Cap and Trade Will Severely Harm the Steel Industry

Landmark legislation to curb U.S. greenhouse-gas emissions was approved by the House of Representatives in a close vote late Friday, June 26, 2009. Obama and other Democratic leaders insisted it will spur job-creating investments in "green" technologies, while lessening U.S. reliance on foreign oil. The numbers are staggering. Obama's recently unveiled cap-and-trade plan would raise $645 billion in revenue from government-run emissions auctions over eight years. The nonpartisan Congressional Budget Office ((CBO)) projected the bill to have an annual economy-wide cost in 2020 of $22 billion, or about $175 per household. However, the CBO study failed to consider the broader effect of the legislation on employment or GDP. The hit on the U.S. GDP is the real threat of the bill.

A cap-and-trade system is simply a mechanism to put a price on emissions in order to compel businesses and consumers to emit less. That is, it's essentially an emissions/energy tax, since almost all economic production activities are powered by combusting fossil fuels (coal, oil, and natural gas), a process that emits greenhouse gases. Once a scarce new commodity, i.e., the right to emit carbon, is created, and businesses are mandated to buy it, the costs would inevitably be passed on to all consumers in the form of higher prices. Everyone would feel the pinch. These higher prices on electricity and gas will show up in the manufacturing sector from food to cars, all the way down to electricity bills and at the gas station. The hardest hit would be on the working families, which is about 95% of the U.S. population. As higher prices are passed along to the consumer, consumers will cut back on spending, which in turn will reduce production resulting in fewer jobs or higher unemployment. Some companies will instead move their operations overseas creating further loss of jobs.

One may also take a look at similar policies already implemented elsewhere. For example, in Europe, cap-and-trade has failed to deliver on climate change. It yielded windfall profits for utilities, but few reductions in emissions or investments in clean technology. Britain's Taxpayer Alliance estimates the average family there is paying nearly $1,300 a year in green taxes for carbon-cutting programs in effect only a few years. Spain has been touted as a global example in promoting renewable energy to create green jobs. But research shows that each new job cost Spain 571,138 euros, with subsidies of more than one million euros required to create each new job in the wind industry. Moreover, the programs resulted in the destruction of nearly 110,000 jobs elsewhere in the economy, or 2.2 jobs for every job created.

Business groups in the U.S. are split on the measure. Utilities that stand to benefit from the free-permit program support it. The U.S. Chamber of Commerce and the National Association of Manufacturers lobbied against it. The oil-refining sector that will receive 2% of the free permits, denounced the measure as "an abject policy failure." Steel companies also opposed the measure. The domestic steel industry would be one of the hardest hit sectors and could be severely impacted under the cap-and-trade system. The integrated mills such as U.S. Steel Corp. (X), AK Steel (AKS), ArcelorMittal (MT) and OAO Severstal would be among the biggest losers because they produce steel using iron ore and coke. The main input material, coke is made of carbon. If steel companies are mandated to reduce carbon-dioxide output or pay more for their emissions, they would be forced to raise prices or cut production. Under the worst case scenario, the integrated steel operations would move to developing nations without carbon restrictions, such as Brazil. In this case, the carbon emissions wouldn't be reduced, but U.S. jobs would be lost.

On the other hand, minimills, like Nucor Corp (NUE), and Commercial Metals Company (CMC) make new steel by melting down scraps. Re-melting steel emits nearly 66% less carbon dioxide in the production process. Nucor Corp. is now the largest producer of domestically made steel, having supplanted U.S. Steel. However, it is not feasible to switch domestic steel operations entirely over to the minimill process, because some types of the more rust resistant steel, such as cans for food, still have to be made through the integrated steel process. While minimills wouldn't be affected as much as integrated mills by the legislation, they still oppose the current plan. Both camps are concerned the bill could give a competitive advantage to firms in countries that don't operate under emissions caps.

