Cap and Trade: A Letter to Senators and Congressman

The following was sent to my Senators and Congressman on the issue of the current Administration's proposal on Cap and Trade:

"I have been a resident of New Jersey for thirty years and have resided at the same location for that period. The last time I wrote my Congressmen was when the Hillary Health Care plan was in the offing. However this time the proposed Obama Cap and Trade proposal is a devastating plan which will have massive negative unintended consequences. I have been a Professor at MIT and have returned there after I sold my companies and retired. I still reside in New Jersey. I have lived and still have contacts with people I befriended in over twenty countries where I had started branches of my company. Yet, they too have concerns about the current expansive spending proposed by this current Administration and the impact on the United States and in turn on them. China is not asking for a new currency because it dislikes the color of ours, it is doing so because it fears that ours may very well become worthless. I share their concern.

I have just published a White Paper on the cap and trade issue. The intent of the White Paper was two-fold. First, develop a simple analytical model to understand how it works and what its consequences are. It appears that no one has presented such an approach. Second, consider and evaluate the impact of the unintended consequences of this cap and trade proposal. We have found that it is essential to study these unintended consequences lest you find yourself back in the same mess we have in the financial markets.

The current Administration seems so hell bent to institute this cap and trade system that they are totally neglecting the downside risks! I summarize a few here.
The law of unintended consequences plays an ongoing role in all Government programs. Whenever the Government acts, there are reactions to avoid the actions. The unintended consequences are critical to understand and hopefully anticipate and if necessary avoid. Let me list but a few:

1 THERE WILL BE MASSIVE JOB LOSS AND JOB DISPLACEMENT RESULTING FROM THE DESTRUCTION OF INDUSTRIES BASED UPON COAL SUCH AS MINING AND THOSE INDUSTRIES REQUIRING LOW COST ENERGY FOR CHEMICAL AND SIMILAR CONVERSIONS SUCH AS ALUMINUM AND CONCRETE.

Coal is the livelihood for hundreds of thousands in the United States. Wheeling, WV is a lynch-pin in this world, and in the "hollers" of that region the mining of coal has been the base of centuries of human existence. This current cap and trade proposal by the current Administration will drive them totally into the Stone Age. One of many technological solutions is a "clean coal" which seems to be dismissed totally out of hand by the current Administration. Technologically ignorant people assume if it has not been done it cannot be accomplished. President Roosevelt was not such a Luddite; the atomic bomb was a glimmer in the eye as late as 1943. It took really just over two years to deploy. The same effort could be applied to coal and the creation of "clean coal". But for some almost religious reason it has been defaulted to be undoable.

One of my typical exercises when teaching at MIT is to tell my students on a Friday that "such and such" cannot be done. By Monday they have delivered a solution and showing me how little I knew. For in reality anything can be accomplished and the costs of these accomplishments can always be engineered to a realistic and economic level. Added to this will be the industrial collapse of many industries because of the dislocations of these industries and we would expect massive unemployment. The recovery would take generations. It would be costly beyond any trillion dollar Stimulus we have yet to see.

2 MASSIVE INDUSTRIAL MOVEMENT FROM THE U.S. WILL OCCUR RESULTING FROM THE ESCALATING ENERGY PRICES.

The Industrial sector is a major user of energy in the United States. One approach of controlling the CO2 emissions at the source would be to have the Industrial sector be controlled like the electricity sector. If we analyze the data as we have in our report, the industrial sector relies heavily on oil, gas and even coal. Coal is used for aluminum and concrete, it is a cheap energy source for creating these and also concrete as a chemical process also produces CO2.

Thus is we were to apply the same restriction here we would inevitably drive these industries from the US totally. The Information Technology industry is a heavy user of electricity and it too would find itself driven elsewhere. Thus one of the unintended and totally un‐thought about consequences is this driving of industrial entities, the residual ones at that, from the US to countries which have available and affordable power.

3 DRAMATIC INFLATION AND INFLATIONARY PRESSURE RESULTING FROM THE IMPOSED TAXES WILL BE THE RESULT.

The problem of inflation is pandemic in this approach. Cap and Trade taxes will drive up costs of the energy sources which will drive up costs of production and on and on. The cap and trade proposal may very well set in motion a whole cycle of dramatic and destructive inflationary pressure. It may also have the unintended consequence akin to Gresham's Law that it may actually drive out "good fuels" and leave bad. For example as coal becomes non‐existent in electric power plants, there may be created a "Black market" for coal and furthermore wood may even replace coal in certain markets. It will be akin to prohibition, the demand will be intensified because of the inflationary and prohibitory pressures.

