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Cap and Trade: Will it happen and what does it mean for the economy?

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March 02, 2009 – Comments (12) | RELATED TICKERS: FPL.DL2 , 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

12 Comments – Post Your Own

#1) On March 02, 2009 at 4:46 PM, djemonk (< 20) wrote:

I don't know if destroying the only planet we know we are capable of surviving on is worth the economy.  I'd rather be underemployed for a year than sunning myself on the new beaches of Antartica and taking a cruise over the Former Washington DC Sea.

This is a common logical omission that I see all-too-often.  Thinking that the economy and the world are two separate things can have disasterous consequences.  I think it's something to give credence to, since virtually every reputable scientist agrees and the only real objection comes from the heavist polluters.

Alternately, you could raise your children to have gills.  That would allow carbon emitting companies to destroy the atmosphere for that extra couple percentage points of profit.

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#2) On March 02, 2009 at 5:13 PM, TMFDeej (99.32) wrote:

Thanks for reading djemonk. 

I never said that I am completely opposed to reducing carbon emissions, just that we have to be mindful of the unintended consequences of such legislation.

I don't think that the cap and trade issue is quite that simple.  The U.S. has control over what happens within out borders, but implementing a penalty on carbon-producing manufacturers will likely just drive their operations overseas to places with fewer regulations.  They will emit the same level of pollution, just not here.

Having said this, my first loyalty is to my wife and sons.  I ABSOLUTELY would not exchange one year of joblessness for a 0.001% drop in the total global carbon emissions.  I fear that implementing any tax during a period of economic weakness is a bad idea.  If I was convinced that green legislation would create enough new high tech jobs to replace the ones that it will drive abroad and the ones that a potential drop on consumer spending would cause or even close, I would be all for it. 

Our country needs a new industry to drive growth and it needs to stop sending money that could stay at home abroad to oil-producing countries.  Perhaps a massive improvement in the electricity grid combined, a boom in low-carbon fuels, and a large scale introduction of plug-in electric vehicles would keep more money at home.

Deej

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#3) On March 02, 2009 at 5:38 PM, socialconscious wrote:

Good read  chock full of information thanks. 

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#4) On March 02, 2009 at 6:05 PM, djemonk (< 20) wrote:

In the end, you're right in pointing out that this doesn't take effect until 2012.  The economic landscape will hopefully be very different then than it is now.  I'm not a climate change scientist, so I don't really know what the implications are for this, but the warnings seem clear enough that we need to rethink our carbon emissions.

How well do you think your family would do if ocean levels rose worldwide and NYC, LA, SF, and DC were all under water?  Not to mention most of tokyo and the most populated areas of China?  There are definitely two sides to this.  The short-term effects, which you are concerned about, and the long-term effects, which I am concerned about.

I'm very much behind your assertation that we need a new industry.  

It's been a long day, so this isn't as well-thought out as I'd like.  :)

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#5) On March 02, 2009 at 6:12 PM, OldEnglish (28.14) wrote:

djemonk

Without limiting births, "Cap and Trade" is trivial relative to long term Greenhouse emissions. China already does more than any other nation on earth to limit future carbon emissions by removing the incentive to have children. If you think the rest of the world is going to live like animals to limit carbon emissions, you're dreaming.

A year of unemployment as the only cost? Try being forced to put your teenage daughter on the street to pay your bills. That's what many in the developing world face. In five years, it may be a challenge many Americans face. Global warming, I refuse to allow enviromentalists to change their thesis to "Climate Change", will be the least of America's concerns in a few years.

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#6) On March 02, 2009 at 6:50 PM, dmjst11 (< 20) wrote:

Low energy prices are the foundation of our ecomony.  Our country is blessed in having such vast rescources under our feet for centuries to come.  Unfortunately European countries ran out of  cheap fossil fuels and  as their energy prices increases  the U.S. moved in to be the ecomonic power house of the world.  Anyway if we start taxing fossil fuels I fear that manufacturing companies will move further west;  like China.

 

Some CO2 facts........

 

http://www.geocraft.com/WVFossils/greenhouse_data.html

 

 

 

 

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#7) On March 02, 2009 at 7:00 PM, workin4mony (< 20) wrote:

If you reduce the CO2 in the atmosphere 0.001% then the CO2 content would be -0.0007%! All the plants would die!

Of the 0.0003% (3/10,000) of CO2 in the atmosphere, man is responsible for 5%. One volcanic eruption in an instant can dwarf mans contributions for years.

The sun is responsible for earth's temperature and in fact the earth is cooling. Pelosi did not attend the global warming protest today because it was snowing.

It is just a money grab that will cripple any manufacturing in the US.

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#8) On March 02, 2009 at 9:39 PM, tonylogan1 (28.15) wrote:

They are not talking about making carbon emission illegal, just taxing it so a small group of humans have tremendous power over every other human.