Another potential problem area: the House bill has a provision that would impose tariffs on goods imported from countries that don't match U.S. carbon dioxide restrictions, like China and India. Naturally, these countries would retaliate by putting tariffs on U.S. exports, which could provoke a global trade war. Protectionism deepened the Great Depression, just as climate protectionism would worsen the current recession.

Although it isn't clear how much of the House bill will survive in the Senate, in the case of climate change, we need to create strong incentives to increase energy efficiency throughout the economy and to invest in new clean-energy infrastructure. Cap-and-trade is an ineffective tool for that, because it does not reliably end fossil fuels' price advantage. Given the current economic crisis, an expensive energy policy is a very bad idea. Most economists agree that the simplest, most efficient system to reduce carbon emissions is via a direct tax, a political impossibility in the U.S.; therefore, we ended up with the cap-and-trade system. Just as the stimulus program has very little allocated to projects that will actually create jobs to revive the economy, the current cap-and-trade system, instead of being an effective clean air policy, is just another tax burden on both businesses and consumers.

Disclosure: No Positions.

Comments

[TradingHelp...:]

The international challenge is persuading India and China not to pollute their way to being the world's 1st and 2nd largest economies, as is their destiny. (As the US and Japan did).

Jun 28 07:07 AM

[Old Rick:]

Well Michael, that is assuming that you believe that CO2 is a pollutant. Seems that is only true for the 30% of Americans who identify themselves as liberals. The article is a bit premature in assuming cap and trade reality. There are probably only 52-53 votes in the Senate for cloture and the bill (as I understand now) will not be subject to the reconciliation process.

Jun 28 01:12 PM

[Old Rick:]

BTW, I absolutely agree with the last paragraph of the story, but as opposed to the windmills that generate full capacity only 30% of the time and solar panels at $10,000/KW, we need more emphasis on nuclear and CNG.

Jun 28 01:17 PM

[La Marque:]

Commercial Metals (CMC) points out in most of their filings that the price of electricity goes right to the bottom line. Most electricity costs will increase under cap and trade. So CMC is going to get hit indirectly.

Jun 28 01:27 PM

[Dian L. Chu:]

You comment is greatly appreciated.
Energy is a major input cost for almost all market sectors. So, yes, mini-mills like CMC will get hit as well by the cap and trade system in the form of higher energy costs. However, as pointed out in my article, since mini's have less to worry about on carbon emissions, they will likely be less affected as compared to the integrated mills. Regardless what the finalized version of the bill will be, its timing & impact is more far reaching than some realize or care to admit.



On Jun 28 01:27 PM La Marque wrote:

> Commercial Metals (seekingalpha.com/symbo...) points out
> in most of their filings that the price of electricity goes right
> to the bottom line. Most electricity costs will increase under cap
> and trade. So CMC is going to get hit indirectly.

Jun 28 03:48 PM

[stnickb1:]

Remember CO2 is not a pollutant. I am a Biologist and understanding why CO2 vilified as a pollutant is strictly for raising the amount of money needed to pay for more Government programs through 'Cap & Trade' is easy. Read briefly from Wikipedia photosynthesis en.wikipedia.org/wiki/... and Krebs cycle en.wikipedia.org/wiki/.... Simply CO2 gives us the O2 oxygen we need and fixates C carbon into Biomass. "In all, photosynthetic organisms convert around 100,000,000,000 tonnes of carbon into biomass per year.[5]" The 'Plants planet' will flourish and use as much CO2 as we throw at it providing we clean up true pollutants(i.e.. metals,acids,bases, sulfurs, etc.) that kill or inhibit plant growth, and stop deforestation without equal replanting. Clean H2O (water) is a much more pressing concern. I hope this basic information is helpful to show that the lawyers in Washington DC., State governments, who fill our political offices don't remember their High School science, and are counting on the fact that you don't either.

