As home to the entertainment industry and the land of make-believe, California is known for embracing fads. The latest rage among the Democrats who just won a supermajority sway in the Sacramento Statehouse may prove to be the most costly. California is starting its own cap-and-trade program, which taxes carbon-dioxide emissions and other "greenhouse" gases through a convoluted permit system. The Golden State could end up suffocating its golden goose with this scheme.
It all begins on Nov. 14, when large businesses will be forced to bid on permits for the gases they emit in the course of producing goods and services. State officials hope the permit auction, with a floor price of $10 per ton of carbon dioxide, will raise between $500 million and $1 billion initially and billions annually thereafter. The bureaucrats claim the escalating permit costs will reduce emissions to 1990 levels by 2020, as if that's a good thing. There is no chemical difference between the carbon dioxide emitted by a factory or power plant and the byproduct of the respiratory process that keeps humans, animals and plants alive on this planet.
Nonetheless, California branded carbon dioxide as an evil that must be abolished in a 2006 law that authorized the state's powerful Air Resources Board to impose the cap-and-trade system on about 360 businesses statewide in its initial phase. Electric utilities and other large manufacturers will receive free permits covering 90 percent of their current emissions, and they must buy extra permits through an online auction to cover the remainder. A second phase begins in 2015, when other industries, such as petroleum refineries, distributors of natural gas and other heavy carbon-dioxide emitters also must join the program. The supply of permits will be reduced gradually, increasing demand and making them more expensive.
President Obama's re-election was a victory for proponents of wealth redistribution, but California is venturing into the territory of wealth reduction. On Election Day, the Golden State approved a tax increase sought by Gov. Jerry Brown that is expected to raise $6 billion annually. Combine that with cap-and-trade, which essentially is a tax on production, and billions will be sucked out of the state's economy. Businesses hurt by the higher costs will be forced to raise their prices, and consumers will find themselves paying more for everything from gasoline to groceries. The collateral damage likely will be felt in the form of job "leakage," in which firms flee to more business-friendly locales. The state's unemployment level stood at 10.2 percent in October, the nation's second-highest.
Government can create a market out of thin air, but it can't guarantee its success. As California officials anticipate their cap-and-trade booty, demand for carbon-dioxide permits could be softening even before bidding opens. U.S. carbon-dioxide emissions fell 1.3 percent in 2011 to a 20-year low, partly because of advances in technology but mostly because of persistent economic malaise.
The Golden State's cap-and-trade program has a forerunner in the European Union's Emissions Trading System, in place since 2005. The EU system has suffered through price collapses caused by Europe's economic slowdown and has been pilfered repeatedly by computer hackers, who have stolen tens of millions of euros' worth of emissions permits.
Tax-loving lawmakers in Washington will be gauging the viability of emissions trading in California before attempting a reprise of their cap-and-trade law, which failed in 2010. It will be interesting to see how long it takes them to realize the carbon-dioxide tax is really a tax on prosperity.
The Washington Times
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