If they cared about the earth they would just outlaw this supposed "pollution" or propose other solutions that could either have a chance at working (like increased nuclear power generation), or would help us adapt to a warmer climate (if that even happens) like increased spending on malaria prevention, etc.

Of course, more CO2 in the environment is actually a really good thing for our survival, and global warming / human induced climate change is a complete joke (just not funny).

Maybe when we have a few consecutive years of cold weather to th epoint that it reduces the food supply and the earth experiences mass starvation, we will wish we hadn't wasted so much effort on cooling the planet.

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#9) On March 03, 2009 at 12:56 AM, BigFatBEAR (29.16) wrote:

Without limiting births, "Cap and Trade" is trivial relative to long term Greenhouse emissions. China already does more than any other nation on earth to limit future carbon emissions by removing the incentive to have children.

Actually, birth rates and population may be stabilizing over the next century, as countries and economies continue to develop. Remember the calls for "10 (billion) in 2010"?? That's next year, my friends, and we're still quite a ways from 7 billion. While China's government may have played a part in stopping that country's population explosion, development and macroeconomics is doing the job just fine in the rest of the world.

-BFB 

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#10) On March 12, 2009 at 9:29 PM, PTKeil (< 20) wrote:

There are some of our states doing this in some version already....keep an eye on them. The EU has a program similar to this already in place, although it is drawing criticism of being too loose to make a difference.

We Americans have to start acting like leaders and stop making up excuses for what we are doing ("China and India are exempt from the Kyoto stipulations...so why shouldn't we be? To hell with the world!")  We have 5% of the world's population and yet use 25% of the commercial energy, most of which comes from coal, the "dirtiest" fossil fuel there is. There's nothing wrong with moral obligations, and WE ALL pay in some form or another, not just big business. What goes to business trickles down to all of us in some way, and that is money well spent. There is no "Plan B" for the human race. Money is wonderful, but you can't eat, drink, or breathe it.

As far as technology goes, we all know money talks, and unless you give the businessmen a monetary reason or force them to make big changes, they won't....it's that simple. Don't kid yourself into thinking that companies are going green because they care. The bottom line is the bottom $ line. If they can save money by going green, they will. If they can present themselves as an "Ecobusiness" to boost their PR and profits, they will. They won't self-check without monetary motivation or mandatory caps.

Most importantly, and something everyone seems to forget, is it's much cheaper and easier to PREVENT a problem than clean it up in the aftermath.

Attempting to control CO2 emissions before they are released is feasible. Gathering molecules once they're released and dealing with the environmental impacts (i.e. Hurricane Katrina) would be a pipedream and more costly than any of us could ever imagine. Pay now or pay exponentially later. 

This cap and trade is a step in the right direction. Maybe not the end all, but a step that we must take. Think of measures such as these as "LIFE insurance."

Thanks!

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#11) On March 12, 2009 at 10:12 PM, PTKeil (< 20) wrote:

BTW,

Some of you seem to think that you have knowledge on scientific matters, such as global warming, and are spouting off information you don't even know enough about to question the validity of your sources or understand.

You need to step back and think about what you really KNOW about the concept, which, most oftentimes with people who claim it is a hoax, is minimal at best. Stop getting your information through unsubstantiated third parties or relying on third parties' false interpretations as to what the research says.

 Wiki, and most internet sources, are NOT reliable sources of information. Unless you read the actual scientific documents that have been peer-reviewed on this subject, you know nothing, and to even begin to understand them even if you tried, you would need years of knowledge. I know because I have those years.

Occam's razor: the simplest explanation is probably the correct one.

Explanation A: CO2 is a greenhouse gas that contributes to the greenhouse effect, and we are releasing more than ever in the history of the human race due to our energy use, therefore causing excessive greenhouse effects leading to global warming. One of the biggest businesses is energy, and they want you to keep buying, so refuting these claims is a priority.

OR

Explanation B: Hundreds of thousands of scientists who have studied these basic phenomena for years have all suddenly turned stupid (much like we do when discussing evolution), no longer using the logic that is inbred in our scientific mind. There are a few businessmen and some politicians who want to rule the world and control us all, and have multiple tangents in place to ensure that they accomplish this, including paying off world leaders, scientists, and anyone else who will succumb. Scientists are all corrupt and jumping on the bandwagon for grant money, and look the other way when unsubstantiated claims are submitted for publication. There is a huge conspiracy by environmentalists to suck the economy dry. That sounds reasonable....Puuulease!

 

 

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#12) On March 13, 2009 at 9:27 AM, wrparks (62.17) wrote:

PTKeil -

Your two explanations are a straw man argument hiding behind occams razor and you know it. 

 Making one reasonable statement and another less reasonable but possible statement, and setting them up as the only two statements to choose between?  Puuuulease!!!

 I'm a researcher, not climate related, so I'm well versed in scientific theory, and I hate reading arguments like yours, even when I agree with the overall argument (which in this case I do agree with the validity of GW as a theory).

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