MURRAY & SINCLAIR: Energy bills could include trans-Atlantic tax

OPINION:

The “clean energy” bills bouncing around Congress contain a dirty little secret. Both Sen. John Kerry’s American Power Act and the Waxman-Markey American Clean Energy and Security Act (which passed the House last year) contain provisions that could benefit Europe at America’s expense. Both bills would create the first trans-Atlantic tax by hitching an American carbon-emissions “cap-and-trade” system to Europe’s Emissions Trading Scheme (ETS). If either bill is resurrected during Congress’ lame-duck session, we would be a Senate vote away from a single tax on the utility bills of households across the developed world - a tax that could force American consumers to bail out Europe by paying more for energy.

This provision has always been the object of our European “partners.”In May 2009, Jos Delbeke, a senior official in the European Environment Directorate-General, told an audience in Berlin that the “EU’s goal is indeed a global carbon market.” He went on to boast that the ETS and an American counterpart would be “integrated into a trans-Atlantic carbon market” that would drive the creation of a market spanning the developed world. He underlined that the ETS already had provisions for such linkage - all that was needed was for a U.S. equivalent to come into effect.

The drafters of the House and Senate bills were happy to oblige. They included provisions that allow those running a future cap-and-trade scheme to link it to any other country’s government program that imposes a limit on emissions and is at least as stringent as the U.S. law. The ETS qualifies under those criteria. Allowances thereby become interchangeable on a one-for-one basis, making no functional difference between a European emissions credit and an American one.

The problem is that these credits have value. Countries can print money at the expense of others by issuing more credits. Countries that have a tighter cap would end up losing out. That’s exactly what happened in the first phase of the ETS, when Britain set - and stuck to - a tight cap while other nations issued far more allowances. So money flowed from Britain as companies bought those allowances. According to the think tank Open Europe, the imbalance created a transfer of $470 million a year from British firms to their overseas competitors.

The implications for a U.S.-EU scheme would be much greater. While the United States so far has resisted caps as tough as those in effect in Europe, the congressional bills create a mechanism to make America’s at least as stringent as Europe’s. Moreover, America’s courts would hold the United States to its allowance limits, while European governments could easily continue issuing more allowances to help their industries - as has happened already. In effect, the EU could use this power to force the United States into bailing out Europe’s struggling economies and spendthrift governments.

Moreover, this unpredictability in the issuing of credits would introduce volatility into the U.S. carbon market. In the second phase of the ETS implementation, the EU demanded much lower emissions limits from several Eastern European countries. The countries went to court and had their initial allocations restored. The result was a sharp price drop in European carbon markets.

To avoid such uncertainties, there likely will be demands for an expensive international bureaucracy to oversee the market. This bureaucracy - a role the United Nations would love to play - essentially would have taxing powers. Given that the projected revenue from cap-and-trade for 2011 to 2020 is about $750 billion, according to the Congressional Budget Office, this power would be considerable. The EU bureaucracy already views the ETS as a way to free the EU from dependence on funding by national governments. It is not for nothing that former French President Jacques Chirac called the Kyoto Protocol, the precursor to the ETS, “the first component of an authentic global governance.”

Even if cap-and-trade were effective at reducing emissions - which the EU’s experience has shown it is not - this provision alone should be enough to cause its rejection. While cap-and-trade is dead on the Senate floor at the moment, there are suggestions from the Democratic leadership that it could be resurrected in the lame-duck session. That would be an insult not only to democracy, but to America’s sovereignty as well.

Iain Murray is a vice president at the Competitive Enterprise Institute. Matthew Sinclair is director of research at the TaxPayers’ Alliance in London.