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Increasing pollution across the world has led to global climate change, which now threatens the very existence of humanity and entire organisms on earth.
Due to the impending crisis of climate change, the Environmental Protection Agency (EPA) of the United States filed a case in Supreme Court to compel the government to formulate legislations that will regulate emissions of greenhouse gases, particularly carbon dioxide as it is majorly responsible for global warming.
In response to compulsion from the EPA, the House of Representative in 2009 formulated and passed a bill of Cap and trade regulation that aims at reducing emissions of greenhouse gases. According to Bachman (2009), based on 2005 levels of carbon dioxide emissions, the cap and trade regulation aims at reducing 3%, 20%, 42%, and 83% of carbon dioxide emissions in the years 2012, 2020, 2030 and 2050 respectively (p.4).
The regulations are targeting industrial facilities that emit at least 25,000 metric tons of greenhouses gases per year. Therefore, since the proposed cap and trade regulation seems to be an effective way of reducing emissions of greenhouse gases, what are its economic impacts?
Economic Impacts of Regulations
The United States government benefits from the cap and trade regulation through taxes collected from permits that allow varied industrial facilities to release greenhouse gases into the environment. Currently, there are no limits or taxes imposed on industries for emitting greenhouse gases, hence the regulation aims at setting limits and imposing taxes on emissions.
The cap and trade regulation proposes that, the government should set limits of emitting greenhouse gases on each industrial facility and that any industry that exceeds the permitted limits should acquire extra permits from other industries that utilize fewer permits through trading.
Bachman (2009) argues that, when industries buy emission permits, they will be paying taxes proportional to greenhouse gases they emit into the environment (p. 4). In this view, industries that emit smaller amounts of greenhouse gases can also benefit from the regulation for they can trade their permits to industries that emit more greenhouse gases.
In view of the fact that increasing levels of greenhouse gases in the atmosphere are responsible for global climate change, the objective of the cap and trade regulation is to reduce emissions of greenhouse gases by industries.
According to McAllister (2010), the cap and trade regulation is the best instrument that the United States requires to control and regulate the increasing emissions of greenhouse gases from mega industries (p.1196).
The regulation goal is to reduce 83% of carbon dioxide emissions by 2050 based on 2005 levels of emissions. Thus, the cap and trade regulation provides a comprehensive legislation, which ensures that industries pay emission taxes proportionally, and if they exceed the stipulated limits, they receive penalties.
Nevertheless, the cap and trade regulation will have a negative impact on the economy because the cost of producing goods in industries will increase and will hurt consumers. Implementation of the proposed cap and trade regulation will mean that industries will have to incur extra cost of production, as legislation requires that they should pay taxes for emitting greenhouse gases into the environment.
According to Bachman (2009), economic analysis carried out in Florida showed that implementation of the cap and trade regulation will result into increased household expenses…by 2020, household expenses will increase by $816 and by 2050, it will have increased to $4,550 (p.5).
Moreover, given that the regulation will restrict the use of fossil fuels as a source of energy, it will lead to high prices of energy that have compound effect on the economy. The effects include, more employees will lose jobs, and income will decline because investors and industries will be under compulsion to reduce their expenses.
Since the proposed cap and trade regulation is still pending awaiting adoption, the senate should not pass and approve it, as it will result into increased cost of production in industries. Cost of production will increase proportionately to the amount of taxes that industries pay so that they can legally emit a certain amount of greenhouse gases into the environment.
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Increased cost of production means that consumers will have to incur extra cost when buying essential commodities and thus increase cost of living. In addition, increasing global prices of fossil fuel will aggravate the cost of production.
Harmon and Hirschhorn (2006) assert that, instead of restricting on the use of fossil fuel through the cap and trade regulation, the government and environmentalists should focus on developing “alternative sources of renewable energy that do not pollute environment” (p.1).
Given that the use renewable energy will significantly reduce emission of greenhouse gases, there is no need to pass the cap and trade regulation, which has serious economic consequences.
Implementation of the cap and trade regulation is a seemingly a counterproductive attempt by the United States to reduce the amount of greenhouse gases single-handedly without enlisting the cooperation from other countries. Climate change is an international issue and the US should consult other countries.
Moreover, implementation of the regulation will result into increased cost of production and cost of living, which ultimately lead into high rates of unemployment and poor economic growth. To alleviate negative impacts of the regulation on people and economy, amendments that exempt food industries, hospitals, and educational institutions is essential.
Furthermore, the Congress should amend the regulation to target industrial facilities that emit at least 50 metric tons of green house gases annually to exclude small industries from complying. However, implementing the cap and trade regulation as it is will have grave impacts on the cost of living and economic growth in the United States of America.
Bachman, P. (2009). The Economic Effects of Proposed Cap and Trade Legislation on The State of Florida. The James Madison Institute, 1-12.
Harmon, R., & Hirschhorn, M. (2006). Clearing the Air: The Impact of Carbon Cap and Trade Regulations on Renewable Energy. American Solar Energy Society, 1-7.
McAllister, L. (2010). The Enforcement Challenge of Cap and Trade Regulation. Environmental Law, 40, 1195-1230.