Fisher Investments Editorial Staff
Politics, US Economy

Climate Control

By, 03/26/2009

Story Highlights:

  • The House and Senate Budget Committees rejected the fast-track budget process for climate control legislation, opening the bill to a potential Senate Republican filibuster.
  • The bill aims to aggressively lower greenhouse gas emissions through a cap-and-trade system and reap funds for other administration initiatives.
  • The environmental benefit of a cap-and-trade bill is a matter of much debate, but a deleterious impact on the economy is almost assured. The bill would substantially increase the price of many goods and services, such as coal-produced electricity—effectively a tax on economic activity.
  • Both Republicans and Democrats are responsible for the pushback on the cap-and-trade legislation. Few Democratic Senators from industrial and coal states are likely to support a bill that might penalize local business. The more Congress is gridlocked over the legislation, the better.

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Has red ink dampened the green movement? Climate control legislation certainly seems to be losing steam in today's tougher economic environment: Both House and Senate Budget Committees rejected the fast-track budget process for cap-and-trade legislation, opening the bill to a potential Senate Republican filibuster.

The climate control legislation is part of President Barack Obama's highly ambitious budget proposal, which is currently making its way through Congress. The bill aims to aggressively lower greenhouse gas emissions through a cap-and-trade system and reap funds for other administration initiatives. The legislation could have been folded into a budget reconciliation bill, which is a legislative process allowing a budget bill to be deliberated without a filibuster. But for now, thanks to pressure from industrial and coal states and the concerns about the economic impact, the House and Senate budget resolution proposals will likely not include any cap-and-trade language.

No matter your stance on global warming, environmental protection will be a big political issue in coming years—and cap-and-trade legislation is a potentially big component which could prove deleterious to the economy. The bill is effectively a tax on economic activity. It would substantially increase the price of many goods and services. Especially vulnerable to such a system is coal-produced electricity (in 2008, we got 48.5% of our energy from coal*), raising energy costs for American consumers and businesses perhaps by 15-30%, according to Moody's. Higher electricity costs would effectively act as a substantial new tax, sapping economic activity and putting American manufacturers at a relative disadvantage to global competitors.

Both Republicans and Democrats are responsible for the pushback on the cap-and-trade legislation. There are 25 states that produce a percentage of electricity from coal higher than the national average. The number of Democratic Senators and Representatives from these states are 26 and 96, respectively—and it's unlikely many will vote for the coal industry-damaging cap-and-trade legislation. Since a Senate filibuster allows for extended debate on a measure, broken only by a supermajority vote (three-fifths of the Senate), the lack of support from these Democrats (and likely most Republicans as well) will prove high hurdles for this legislation. For Congressional members looking to move other parts of the budget legislation quickly through the approval process, cap-and-trade may be an acceptable sacrifice. This is a positive.

There are countless ways to produce meaningful, beneficial environmental change without costly consequences. The cap-and-trade bill is ambitious, but economically very inefficient. The more Congress is gridlocked over the legislation, the better. The economy is an inconvenient truth to cap-and-trade legislation, but keeping cap-and-trade on the back burner could mean a better future for us all.

*Source: Energy Information Administration, http://www.eia.doe.gov/cneaf/electricity/epm/epm_sum.html

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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