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Press Release

    Kyoto Style Cap-and-Trade for the United States?

    01/27/2003

    January 27, 2003

    The Honorable George W. Bush
    The White House
    1600 Pennsylvania Avenue NW
    Washington, DC 20500

    Dear Mr. President:

    We are writing to reiterate our concerns about the Administration’s plan to award regulatory offsets ("transferable credits") to companies that reduce emissions of carbon dioxide (CO2) and other greenhouse gases.

    Three significant events have occurred since our earlier (October 2, 2002) letter – events that make the case against carbon credits even more compelling. Those events are: (1) introduction of the McCain-Lieberman bill to establish a Kyoto-style cap-and-trade program for the United States; (2) publication of a major study in Science demonstrating the futility of regulatory "solutions" to climate change; and (3) your advocacy of expensing as part of the administration’s growth and jobs policy.

    As noted in our previous letter, transferable carbon credits attain full market value only under a mandatory emissions reduction target or "cap," like that proposed in the McCain-Lieberman bill. Thus, companies that earn carbon credits for "early reductions" will gain incentives to lobby for the bill. If enacted, McCain-Lieberman will have the same effects on consumers as an energy tax. The carbon caps will increase the prices households must pay for electricity, gasoline, and home heating oil, and the impacts will be regressive, imposing proportionately larger burdens on those, like seniors and the poor, who are on fixed or low incomes.

    Clearly, McCain-Lieberman is antithetical both to your National Energy Policy, which seeks to secure affordable energy for the American people, and your growth and jobs policy, which seeks to stimulate the economy via tax cuts. The administration’s crediting plan will build support for McCain-Lieberman and similar energy rationing schemes.

    We share your view that climate policy should emphasize long-term technology change, not short-term regulation. As a study in the November 1, 2002 issue of Science explains, world energy demand could easily triple by 2050. However, according to the study, "Energy sources that can produce 100 to 300 percent of present world power consumption without greenhouse emissions do not exist operationally or as pilot plants." Major technological breakthroughs and decades of market evolution must occur before nations could stabilize atmospheric CO2 levels while meeting global energy needs. Any serious attempt to stabilize CO2 levels via regulation would be both futile and economically devastating.

    But, if regulatory strategies are unsustainable, then no good purpose is served by providing a pre-regulatory ramp-up to such policies. An early start down a dead end street is not progress; it is wasted effort.

    As an alternative to Kyoto’s mandatory tonnage reduction targets, which are anti-growth, you have proposed a voluntary carbon intensity reduction goal, which can accommodate growth. The administration views early credits as a way to motivate companies to invest in newer, less carbon intensive, technologies. However, there is a better way to speed up carbon intensity decline, and it comes straight out of your economic policy playbook: expensing.

    Your growth and jobs plan calls for increasing the small business expensing option from $25,000 to $75,000. This is a good first step, but we think the limits on expensing should be expanded even further, and extended to all capital investment.

    A recent study sponsored by the American Council for Capital Formation shows that U.S. firms have to wait longer than many of their foreign counterparts to recover capital expenses for electric power generation, pollution control technology, and other energy assets. For example, after five years, a firm that installs a combined heat and power plant in the United States recovers only 29 percent of its capital costs, compared to 100 percent cost recovery for the same investment in the Netherlands.

    By removing the tax penalty on capital investment, expensing would encourage more rapid turnover of plant and equipment. In general, state-of-the-art facilities are more productive than older units, delivering more output per unit of input, including energy inputs. Expensing would thus accelerate carbon intensity decline – yet without building political support for energy rationing.

    Because expensing enhances productivity and boosts wages, it makes good economic sense whatever science ultimately tells us about global warming. Expensing is a true "no regrets" policy.

    We would be pleased to help the Administration develop a climate policy that employs expensing rather than transferable credits to reduce U.S. energy and carbon intensity.

    Sincerely,

    Fred L. Smith, Jr., President
    and Marlo Lewis, Jr., Senior Fellow
    Competitive Enterprise Institute

    Paul Beckner
    President
    Citizens for a Sound Economy