I received an email from a Washington, D.C. advocacy group urging me to urge my U.S. Senators to “support the Climate Security Act.” Climate security? This is legislation to set up emissions trading or a “Cap & Trade” system for carbon-based energy supplies.

Basically, the government sets up a national limit for carbon emissions. This is meant to slow the changes that are supposedly occurring to the atmosphere, and by implication threatening the long-term health of the earth’s climate systems.

Under the national Cap & Trade limits, industry has to obtain rights to emit carbon dioxide (CO2) or find another source for energy. This will lead to a new market for carbon-credits and carbon-trading. Industries that hold carbon permits will be able to operate. Industries that lack carbon permits will face shutdown and probable extinction. One way or the other, the economy will immediately transform into a system where one’s industrial fate is controlled by the carbon permits.

For example, carbon permits will dramatically alter the future for coal-based electricity. If coal gets burned at all, the Cap & Trade requirement will enforce CO2 sequestration — an utterly embryonic technology of which there is not a single large-scale working example anywhere on the face of the planet. And the coal-fired electricity under Cap & Trade will be much more expensive.

So non-carbon alternatives like wind, solar & geothermal will be more competitive as well. There is also a gratuitous plan to handicap the nuclear industry, despite the fact that nuclear power is essentially CO2-free. Old environmentalist habits — like hating nuclear power — die hard.

But the higher energy costs of production will have to pass through to consumers. At the end of the consumption chain, people can expect to pay higher prices for most everything that contains an element or two of electricity. (Gee, what might that be?)

In essence, the government will be setting up a new Federal Reserve, except instead of governing the nation’s money supply and quality, this new “Cap & Trade” Fed will govern the nation’s supply of energy. At the end of the day the “Carbon Fed” will control the output of the nation’s energy supply. In the long run, this may be more important than controlling the supply of credit or even the gold supply. Really, without electricity gold may yet prove to be a barbarous relic.

But consider how little most people knew about the original Fed when its enabling legislation was passed (in the dead of night) on Friday, December 23, 1913 — yes, almost Christmas Eve. The Panic of 1907-1908 was fresh in the minds of many observers. In that Panic, the U.S. money supply had simply dried up. The nation was broke, and even the U.S. government had to borrow money from the house of JP Morgan.

So by 1913 there was a basic political consensus that the nation ought to have some sort of “elastic” element to its currency. Most economists and policy-makers agreed that there had to be a way of increasing the nominal money supply quickly, especially when economic conditions led to a “panic” that dried up the circulation of dollars. Yet few understood the nature of the powers that the Federal Reserve Act was creating and placing in the hands of a quasi-independent monetary body. And even fewer were thinking about the political difficulty of pulling back those excess dollars when the panic abated.

Indeed, the U.S. Fed coexisted with a $20-gold standard for the next two decades. It was no curious coincidence that within a few short years, the U.S. was able to “afford” to participate in World War I, courtesy of the credit-creating mechanisms of the Fed.

Later on, when the central government needed more funds during the depths of the Great Depression, the $20 gold standard became untenable to the monetary managers. So in one of his first acts as U.S. President, Franklin Roosevelt signed an executive order that simply seized the nation’s gold and consequently unleashed the flood of fiat dollars into the monetary base of the nation. The dollar has never been the same.

This note is not to re-hash the history of the Fed. It is just to remind that the so-called “Climate Security Act” may claim to be all about Cap & Trade. But Cap & Trade is not just about “Climate Security.”

In the name of reducing the emission of CO2, the government is creating a means to control the economy down to the last electron. This is a power that not even the Fed holds.

Until we meet again…

Byron W. King
June 18, 2008

Byron King

Byron King is the managing editor of Outstanding Investments and Energy & Scarcity Investor. These publications reach over 60,000 paid subscribers. He is also a contributor to the Daily Reckoning. King is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents. He has conducted site visits to mineral deposits in 26 countries and deep-water oil fields in five oceans. This provides him with a unique perspective on the myriad of investment opportunities in energy and mineral exploration. He has been interviewed by dozens of major print and broadcast media outlets including The Financial Times, The Guardian, The Washington Post, MSN Money, MarketWatch, Fox Business News, and PBS Newshour.

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