One of the uncertainties of Cap and Trade is the unintended competitive effects of higher prices caused by the need to pass through the costs of carbon permits.
As I stated in my previous Cap and Trade blog,
It is likely, but not certain, that the additional cost of purchasing a permit in Cap and Trade will increase prices to buyers of the produced goods. Price increases are not certain because competition does not always allow production cost increases to be passed on to buyers. If the industry cannot achieve pricing that allows for a fair return on its investment, the industry will disinvest and eventually go out of business. However, if the price is increased, competitors with alternative lower greenhouse gas emission, equivalent processes and products will see an opportunity to enter the business whereas before the additional costs of Cap and Trade, the lower pricing did not give these new competitors an economic incentive to enter the business. It is uncertain how government will respond to a price increase or to industry competition. Based on the likely political effects of a price increase, especially if it is significant, politicians will chastise the industry and call for it to lower prices or as likely, the politicians will enact price controls. Both could be detrimental to the survivability of the particular industry. Another potential political outcome could be that the industry with a high cost cap and trade permits may not be competitive against a new competitor that either does not need a permit or can produce at a lower level of greenhouse gas emission. Will we see a replay of the current auto industry crisis in a different industry and how will the politicians respond? Will the political reaction ensure the continuation of a high level of greenhouse gas output?For more about the concerns of any cap and trade legislation, read my entire earlier blog here.
The full text of the House bill is available here and here.
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