As explained in many of our publications, articles and in previous congressional testimony, SBSC opposes the Kyoto Protocol to the United Nations Framework Convention on Climate Change for a variety of reasons, including, and primarily due to, the significant costs it would impose on small businesses, consumers and the U.S. economy in general, as well as the competitive disadvantage U.S. small businesses would face versus exempted international businesses in most other countries.
As noted in the invitation letter for this hearing to SBSC from the Committee Chairman and Ranking Minority Member, what we have been asked to specifically address today are the issues related to "formal recognition or crediting of voluntary greenhouse gas mitigation activities." These fundamental issues, for example, are raised by the proposed "Credit for Voluntary Reductions Act" (S.547).
First, we need to understand, or come to agree on what these credits would be used for. Obviously, the credits would only have meaning and value under the Kyoto Protocol or some similar regulatory regime which would implement an emissions "cap and trade" system. Otherwise, the entire early credit endeavor would be pointless. Therefore, we must take a look at how emissions trading would likely work, and what problems it presents.
Under the Kyoto Protocol, the U.S. would be obliged to reduce so-called greenhouse gas emissions mainly CO2 to 7 percent below 1990 levels by 2012. That would require dramatic reductions in energy usage. One method for reducing energy consumption and emissions would be an emissions trading program whereby the government would cap emissions, and then ration or auction off credits equivalent to certain levels of emissions. (Under S.547, for example, a "greenhouse gas reduction credit" means an authorization to emit 1 metric ton of greenhouse gas.) The credits would be tradable. For example, nations or companies seeking to maintain current or expand emissions would buy credits from nations or companies cutting their emissions and not needing the credits.
U.S. Assistant Secretary of State Melinda Kimble, a top climate negotiator, told Reuters (October 21, 1998), "In the United States, first and foremost domestic action is going to be a trading system."
Trading emission credits is called a market-based system, but in fact, it has very little to do with markets. It is merely another regulatory system for shifting around massive government-imposed costs. The government would place severe restrictions on CO2 emissions and therefore on energy consumption and economic activity then implement a kind of shell game to shift around and attempt to hide the enormous costs.
Massive problems exist with such a system.
-- Costly and Stealthy. A "cap and trade" system does the same amount of damage to small businesses, consumers and the economy as do overt energy taxes, but in a dangerously stealthy manner. In a 1994 document, the Environmental Protection Agency reportedly noted the problems facing an overt energy tax, and then cynically declared: "A cap would likely not be as unpopular as a tax, since people are generally less familiar with the concept." Like other forms of regulation, the exact costs would remain largely a mystery to consumers, but nonetheless they would be paying in the form of increased costs, lost GDP, and lost jobs.
-- Impossible Enforcement. The most daunting problem with an emissions trading regulatory system is compliance. In summary, countless dollars would be spent in pursuit of an impossible compliance goal.
Administration of this treaty would require monitoring all sources of emissions, and comparing those results with permissible credit amounts. Environmental bureaucrats would have to monitor both stationary and mobile sources of emissions. Stationary sources would be bad enough think of the number of business, nonprofit and governmental facilities that would be under surveillance but remember there are more than 200 million motor vehicles in use in the U.S. today.
Now, take this scenario, and apply it internationally. The complexity, costs and extent of government intrusiveness grow exponentially. After all, the U.S. cannot even successfully monitor chemical and nuclear weapons activities in Iraq, never mind global monitoring of practically all economic activity. This would require either a massive international environmental police-like force sticking their noses into private-sector and public-sector ventures nation by nation, or extensive domestic regulation under the assumption that each nation will be equally faithful and efficient in their monitoring activities. Either route is naive and costly, but be sure that our Environmental Protection Agency our likely Kyoto Protocol regulator will be the most aggressive enforcer.
-- Developing Nations. If this treaty is meant to be taken seriously, then developing nations eventually must be brought into the fold. Currently, developing nations are excluded from emissions caps.
An exclusion for developing nations would provide them with a tremendous economic advantage, allowing them to attract industries, businesses and jobs away from nations forced to impose draconian costs under the treaty. Obviously, this cannot stand.
But what would happen if developing nations are placed under the Global Warming Treaty emissions caps? Imagine the insurmountable obstacles involved in monitoring emissions in many Third World nations where it can be a formidable task just to feed the populace. If imposed and somehow enforced, limiting emissions in such nations would sentence millions of people to permanent poverty.
-- Small Business at a Disadvantage. Under emissions trading, smaller enterprises would be at a distinct disadvantage as bidding domestically and/or internationally raises the price of credits. As is the case with other forms of regulation, these added costs will hit smaller ventures hardest. Many small businesses operate on the slimmest of margins, and simply would be unable to play the credits game. As it stands now, most small businesses find it daunting to comply with the hundreds of laws and regulations required under all levels of government. In addition, basic business matters require their hour-by-hour, day-to-day attention.
