It’s no secret that climate expert and anti-coal activist James Hansen is no fan of carbon cap-and-trade. According many experts, including Hansen, a recently introduced cap-and-trade bill in the US Congress, known as Waxman-Markey bill to address the climate change issue, would disable people’s ability to cut greenhouse gas emissions.

The Waxman-Markey cap-and-trade system in parts is aimed at cutting carbon dioxide (CO2) emissions. Climate scientists more or less agree that global CO2 emissions could lead to rising global mean temperatures with serious long-term environmental consequences. But without a global pact on CO2 emission cuts, any action in favour of such a bill does not motivate a strong reason. There are many fears, but the main ones are that the proposed bill would have a trivially small effect on global warming, while imposing substantial costs on all US households.

The bill, which was recently passed out of the House energy and commerce committee, pledges to reduce allowable CO2 emissions to 83 per cent of the 2005 level by 2020 and then gradually decrease the amount further. Under this cap-and-trade system, the federal government would limit the total amount of CO2 that US companies could emit each year and it would issue permits that companies would be required to have for each tonne of CO2 emitted.

Once issued, these permits would be tradable and could be bought and sold, establishing a market price reflecting the targeted CO2 reduction. But, with a handful of permits, it eventually would lead to an increase in prices. Companies would buy permits from each other as long as it is cheaper to do so, than make technological changes needed to eliminate an equivalent amount of CO2 emissions. In turn, companies might also pass along the cost of the permits in their prices to consumers, pushing up the relative price of CO2-intensive goods and services, such as gasoline and electricity.

Consumers might respond by cutting back on consumption of CO2-intensive products in favour of other goods and services. This passage of permit costs in higher consumer prices is the primary way the cap-and-trade system would reduce the production of CO2 in the US and a major part of the world.

The Congressional budget office recently released an estimate that the resulting rise in consumer prices needed to achieve a 15 per cent CO2 reduction, that is, slightly less than the Waxman-Markey target would raise the cost of living of a typical household by $1,600 a year.

In a nutshell, the future cost to a typical household would rise significantly as the government reduces the total allowable amount of CO2 produced. Since the US share of global CO2 production is now less than 25 per cent (and will decline as China and other developing nations such as India grow), a 15 per cent fall in the US CO2 output would lower global CO2 output by less than 4 per cent. In this regard, many people believe that the US should “wait” until there is some global agreement on CO2 reduction that includes countries such as India and China.

On the other side, countries such as China and India have made the case to limit their own emissions only if the US does so. In that sense, any US domestic agreement on climate change should improve the chances of getting the world’s fastest-growing emitters to cooperate later this year. China recently stepped up its demands of what the West should do and the Waxman-Markey bill in its original form falls short of new Chinese demands of 40 per cent reductions by 2020. But not even the European Union is happy as it demands a 30 per cent reduction by rich countries whereas the promises in the US climate bill amount to only a 5 per cent reduction in emissions over 1990 levels by 2020.

Then there is the fear that the Waxman-Markey bill would give away some 85 per cent of the permits over the next 20 years to various businesses instead of selling them at auctions, just to gather political support. The burden on US households would be the same whether the permits are sold or given away. But by giving them away, the government might not be able to collect the money it could use to reduce some of the higher cost to households.

Other major concerns about the bill are in its promised massive “offsets”. Offsets allow polluters to, for example, pay to preserve an acre of forest so they can continue to burn coal above the cap. In this light, Waxman-Markey would allow almost 20 years of cheap, essentially fraudulent offsets to meet all required cuts in pollution.

It strongly appears that the proposed cap-and-trade system would be a costly policy that would penalise people in the US with little effect on global warming.

In the big picture, what most of the other world, that is, countries such as China, India, Brazil, Indonesia, South Africa and other developing countries do on emissions actually matters as much or more than what the US alone does. One could then ask, do the compromises that allowed Waxman-Markey to survive a vote in the full House, make it that much harder to get the rest of the world in line for climate change?