The main goal of the proposed cap and trade bill is to reduce the level of harmful greenhouse gas emissions.
To achieve this objective, Congress has crafted a plan to place a cap (or limit) on the amount of greenhouse gas that can be emitted into the atmosphere by large scale companies. These companies are required to have an emissions permit for each ton of CO2 released.
The bill will also offer trade incentives for companies to reduce emissions below the maximum level they were limited to in the purchased permit. The companies that emit less than required can sell the left over amounts to other companies that cannot meet the reduction limit. The main source of government profit from the cap and trade bill would derive from auctioning off emissions permits.
An additional purpose of this bill is to decrease the demand for "dirty" energy, and instead use profits to stimulate the path towards a "greener" energy market. It's common knowledge that with decreased demand, prices must fall to lure in customers. This rule doesn't apply in the case of cap and trade.
Cap and trade is in fact a tax on emissions. As with any tax imposed on a business, the new expense is offset by a price increase. Thus, energy companies will need to increase their prices to remain stable. The Congressional Budget Office CBO estimates that the extra cost per household will be $175 in 2020.
The government has realized this negative affect on consumers, and has added loopholes to the proposed bill. Congress stated that energy rebates and tax credits will be granted to consumers. NY Times Economix blog states that poor households will receive a benefit of $40, while the richest households will have a net cost of $245 per year. (All figures are estimated for the year 2020).
Another strategy to reduce the financial burden of a Cap and Trade tax on energy companies is for the government to simply hand them out for free.
The Economist Magazine stated that up to 80% of these cap and trade permits have been handed out. So, does your small Midwestern energy company receive a free permit if you're not part of the Washington elite club? Probably not, because it will not help the Congress campaign for the passing of this bill. The more established companies that support Cap and Trade the better for Washington.
Let's return to the impact on our bottom line. Most of the handouts were given to utility companies that distribute electricity to local areas. The government now hopes that if the bill passes, they will be able to order these companies to keep energy prices low and affordable for consumers.
Supporters of the bill state that the main point is to raise energy prices to shift demand to green energy. My question is how long will it take for this major shift? It seems that we will pay up in the meantime hoping for a price reduction, just as we did in the summer of 2008.
Remember when Nancy Pelosi said that high gas prices will make people greener? I've reached the conclusion that there are too many proposals and promises, and too little money to actually accomplish them.
How a cap and trade bill will affect you