I like to think of myself as a well-informed citizen who keeps up on the issues of the day. But I am sometimes surprised by how ignorant I can be of very important issues. I get the feeling that I have been less than fully informed about Cap and Trade schemes, and I wonder how many other people really don’t understand what the system is and how it is supposed to work.

In theory the system is supposed to utilize market forces to drive to the most efficient means to achieve a desired goal. In the case of CO2 emissions the idea is that every business will have a “cap” of CO2 emissions they are allowed to generate, and that cap will be determined by the number of “coupons” they hold which allow a certain amount of CO2 to be emitted. If the business emits more than they hold coupons for, they receive hefty fines and potential criminal charges. That’s the “Cap” part of the system.

The “Trade” part of the system is where market forces are supposed to come into play. Basically the coupons are treated as negotiable items and can be freely traded between businesses. If one business is well below their cap, they can sell their unneeded coupons to a business that is over their cap. Since the fines and other penalties for being over the cap are so severe, this will generate a high demand for coupons, making them a profitable commodity for the sellers.

The idea is that such a system will drive businesses to improve their emissions controls so that they can convert their own coupons into a profit center. Or at least they will control their emissions so they do not find themselves in bidding wars for the available coupons. There’s an obvious Game Theory background to this sort of scheme. Of course all of this is controlled and monitored by the government.

This is where Obama’s famous quotation about bankrupting coal power plants comes from. The goal of the system is to make it unprofitable to operate power plants like coal and to give “green” power plants an additional source of income to offset their generally unprofitable business models.

It’s interesting to note here that one obvious major benefitter from this system would be nuclear power.

The money derived from the coupons themselves would become revenue for the US Government.

Now, if you look at this from a macro-economic perspective, what you see is an immediate increase in the aggregate cost overhead for energy production in the country. The money that the government gains from this system necessarily comes from the power plants that have to buy the coupons. Of course power plants will not absorb this cost, so they will pass the cost along to their customers. That means energy bills will go up. How much will they go up? Well, that’s a source of great debate right now. At a bare minimum it should be clear that the energy costs will AT LEAST go up enough to offset the expense of buying the coupons. That’s forecast by Obama’s own budget to be over $500 billion dollars. Which is coincidentally very nearly equal to the supposed tax reductions his budget is projecting for the 95% of us who aren’t obscenely and immorally wealthy.

Now, you might be asking how Obama can tout a tax decrease if it is AT LEAST going to be offset by an increase in energy costs. Well, he can do it because he is a master of twisting language around to suit his needs. He doesn’t care that the actual financial impact to the average American is AT BEST a net zero, he just wants the political points he can score by claiming to have a tax decrease (except on the evil rich) while getting a daily double by ALSO claiming to be addressing global warming (or as he puts it, making the oceans recede and the hurricanes go away). And, incidentally, he can claim to have increased government revenues too. It’s masterful politicking. He’s banking on people not blaming HIM for energy cost increases, but giving HIM credit for a tax cut (or in the case of the majority of Americans who don’t pay taxes, a check from the government to go spend on whatever they want, which will most likely be paying off some energy bills). The fact that they end up with no net gain in finances is immaterial to Obama’s ends. It’s just not relevant to his goals.

It is fair to point out that John McCain also made Cap n Trade a central element of his platform, so no matter who we elected, Cap n Trade was going to be part of our future.

In the mind of the liberal, Cap n Trade is the perfect Government program. It promotes their goals to change the world, and they get to point at the “market forces” and say “neener neener” to conservatives because it’s supposedly market driven.

The real question here is whether it will work. This has been in place in Europe for some time and the liberals call it a major success while the conservatives call it a total failure. Of course being conservative my personal opinion is that it has been a dismal failure in Europe and will likely be a major failure here too. The bottom line is that it is a totally artificial market effect, and will be driven by the Government with all the political realities that implies. It is highly likely that some businesses will benefit from cozy relationships with certain Senators, Congressmen or Presidents while others will suffer and potentially go bankrupt as a result.

There is no doubt that the impact of this will be hugely negative to the existing 80+% of our national power generation which comes from CO2 producing sources. It is conceivable that the impact of this will be a net positive for those “green” businesses which are already hugely subsidized by the federal government. Since nuclear power plants are so obviously benefitted by this, and yet are so reviled by the “greens” you can expect special rules which will either punish nuclear power plants or else will remove any of the positive benefits they would otherwise gain. It is hard for me to imagine the government running this scheme without interfering with it on a regular basis, pretty much negating any true market forces that would potentially create a desired result.

My guess is that the actual impact of this scheme will be a huge increase in energy costs, a minor increase in “green” power generation, and a near-certain negative impact on the economy which will extend and exacerbate any coming recession/depression.

If it were me I’d take every penny of the revenue from this and put it into a Manhattan Project style approach to make nuclear fusion economically viable.