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How Cap and Trade Affects Your Small Business

“Those price increases are essential to the success of a cap-and-trade program.” Those were the words of Peter Orszag the new White House budget director. He spoke them at a congressional hearing last year, answering a question about how the costs imposed by such a program would eventually hit consumers. 

Here is how a system like that works. The government creates a scarce new commodity, carbon credits, in this case, and then makes a law that businesses buy it. There is then a competition for these credits among corporations large and small and their cost rises as high as the market will allow. Now you will be hit by these costs. Your energy bill will increase, or you will have to pay the government for the carbon you produce. However, as with sales taxes, you won’t pay this money yourself. No, the costs would inevitably be passed on to your customers in the form of higher prices. 

Now, if we were discussing a fixed amount, a given percentage, then we would be able to get a handle on how high prices will rise for consumers. We can’t. The reason is that these carbon credits (or whatever they will end up being called) are going to be a commodity and commodity prices are not all the stable. However, there has been some work to see what might happen. The Wall Street Journal recently said this: 

The Congressional Budget Office — Mr. Orszag’s former roost — estimates that the price hikes from a 15% cut in emissions would cost the average household in the bottom-income quintile about 3.3% of its after-tax income every year. That’s about $680, not including the costs of reduced employment and output. The three middle quintiles would see their paychecks cut between $880 and $1,500, or 2.9% to 2.7% of income. The rich would pay 1.7%. Cap and trade is the ideal policy for every Beltway analyst who thinks the tax code is too progressive (all five of them). 

In other words, the fabled “95% of all taxpayers” who were promised no tax hikes will see a hike in their taxes and, as usual, the poorest Americans will be hit the hardest. After all, even the poor use electricity, or gas; they drive cars or they take the bus. More than that, they buy things that have to be manufactured and transported, and in each of these steps, energy and cap and trade laws will play a part, driving up the prices. 

Today, during the worst economic downturn in living memory, with unemployment over 8.1% and the stock market plumbing new depths seemingly every day, this congress and this administration are about to add a new tax on energy in the name of global warming, a tax that will make it harder for businesses to survive as they have to make deeper cuts  and raise prices on their already hurting customer base. 

Maybe you believe in global warming, maybe you don’t. That is not at issue. What is relevant is how all of this will affect your business and what you are doing to mitigate in inevitable damage. How would your business cope with this new cap and trade legislation? We would love to hear from you so take a moment and let your fellow business owners know how you will deal with this. Your approach could be of great help to others in your position. For those who want to take more direct action, contact your congressmen and senators.It might make a difference.