A cap-and-trade scheme for controlling greenhouse gas emissions (GHGs) would impose significant economic costs on the U.S. economy and is not a sound policy response to current concerns about global warming, says renown economist Arthur Laffer.

"Dr. Laffer's analysis is another death knell for the cap-and-trade approach to addressing concerns over carbon dioxide emissions," said Steven Milloy, executive director of the Free Enterprise Education Institute (FEEI), the nonprofit group sponsoring the study. "The Department of Energy, Congressional Budget Office and, now, Dr. Laffer have all concluded that cap- and-trade would be disastrous for the U.S. economy," added Milloy.

Cap-and-trade may reduce U.S. economic growth by 4.2 percent - even to achieve the comparatively modest GHG reductions of the Kyoto Protocol i.e., GHG emissions 7 percent below 1990 levels by 2008-2012). The cost to reach the ultimate goal of some GHG control proponents (e.g., reducing GHG emissions to 80 percent below 1990 levels by 2050) would be significantly greater. Moreover, these estimates may underestimate the actual cost as they assume the government would auction the rights to emit greenhouse gases - as opposed to simply giving them away, which is the approach often discussed in the Congress.

Because fossil fuels (oil, coal and natural gas) provide 86 percent of current U.S. energy needs and it is not currently feasible to substitute contribution of alternative energy sources in the near-term, a GHG cap could effectively become an energy production cap - or an energy supply shock. During the previous energy supply shocks of 1974-75, 1979-81 and 1990- 91, the economy declined, unemployment rose, and the stock market declined in value.

Based on the energy efficiency responses to the energy supply shocks of the 1970s, the U.S. economy could be 5.2 percent smaller in 2020 compared to what would otherwise be expected if cap-and-trade regulations are imposed. This equates to a potential income loss of about $10,800 for a family of four for the initial Kyoto GHG reduction target.

"Cap-and-trade is a simply dreadful policy option that is being pushed by Alcoa, BP, Caterpillar, Conoco Phillips, Dow Chemical, Duke Energy, Dupont, General Electric, PepsiCo and the other big business interests that belong to the U.S. Climate Action Partnership (USCAP)," said the FEEI's Tom Borelli. "Global warming pork-barrel spending and corporate welfare are what they're after," Borelli added. "USCAP members hope that, through a cap-and-trade scheme, Congress will simply give them and other special interests what amounts to essentially 'free money' - as much as $1.3 trillion dollars over the next 10 years under legislation recently introduced by Sen. Jeff Bingaman (D-NM) and Arlen Specter (R-PA) - as well as other competitive business advantages," explained Milloy. "Not only is cap-and-trade likely to misdirect taxpayer monies and rob hard-working Americans of income, it's not at all clear that it will produce any environmental benefits whatsoever," he added.

"The Laffer paper confirms that cap-and-trade is a lose-lose proposition," said Borelli. Given the well-established relationship between economic prosperity and a clean environment, it's hard to see how harming the economy won't also harm the environment," Borelli concluded.