient empires. Here’s how it would work. Let’s say the king needed some money to finance a war, a monument to himself, or similar worthy endeavor. Rather than fuss with the administration needed to collect taxes directly, he would sell the right to tax a given province to some wealthy crony. This public-spirited individual would then deploy his gangs of hired thugs to loot the people of the province in question. The king would get ready cash for his project, while through the exercise of unrestrained rapacity, the tax-farmer crony would generally obtain an excellent return on his investment. Thus, everyone who counted would be happy.

In essence, the cap-and-trade system works the same way. Initially carbon emission permits would be bought by utilities and industries, which need them in order to engage in their business. Such fees paid to the government for carbon permits are simply direct taxation. However, the carbon permits would be sold at auction, and many of them would be bought by financiers, not for their own use, but for the purpose of resale at profit. Provided that the government kept its issuance and sale of new carbon permits limited, which it must and therefore would in order for the system to function as desired, the resale mark up on privately held carbon permits could be very steep, allowing those with the ready cash to buy such permits in advance to tax the real economy at will. The utilities hit by these inflated costs would then pass them on to consumers, while those with the lowest incomes would be hit the hardest.

In the current set of bailouts, the government collects income taxes and gives the money to Wall Street. Under cap-and-trade, the government will sell well-heeled financiers the right to impose a massive and extremely regressive electricity sales tax on the nation and collect the revenue for their own profit directly. This will take kleptocracy to an entirely new level.

The Obama administration says that it hopes to raise some $650 billion in revenue for Uncle Sam through the sale of cap- and-trade carbon permits, and there is no reason to doubt this figure. However, that is only the government’s piece of the action. Because of the tax farming feature built into the system, the cost to the public is likely to be far greater.

While publicly justified by President Obama as a means of achieving petroleum independence, the actual purpose of the cap-and-trade system as conceived by the environmental activists currently formulating White House energy policy is to combat global warming. However it won’t contribute to achieving that goal either. Rather, by imposing a costly tax on the U.S. economy, cap-and-trade will cause American-made goods to cost more, allowing them to be displaced to an ever greater degree by those manufactured elsewhere, most notably China. As a result, the American economy will contract while the Chinese economy expands at U.S. expense. Since an even larger fraction of Chinese electricity and industrial process heat comes from coal than does American, the net effect of the cap-and-trade system will therefore be to increase the total carbon emissions released into the Earth’s atmosphere, not decrease it. However not only will Chinese industrialists obtain a larger market share for their products, they will be able to charge more for them, since their competition will be priced even higher. Thus the big losers overall will not only be American manufacturers and workers, but the world’s poor.

It is very unfortunate that the Obama administration has embraced a policy so thoroughly lacking in merit as cap-and-trade. If the goal is to reduce carbon emissions, this could be effectively advanced by removing obstacles to expansion of nuclear power. Instead, the administration has acted to dramatically reinforce such obstacles, most notably by halting the development of a permanent nuclear waste repository at Yucca Mountain, Nevada.

But if the goal is, as the president has said — and as it indeed should be — is to break the hold of the oil cartel, then nuclear power, windmills, and certainly cap-and-trade electricity taxes are all off the subject. Rather, what is needed is a vehicle fleet that can run on liquid fuels that can be obtained independent of OPEC and its allies. This goal could be most quickly achieved by passing a law, such as the Open Fuel Standards Act (HR 1476), requiring that the majority of new cars sold in the U.S.A be fully flex fueled, i.e., able to run equally well on gasoline, ethanol, or methanol (which can be manufactured from any kind of biomass whatsoever, as well as coal, natural gas, and recycled urban trash). Since such a law would impel foreign car makers to switch their lines over to conform to the open fuel standard, this would rapidly transform the global automobile fleet so as to make it compatible with fuels that can be readily produced from non-petroleum sources worldwide, thereby completely unhinging the vertical monopoly of the oil cartel internationally.

Cap-and-trade is very bad for what it is, but it is even worse for what it is not. For the 36 years since the first oil embargo made the need for an effective energy security policy apparent, the American political class has fecklessly failed to deliver. Like the Bush administration’s fantastical hydrogen economy dream, which was a means of achieving energy security before it, cap-and-trade is yet another hoax that avoids solving the critical problem of freeing the nation from the threat of extortion by the oil cartel.

The price of oil is down right now, but only because of the collapse of the world economy. Last December, OPEC took 4 million barrels per day off the world market, so that as soon as the global economy shows any sign of recovery, the price of petroleum will soar to record levels, slamming us right back into recession, and resuming the massive transfer of world power from the West to the Islamists. This must not be allowed to happen.

Mr. Obama, I sincerely hope you will provide the change we need.

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