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California‘s Cap And Trade: Circumventing Taxpayer Protections to Hammer Energy

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California residents just can’t seem to catch a break. Scarcely a week after being socked with a $6.8 billion to $9 billion per year tax hike in the form of Proposition 30, taxpayers are now being saddled with a new cap-and-trade initiative that could cost as much as $70 billion.

On Wednesday, the California Air Resources Board (ARB) began auctioning off permits for greenhouse gas emissions as one of the key components of its ambitious attempt to force statewide levels of greenhouse gas emissions back to 1990 levels by 2020. The auctioning process is a key element of the 2006 Global Warming Solutions Act (also known as AB 32) signed into law by Governor Schwarzenegger. According to the ARB website its primary premise is to:

“Adopt a regulation that establishes a system of market-based declining annual aggregate emission limits for sources or categories of sources that emit greenhouse gas emissions, applicable from January 1, 2012, to December 31, 2020.”

The program follows the typical cap-and-trade design that many European nations have adopted in a quest to limit carbon emissions through stringent market regulation.  Bloomberg describes how California’s program will work:

“The state will set a maximum for carbon emissions from power generators, oil refineries and other industrial plants and cut that limit gradually to achieve a reduction of about 15 percent by 2020.”

According to the California Chamber of Commerce, this forced reduction-or-pay-up stranglehold on business is akin to an illegal tax, because it never received the required two-thirds vote by the Legislature which new taxes require in the state. Citing the unconstitutionality of the initiative, the Chamber filed a lawsuit Tuesday. Steven Merksamer, an attorney for the Chamber, said in a statement: 

“What the Air Resources Board is doing is illegal.  This tax wasn’t approved by the voters. We believe the auction is unlawful.”

Regardless of whether the cap-and-trade portion of AB 32 turns out to be illegal, from a fiscal perspective it is simply bad policy, especially during tough economic times. Ben Lieberman, a Senior Policy Analyst on Energy and Environment for the Heritage Foundation, noted the well documented failures of European cap-and-trade schemes under the Kyoto treaty in a 2007 paper:

“European efforts have racked up significant costs while failing to reduce emissions. Nearly every European country participating has higher emissions today than when the treaty was first signed in 1997. Further, despite ongoing criticism of the United States from Kyoto parties for failing to ratify the treaty, emissions in many of these nations are actually rising faster than in the United States.”

Besides being relatively ineffective at their intended aim---reducing emissions---the European cap-and-trade schemes carry with them a whole host of injurious economic side effects. Lieberman's research went on to explain the higher costs, regressive-tax nature, and stunted economic growth associated with Europe’s fanatical obsession with forcing down carbon emissions.

There is little dispute that forcing businesses to reduce carbon emissions and taxing those who cannot comply will increase the costs associated with energy production, which will in turn reduce their ability to hire new workers and increase the costs consumers pay for their basic energy needs. After being pummeled with the massive new tax increases under Proposition 30, and with unemployment remaining resolutely over 10% in the state, additional barriers for doing business and creating jobs coupled with higher energy costs are the last things California residents need. As the legal challenges against the initiative continue, it will be imperative that lawmakers consider what is at stake for the Golden State’s economy as a whole.