The home "still" of the 1920s will be replaced by the home coal burning stove and a new massive Federal police force will likely be formed to strike down the down-trodden pollution violators.

4 DESTRUCTION OF ENTREPRENEURIAL INNOVATION WILL RESULT DUE TO THE EXTRACTION OF MASSIVE AMOUNTS OF CAPITAL FROM THE ECONOMY AND ITS TRANSFER TO THE GOVERNMENT. GOVERNMENT HAS NEVER HAD A RECORD IN CREATING NEW BUSINESS; IN FACT THE RECORD IS OVERWHELMINGLY TO THE CONTRARY.

One of the things which seem to be coming out of this current Administration is a total lack of understanding of the entrepreneur and their role in creating value in this economy. This cap and trade proposal will remove vast amounts of money from those who invest and take risks in new ventures and place it in the hands of Government bureaucrats. The Government, with all due respect, has never invented anything. It has been the risk takers embodied by the entrepreneur. This massive destruction of capital from the American system will destroy that engine for generations.

5 INHERENT INSTABILITIES IN DEPLOYMENT OF ALTERNATIVES BY ENVIRONMENTALIST INTERVENTION. THERE IS A WELL ESTABLISHED RECORD THAT THE ENVIRONMENTAL LOBBY WILL OFTEN OPPOSE ANY CHANGE TO THE ENVIRONMENT FOR ANY REASON. THUS THE DEPLOYMENT OF AN INTELLIGENT GRID, A NEW NUCLEAR POWER PLANT, WIND AND SOLAR WILL ALL FACE COSTLY AND TIME CONSUMING DELAYS FROM THE NEVER ENDING PETITIONS AND LITIGATIONS FROM THESE GROUPS. AT THE SAME TIME THE CAPS WILL DROP AND THE TAXES WILL MOUNT, AND FLOW DOWNWARD DESTROYING THE ECONOMY FURTHER.

As we have seen in so many prior cases, the environmental lobby, for reasons often known to only them, opposes anything. The use of wind has seen objection after objection. The deployment of large wind turbines across the mid country would be in the path of many migrating birds. Thus they cannot go there. Or the environmental impact statements would go on forever. Delay is often the deadliest form of denial. Delay can occur at the Federal, State, and local level, and the delay adds costs directly and derivatively. Furthermore delay will just result in the cap and trade algorithm driving up energy costs even higher with no ability to seek alternatives due to the delays. This is a countervailing power that the Environmental lobby has. As a personal not, I operate a nursery in New Jersey and have a strong personal interest in good environmental practices. However in my experience it is the extreme groups which give all the rest of us bad names.

6 FAILURE TO DEPLOY A NATIONAL GRID IN A TIMELY MANNER WILL RESULT IN DRASTICALLY HIGH TAXES. ENVIRONMENTAL AND OTHER DELAYS WILL MAKE ANY ATTEMPT TO BRING ON-LINE WIND, SOLAR OR NUCLEAR A FUTILE EFFORT. THE MAJOR PROBLEM IN THE DEPLOYMENT OF AN INTELLIGENT GRID IS THAT THE COMPETENCE IN THE AREA IS SCARCE IN THE U.S. RESULTING IN A UNION DOMINATED PROGRAM TO PUSH OUT TECHNICAL GRADUATED WITH H1B VISAS.

You cannot get wind and solar or even nuclear unless you have a national grid. This is in and of itself a major task. What is an intelligent grid? It is an evolving and learned process of distributing electrical energy. It is very muck akin to the Internet. The Internet did not spring forth fully formed. It began in the late 1960s and slowly evolved assisted by thousands of highly intelligent and collaborative systems and development engineers. The power industry has been a backwater of engineering talent for the past fifty years.

Thus the competence set is just not there. Classic companies like GE most likely will not develop the smart grid by themselves. It will take a similar group of a broad base of smart and motivated engineers working in a collaborative manner with some support from a 1970s like ARPA. However the problem is that the people to do this just do not exist. Thus the achievement of this essential first step, the intelligent grid, is at best problematic. Ironically many of those who could do this have H1B visas and are soon to be shipped out of the US! Who is forcing this? The Unions. They want all Americans. The H1Bs want to become Americans and yet we throw them away. The system seems to devour itself in an endless fashion.

There are many other ways to implement a cap and trade system. The current Administration's proposal is a bald-faced tax, a regressive and extortionary tax which will hit the citizens of the state of New Jersey and of the United States. It will set our Country back economically into the Stone Age. I am asking you to think otherwise, since implementation of this tax will, in my opinion, destroy the United States.

Very truly yours,"