Growing Cap-and-Trade on the Tax Farm

President Obama has called for a determined effort to free America from the hold of the international oil cartel. As his prime measure to achieve this, he has advanced a proposal to create a "cap-and -trade" system to limit carbon emissions. While the president's stated objective is indeed worthy and in fact critical to the future of the nation, unfortunately, as a means to achieve it, a carbon cap-and-trade system is a complete non sequitur. The cap-and-trade mechanism is primarily a method of constricting electricity production. The United States only gets 3% of its electricity from oil. Thus taxing electricity will do nothing to free us from dependence on foreign petroleum. Quite the contrary. To the extent that electrified transport offers an alternative to oil, such as subways, trolleys, and trains actually do today and electric cars might hypothetically do tomorrow, taxing their motive power can only make the situation worse.

The defenders of the cap-and-trade proposal, however, have advanced the proposition that strictly speaking, cap-and-trade is not just a tax, as its mechanism contains features not included in a conventional taxation system. In this they are correct. Cap-and-trade is not just a tax. It is worse than a tax. It is a modern version of tax farming.

Tax farming was a practice followed by the Persian and various other ancient empires. Here's how it would work. Let's say the king needed some money to finance a war, a monument to himself, or similar worthy endeavor. Rather than fuss with the administration needed to collect taxes directly, he would sell the right to tax a given province to some wealthy crony. This public-spirited individual would then deploy his gangs of hired thugs to loot the people of the province in question. The king would get ready cash for his project, while through the exercise of unrestrained rapacity, the tax-farmer crony would generally obtain an excellent return on his investment. Thus, everyone who counted would be happy.

In essence, the cap-and-trade system works the same way. Initially carbon emission permits would be bought by utilities and industries, which need them in order to engage in their business. Such fees paid to the government for carbon permits are simply direct taxation. However, the carbon permits would be sold at auction, and many of them would be bought by financiers, not for their own use, but for the  purpose of resale at profit. Provided that the government kept its issuance and sale of new carbon permits limited, which it must and therefore would in order for the system to function as desired, the resale mark up on privately held carbon permits could be very steep, allowing those with the ready cash to buy such permits in advance to tax the real economy at will. The utilities hit by these inflated costs would then pass them on to consumers, while those with the lowest incomes would be hit the hardest.