Cap and Trade: Will it happen and what does it mean for the economy?
March 02, 2009
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RELATED TICKERS: FPL
, EXC
This week's Barron's had a number of articles on the Obama administration's desire to pass "Cap and Trade" legislation. For those of you who aren't familiar with the term, it essentially means that the government will levy a tax on companies whose operations produce carbon emissions and provide credits to "green" companies. These environmentally friendly companies can then turn around and sell the credits that they have earned to "dirty" companies.
Senate Majority Leader Democrat Harry Reid is in the process of drafting a huge new energy bill that should be officially unveiled some time in the next several months. Part of this bill will likely be some sort of cap and trade system which starting in the year 2012, would raise an estimated $75 billion to $200 billion in additional annual tax revenue.
I anticipated the Democratic majority making a major effort to push greener legislation through the system in 2008. As a result, I have steered clear from coal-heavy power companies in my portfolio. Two of the small number of common stocks that I still own are among the cleaner power companies in the United States, FPL Group (FPL) and Exelon Corp (EXC). Exelon is heavily involved in nuclear power and FPL has a large number of solar and wind assets as well as nuclear. Both sport attractive dividend yields of over 4% and both will likely benefit tremendously if a cap and trade system is implemented.
As a shareholder of both companies, you'd think that I'd be all for cap and trade, right? Ah not really. I think that if such a system was implemented before out economy gets back on its feet, it would be disastrous. Sure, the U.S. could benefit from a new green tech revolution. I am all for energy independence and for creating new, high tech jobs. However, the taxes from a cap and trade system would be a tremendous burden that would hurt low income families and serve to slow consumer spending at a time when we can hardly afford to do so.
Obama's recently released budget assumes that the government will rake in $79 billion in revenue from an escalating cap and trade tax in 2012, $237 billion in 2014, and in $646 billion by 2019. A huge chunk of this money will come from power companies that use coal to produce electricity. $600 billion dollars is a lot of dough. That's $600 billion in additional taxes that won't get spent by consumers, unless Uncle Sam takes it upon himself to redistribute all of the money from this tax so that it theoretically finds its way back into the economy. Furthermore, cap and trade has the potential to drive what little manufacturing actually still happens here in the U.S. to other countries with more business-friendly emissions standards. Forcing manufacturing abroad would steal much needed jobs from the U.S. economy and actually limit the effectiveness of this legislation from an environmental perspective.
As one person was quoted in the Barron's article, "Substituting more expensive energy for cheaper energy doesn't make sense." To that, I would add, at least not right now when we can least afford to do so.
Of course, none of this is scheduled to start until 2012. For all of our sakes I hope that the economy will have stabilized by then. I personally expect the economy to stabilize some time in 2010, but I do not expect to see any rapid rebound. If the economy was to stabilize then and the GDP was to only grow 1% to 2% annually from there a cap and trade system could have the unintended consequence of pushing us back into a recession.
It will be very interesting to follow what happens on this front. For now, I own stock in EXC and FPL. I have refrained from purchasing more because even though the chatter about green legislation has picked up significantly lately I expect weakness in the overall market to drag down almost all stocks across the board for the next several months. For now I am content to sit on my stakes in these companies and reinvest the 4% per year that they pay me to wait until something happens with cap and trade...if it ever does. If I see any sort of stabilization in the economy and the markets or it becomes absolutely clear that cap and trade will pass I will strongly consider adding to my positions.
I'd love to hear others' thoughts on whether a cap and trade system will pass and what sort of impact it will have upon the U.S. economy if it does.
Deej
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