Jun 28 08:27 PM

[Tgrant:]

When you factor in that BRIC economies will not participate in carbon caps, and a tariffs will likely be overturned by the WTO. Contracting your economy, especially when unemployment rates are already at multi-decade highs is not wise. I'm not sure I can believe the job growth claims, when you consider you could in theory have large amounts of workers who will be displaced.This could be the straw that breaks the camels back. These companies will have to move and outsource into the BRIC.

This just looks like one large value added tax. Which substantially inflates the prices of all good that require energy in their production, storage, distribution and sales.

Jun 28 11:19 PM

[Dian L. Chu:]

Thanks Todd, Agree with you 120%. Regardless what the final bill will look like after the Senate , its costs still far outweigh the benefits at the worst possible timing. I hope to see you here often.

On Jun 28 11:19 PM Tgrant wrote:

> When you factor in that BRIC economies will not participate in carbon
> caps, and a tariffs will likely be overturned by the WTO. Contracting
> your economy, especially when unemployment rates are already at multi-decade
> highs is not wise. I'm not sure I can believe the job growth claims,
> when you consider you could in theory have large amounts of workers
> who will be displaced.This could be the straw that breaks the camels
> back. These companies will have to move and outsource into the BRIC.
>
>
> This just looks like one large value added tax. Which substantially
> inflates the prices of all good that require energy in their production,
> storage, distribution and sales.

Jun 29 12:51 AM

[ArtfulDodger:]

stnickb1:

You are so right. Thank you for the comment.

Another point (and question) for those, such as you, who understand how the state brainwashes, is this: How can the state convince millions of people (mainly Generation X &Y) that a substance that is an integral part of our survival is evil?

The answer is quite frightening. I think everyone will agree.


On Jun 28 08:27 PM stnickb1 wrote:

> Remember CO2 is not a pollutant. I am a Biologist and understanding
> why CO2 vilified as a pollutant is strictly for raising the amount
> of money needed to pay for more Government programs through 'Cap
> & Trade' is easy. Read briefly from Wikipedia photosynthesis
> en.wikipedia.org/wiki/... and Krebs cycle en.wikipedia.org/wiki/....
> Simply CO2 gives us the O2 oxygen we need and fixates C carbon into
> Biomass. "In all, photosynthetic organisms convert around 100,000,000,000
> tonnes of carbon into biomass per year.[5]" The 'Plants planet' will
> flourish and use as much CO2 as we throw at it providing we clean
> up true pollutants(i.e.. metals,acids,bases, sulfurs, etc.) that
> kill or inhibit plant growth, and stop deforestation without equal
> replanting. Clean H2O (water) is a much more pressing concern. I
> hope this basic information is helpful to show that the lawyers in
> Washington DC., State governments, who fill our political offices
> don't remember their High School science, and are counting on the
> fact that you don't either.

Jun 29 12:58 AM

[ArtfulDodger:]

I agree totally. Good point. Thank you.


On Jun 28 11:19 PM Tgrant wrote:

> When you factor in that BRIC economies will not participate in carbon
> caps, and a tariffs will likely be overturned by the WTO. Contracting
> your economy, especially when unemployment rates are already at multi-decade
> highs is not wise. I'm not sure I can believe the job growth claims,
> when you consider you could in theory have large amounts of workers
> who will be displaced.This could be the straw that breaks the camels
> back. These companies will have to move and outsource into the BRIC.
>
>
> This just looks like one large value added tax. Which substantially
> inflates the prices of all good that require energy in their production,
> storage, distribution and sales.

