I have just finished the CBO report for H.R. 2454, otherwise known as Cap and Trade, and it is just like a well written 1,428 page horror story that gets scarier with every turned page. In fact it is such a well written horror story that only Congressman Edward Markey (D-MA7) was willing to be a co-sponsor. The CBO report shed a bit of a different light on the legislation than the summary because it lays out the fiscal damage and government growth points better. It is also easier to read and understand. Despite these benefits, there is also a great deal of pertinent information that the CBO report does not touch on. Therefore, I will write a multi-part series on this fiasco and will do the same when the Senate version becomes available on April 26th.
H.R. 2454 is all about attempting to mitigate America’s role in manmade global warming while assisting and encouraging other countries to do the same. The bill will limit the amount of greenhouse gases (GHG) emitted by a variety of sources from power generating facilities to product manufacturers and everything in between. H.R. 2454 will also mandate a myriad of energy efficiency programs as well as the creation of a national smart grid, regulate the efficiency of a standard light bulb, create new agencies and bureaucracies, implement more cash for clunkers programs, and the list goes on. The hardest hit will be the power production entities and manufacturers. There are several points that need to be brought to light from the CBO report. Each point will be examined in its own part of this series. The first is the greenhouse gas emissions reduction targets and subsequent government “allowances” for emitting such gases.
According to the CBO report, in 2012 the emissions will be capped at the equivalent of 4,581 metric tons of CO2 for certain covered entities. Just as a note, electrical production facilities are the lion’s share of these covered entities. Depending on the gas emitted there is a conversion factor involved to determine that equivalency. This cap is equal to approximately 97% of the emissions from the same covered entities in 2005. Then end result is that by 2050 the emissions from these covered entities equal approximately 17% of the 2005 baseline. That equates to an allowable level of emissions for the covered entities of 1,035 metric tons per year or a reduction of 3,546 metric tons. The targeted levels of emissions are controlled through allowances distributed or sold by the Federal Government. Each year, the allowable levels of emissions are divided into three categories: the strategic reserve held by the government which can only be sold if the market value of those allowances available becomes cost prohibitive, the allowances distributed to covered entities without cost, and those allowances sold at auction. The percentage of the allowanced given to the various entities versus those auctioned off starts quite large. As time goes by the percentage gap between the two closes and then reverses until only 30% of the allowances are given freely with the rest being auctioned off. As this occurs, the total number of allowances available decreases as the emission levels decrease thus increasing the cost of doing business in addition to the costs associated with adjusting business practices and procedures to continually maintain compliance with the ever decreasing emission limits.
The graph below shows the emission allowances mandated by the legislation.
As with all government programs there are expenses involved for the entities being regulated. The Cap and Trade Programs are no different except for the amount of money involved. The CBO estimates that approximately 7,400 private and intergovernmental entities will be covered by Cap and Trade emission allowance allocation programs. The graph below shows the estimated costs to these 7,400 entities if they purchased all of the allowances available for auction each year. However, these allowances can be purchased by anyone who has the money. Once purchased, these allowances can be used, traded, stockpiled, or retired. Therefore, the figures presented are very conservative. The cost per allowance for years 2012 to 2019 are from the CBO report. From 2020 to 2050, the annual increase is an average of the increases from 2012 and 2050 without any addition for market forces. It should be expected that as the emission allowances decrease with the reduction in limits, the value for such allowances will skyrocket. Also remember that the number of freely distributed allowances as compared to those auctioned will decrease on an annual basis until they are just 30 percent of the total available.
It is evident that from the limits and allowance portions of the Cap and Trade programs will present daunting issues for those entities covered. These financial impacts from these programs as well will have a very chilling effect on the economy is ways we cannot yet imagine. However, it is just the tip of the iceberg. I will be examining the various other programs and effects of this bill in the near future as well as the expansion of power and financial windfalls of the Federal Government.
H.R. 2454 is all about attempting to mitigate America’s role in manmade global warming while assisting and encouraging other countries to do the same. The bill will limit the amount of greenhouse gases (GHG) emitted by a variety of sources from power generating facilities to product manufacturers and everything in between. H.R. 2454 will also mandate a myriad of energy efficiency programs as well as the creation of a national smart grid, regulate the efficiency of a standard light bulb, create new agencies and bureaucracies, implement more cash for clunkers programs, and the list goes on. The hardest hit will be the power production entities and manufacturers. There are several points that need to be brought to light from the CBO report. Each point will be examined in its own part of this series. The first is the greenhouse gas emissions reduction targets and subsequent government “allowances” for emitting such gases.
According to the CBO report, in 2012 the emissions will be capped at the equivalent of 4,581 metric tons of CO2 for certain covered entities. Just as a note, electrical production facilities are the lion’s share of these covered entities. Depending on the gas emitted there is a conversion factor involved to determine that equivalency. This cap is equal to approximately 97% of the emissions from the same covered entities in 2005. Then end result is that by 2050 the emissions from these covered entities equal approximately 17% of the 2005 baseline. That equates to an allowable level of emissions for the covered entities of 1,035 metric tons per year or a reduction of 3,546 metric tons. The targeted levels of emissions are controlled through allowances distributed or sold by the Federal Government. Each year, the allowable levels of emissions are divided into three categories: the strategic reserve held by the government which can only be sold if the market value of those allowances available becomes cost prohibitive, the allowances distributed to covered entities without cost, and those allowances sold at auction. The percentage of the allowanced given to the various entities versus those auctioned off starts quite large. As time goes by the percentage gap between the two closes and then reverses until only 30% of the allowances are given freely with the rest being auctioned off. As this occurs, the total number of allowances available decreases as the emission levels decrease thus increasing the cost of doing business in addition to the costs associated with adjusting business practices and procedures to continually maintain compliance with the ever decreasing emission limits.
The graph below shows the emission allowances mandated by the legislation.
As with all government programs there are expenses involved for the entities being regulated. The Cap and Trade Programs are no different except for the amount of money involved. The CBO estimates that approximately 7,400 private and intergovernmental entities will be covered by Cap and Trade emission allowance allocation programs. The graph below shows the estimated costs to these 7,400 entities if they purchased all of the allowances available for auction each year. However, these allowances can be purchased by anyone who has the money. Once purchased, these allowances can be used, traded, stockpiled, or retired. Therefore, the figures presented are very conservative. The cost per allowance for years 2012 to 2019 are from the CBO report. From 2020 to 2050, the annual increase is an average of the increases from 2012 and 2050 without any addition for market forces. It should be expected that as the emission allowances decrease with the reduction in limits, the value for such allowances will skyrocket. Also remember that the number of freely distributed allowances as compared to those auctioned will decrease on an annual basis until they are just 30 percent of the total available.
It is evident that from the limits and allowance portions of the Cap and Trade programs will present daunting issues for those entities covered. These financial impacts from these programs as well will have a very chilling effect on the economy is ways we cannot yet imagine. However, it is just the tip of the iceberg. I will be examining the various other programs and effects of this bill in the near future as well as the expansion of power and financial windfalls of the Federal Government.
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