Aldyen Donnelly: Cap and trade: A history

In my opinion, the science on climate change is now irrelevant—even though I’m a believer.

Every time the US has implemented a cap and trade regulation—the first one was in1977—its primary political objective was trade protectionism. And every time the US has done so, the measure has successfully drawn investment capital away from nations on which Americans have traditionally relied for imports into the US.

The US "energy security" and cap and trade bill is now Obama’s top priority, because it is the only mechanism on the agenda that could support his stated objective of doubling US exports by 2020.

Regardless of the fact that I am wedded to the environmental agenda, I never debate the science with my clients. Accepting the environmental argument does make it a little easier for me to do my job. But I agree the science is uncertain, and I do not ask my clients to join me in my environmental position.  

The real question businesses and Canadian governments should be asking, in my view, is: how do we defend our economy against this repeatedly successful US protectionist measure?

"Cap and trade" was invented by a fellow named Stuart Eizenstat—a brilliant and most interesting fellow. Eizenstat is now 67, but still working as a trade and MI lawyer in New York. He was President Jimmy Carter’s domestic policy advisor when he first came up with "cap and trade" to protect US interests. A rabid Democrat, he was still called in by Reagan to act as special ambassador to Europe to diffuse a couple of major trade crises.  He started with the Clinton administration in the White House as internal economic advisor. From1993 through 1996 he was US Ambassador to the EU. From 1998 through 2001 he was Deputy Treasurer of the United States.

In 1994 I sat in an industry briefing during which he walked the audience through "cap and trade" and how the climate change issue could be used to reverse the US’s balance of energy trade.

In September 1994, when Eizenstat briefed a number of US industrial interests and consultants on the trade role of "cap and trade", the price of a barrel of oil was only $11. One of the reasons the US economy was booming was the low price of oil. In his briefing, Eizenstat forecast that growing Chinese and Indian demand would drive that price up to somewhere between $50 and $100/barrel by 2005, and also that US would be relying on unstable Persian Gulf nations for over 50% of its oil demand.  

To put this in context, in the 1970s the OPEC nations were able to pull off the "oil shock" when their share of US consumption was under 10%.  

Eizenstat said he had also determined that after the first Gulf War, the US was going to have to maintain a growing military presence in the Persian Gulf—in perpetuity—to manage the growing potential for conflicts that could disrupt US oil supply. He said that he calculated that the current and short-term US defence and security expenditures directly related to security of oil supply equated to roughly US$40/bbl. He argued, therefore, that Americans were already paying more than any other nations for gasoline—just that most of the price they were paying did not appear at the pump and came out of general tax revenues.  

He explained how the US government could use GHG cap and trade to compel foreign carbon-based commodity suppliers to at least partially bear the US’s costs of investing in domestic development that would wean the US consumer off imported oil and other key GHG-intensive commodities—most notably aluminium, iron, steel, beef and pork. In this briefing Eizenstat walked us through how cap and trade had been used to reverse the US balance of trade in gasoline and refrigerants.  

Most of the people in the room rejected Eizenstat’s forecasts out of hand—myself included. I did, however, completely brief my client. When I came home, I said: "I really do not agree with Eizenstat’s analysis. But that is irrelevant. This is one of President Clinton’s closest advisors. We need to understand that Eizenstat’s analysis is driving the US cap and trade agenda, whether or not it is accurate."  

Of course, we can now see that he was correct on all counts.

Surprisingly, Eizenstat is not well known for his role in US trade. He is an observant Conservative Jew who made every President for whom he served agree to one employment condition: that he be allowed, on government time, to try to recover "holocaust art" and restitution for victims of other holocaust crimes. This was a personal objective that he imposed on his White House bosses. He was finally successful and is a great hero in both the US and Europe for his success in this—his top priority personal objective.  

The respect with which many Europeans hold him is part of what makes him such an important asset in US-EU negotiations of all kinds.

If any readers ever have time and or any interest in looking deeper into this very cloudy file, go here.

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