The credits game will be viewed by most as being the domain of big business, or be construed as some complex and vague program that offers no or little current quantifiable benefit in running their day-to-day operations. In addition, the high-risk nature of smaller, entrepreneurial firms require the opportunity to make substantial returns.
The Kyoto treaty and emissions trading raise costs, and therefore reduce potential returns, which means that many start-ups, innovative, potentially high-growth enterprises would be nipped in the bud.
Indeed, it certainly does not take an active imagination to see mature, entrenched large enterprises gaining a clear advantage over smaller businesses under an emissions trading regulatory system. For large firms with greater ability including the necessary capital to survive the added costs of playing the credits game will actually face reduced competition from smaller upstarts who will not survive.
Trading emission credits merely would shift the costs of the Kyoto Protocol around, but certainly would not make them disappear. The economic costs and dislocations promise to be severe.
Having noted the many problems with emissions trading, it becomes obvious that any kind of early action to reduce emissions so-called "voluntary" or not of such a system manages to only make matters worse. For example:
-- The federal government would most likely enter into early implementation agreements with large, established businesses who have the legal expertise, technical abilities, and discretionary capital to undertake early actions. This level of resources would naturally give an advantage to big business to become "volunteers" in an early action program. And since there would only be so many credits to go around under the Kyoto Protocol or a national cap as part of a domestic program, those who did not participate in early actions would suffer accordingly. Small and mid-sized businesses would bear a heavy burden in 2008 and beyond.
-- Politics no doubt would play a major part of this early implementation program. For example, S.547 would authorize "the President to enter into binding agreements under which entities operating in the United States will receive credit, usable in any future domestic program that requires mitigation of greenhouse gas emissions, for voluntary mitigation actions taken before the end of the credit period."
Those with political connections and lobbying clout would have the clear advantage when it comes to entering into early implementation agreements, at the expense of the non-politically connected, i.e., smaller enterprises. Even if so-called "pooling" is allowed whereby a group of participants act as one participant for purposes of early action its usefulness would be quite limited. For example, established, politically connected businesses would have absolutely no incentives to pool with other firms. Why would they? For the rest, the costs of organizing in terms of dollars, time, personnel, education, etc. would be formidable.
As noted earlier, most business owners struggle day after day for long hours to keep their business going, or hopefully growing constantly assessing the best way to serve their customers, to keep their employees productive and happy, and to project where their market is headed. These are the folks that will not have the ability to play the politics of credits for early action, and they then will be the ones most savaged by the costs of the Kyoto Protocol, or any other domestic initiative to reduce greenhouse emissions, or another domestic regulatory regime developed to manage, monitor and attempt to reduce emissions.
-- Mature businesses in predictable industries would more easily participate in early implementation than would small, high-growth businesses in new, dynamic and far less predictable industries. None of us really know what the new businesses and industries of tomorrow will be. But we do know that under a credit for early action plan, they will be especially hurt, as they obviously cannot take advantage of early action.
-- Credits for early implementation would establish a strong special-interest group favoring Kyoto implementation or a comparable domestic regulatory program. Credits potentially worth untold millions of dollars would act as powerful incentives to push and lobby for treaty ratification, or some type of regulatory structure that would give value to such credits. In other words, without a program to give value to such credits they would be worthless. I believe this would effectively split some of the business community in its opposition to the Kyoto Protocol pitting many large companies with a special interest in seeing the treaty and its trading scheme become reality, against a far more dispersed opposition overwhelmingly populated by small and mid-sized firms. Already, whatever ruptures that exist in the business community over whether the Kyoto Protocol should be implemented or not are largely based on whether certain industry sectors believe they can take advantage of the new regulatory structure. For example, it is no surprise that we see renewable energy companies and large corporations with vast natural gas reserves cheerfully supporting Kyoto or a similar domestic version of it.
Emissions caps on nations effectively are caps on economic growth. As entrepreneurs try to start up and grow businesses, they will be at a severe disadvantage in securing credits in a highly political system, and then will be hurt as the prices of domestically and/or internationally traded credits rise. Naturally, there is a trade-off between risks and potential rewards. The higher costs resulting from the Kyoto Protocol would mean reduced rewards, and therefore, less risk taking. Less risk taking means slower economic growth and reduced job creation.
Especially from the small business perspective, early action credits are a bad deal. The economics of the Kyoto Protocol or a similar program, including its emissions trading scheme, are dismal. Congress should not be looking for ways to advance Kyoto and its attendant implementation schemes, but instead should be stating quite clearly that it will not ratify this costly, misguided, and highly dubious treaty.
As a final point, it is well worth noting the increasing energy efficiency in the United States brought about mainly by businesses and entrepreneurs without any such draconian measures along the lines of a Kyoto Protocol. For example, between 1970 and 1996, total energy consumption increased by 41%, while our economy more than doubled in real terms over the same period. Indeed, the private sector possesses every incentive to become more and more efficient in terms of energy usage.
Once again, thank you for allowing me to testify today, and I would be glad to answer any of your questions.