Jun 29 12:59 AM

[2soonold2la...:]

On Jun 28 08:27 PM stnickb1 wrote:

> Remember CO2 is not a pollutant. I am a Biologist and understanding
> why CO2 vilified as a pollutant is strictly for raising the amount
> of money needed to pay for more Government programs through 'Cap
> & Trade' is easy. Read briefly from Wikipedia photosynthesis
> en.wikipedia.org/wiki/... and Krebs cycle en.wikipedia.org/wiki/....
> Simply CO2 gives us the O2 oxygen we need and fixates C carbon into
> Biomass. "In all, photosynthetic organisms convert around 100,000,000,000
> tonnes of carbon into biomass per year.[5]" The 'Plants planet' will
> flourish and use as much CO2 as we throw at it providing we clean
> up true pollutants(i.e.. metals,acids,bases, sulfurs, etc.) that
> kill or inhibit plant growth, and stop deforestation without equal
> replanting. Clean H2O (water) is a much more pressing concern. I
> hope this basic information is helpful to show that the lawyers in
> Washington DC., State governments, who fill our political offices
> don't remember their High School science, and are counting on the
> fact that you don't either.

Just adding to your comment about CO2. (keeping it as simple as I can)

Photosynthesis uses sunlight and CO2 as inputs to produce green stuff that we use.

The proponents of this 'green' plan have the objective of reducing the amount of CO2 being emitted.

This reduces the amount of the basic substance available for the process of photosynthesis as you describe above which will make us less green.

Jun 29 02:10 AM

[TradingHelp...:]

I didn't mention C02. I am referring to pollution. Are you saying the US's economic growth over the past 40 years has not caused considerable pollution? It has. It has created significantly more pollution than its 'fair share'. That is indisputable. That is why the US gets so much push-back from China on emissions controls as the US is being hypocritical.


On Jun 28 08:27 PM stnickb1 wrote:

> Remember CO2 is not a pollutant. I am a Biologist and understanding
> why CO2 vilified as a pollutant is strictly for raising the amount
> of money needed to pay for more Government programs through 'Cap
> & Trade' is easy. Read briefly from Wikipedia photosynthesis
> en.wikipedia.org/wiki/... and Krebs cycle en.wikipedia.org/wiki/....
> Simply CO2 gives us the O2 oxygen we need and fixates C carbon into
> Biomass. "In all, photosynthetic organisms convert around 100,000,000,000
> tonnes of carbon into biomass per year.[5]" The 'Plants planet' will
> flourish and use as much CO2 as we throw at it providing we clean
> up true pollutants(i.e.. metals,acids,bases, sulfurs, etc.) that
> kill or inhibit plant growth, and stop deforestation without equal
> replanting. Clean H2O (water) is a much more pressing concern. I
> hope this basic information is helpful to show that the lawyers in
> Washington DC., State governments, who fill our political offices
> don't remember their High School science, and are counting on the
> fact that you don't either.

Jun 29 08:44 AM

[enki09:]

Cap and Trade is an effort to spur the growth of the Green Energy Economy and one that I have been on the fence with for some time. On the one hand the Green Energy Economy is inevitable eventually and would evolve on it's own as fossil fuels become more expensive to retrieve. Climate Change fears are the driving force behind Cap and Trade which is meant to jump start the process by penalizing CO2 emitting industries.

But I think that another alternative exists which would achieve the same ends without putting a carbon tax on everyone. One really has too keep the market in mind when doing these kind of manipulations. The American people overwhelmingly support green energy right up to the point where their out of pocket expenses increase. At that point support drops off dramatically.

For this reason I think that the Author here is correct in her assessment. The ball is in the court of Green Energy at the moment. If they can deliver a product which is cheaper and easier to use than current energy there would be no need for cap n trade and consumers would flock to green energy en masse. Until that happens though we have to be very careful how we attempt to manipulate things in order to achieve that end.

Why do we have to increase the cost of energy across the board in order to make green energy competitive? Why not reduce the cost of green energy through market driven competition? Is it simply because green energy hasn't been able to be cost competitive? IS that a reason to penalize everyone?

I think that adopting a renewable energy standard along with establishing a "green bank" to LOAN money to renewable energy companies to pay for grid upgrades and transmission line construction would be the extent to which the public should be expected to commit. This would encourage development of the green energy economy without putting the cap and trade penalty on everyone.

Jul 14 08:48 AM