Supply Chains and Cap & Trade: a High-Level Overview

The American Clean Energy and Security Act (ACES) of 2009 is a piece of legislation presented to the entire U.S. House of Representatives and set for a vote on Friday, June 26, 2009. It is more commonly referred to as “Cap and Trade.” ACES is purported to be a bill to combat so-called “climate change.” The legislation places a limit on the amount of carbon dioxide (the air we, as humans, exhale and that trees convert back into oxygen) that businesses can release into the environment. ACES does allow some carbon to be emitted; however, it requires a permit from the government. These permits have a cost that amount to a tax on production. Admittedly, the bill is more complicated, but this rudimentary explanation will serve the purpose for this discussion.

The supply chain is an economic term which simply describes the process of taking raw resources, turning them into products for the economy, and then placing those products into the hands of consumers. The purpose is to illustrate the flow of materials through the economy and to include all parties involved in bringing goods to the market. Again, this concept can get more complicated, but it is unnecessary to go into that level of detail here.

These two concepts will be interrelated if Congress passes ACES into effect and the President signs it into law. ACES will affect each level of the supply chain with a tax. The additional cost will be passed on to the next link in the chain. Capitalism functions in such a manner because the purpose of risk-taking and investment is profit. Businesses will avoid decreases in profit caused by increased costs of production or purchasing materials by passing the costs down the line. The final result of this process is an increased burden upon the consumer, who happens to be the final link in the chain.

A simple illustration demonstrates this point. Let us examine something as common as the small business dairy farmer who sends milk to the market. The farmer is the beginning of the supply chain. He has the source of the raw material, the dairy producing cows, from which the process begins. The farmer must extract the raw milk from the cows. This is typically accomplished through a harvesting machine, which is used several times a day. The machine runs on electricity. Since over 50% of electricity in this country comes from coal, it is highly probable that the electricity bill for the dairy farmer will be higher. Higher utility bills mean increased cost for the farmer. Since farmers usually have tight margins, that cost will be passed to the next participant in the supply chain. Further, the farmer has to store the harvested dairy product. Again, this requires the use of a machine, this time a refrigerated machine which also runs on electricity. He will again incur more cost.

The next step is transportation of the refrigerated product from the dairy farm to processing centers and laboratories (to test the product that is being sent to market). Transportation typically occurs by means of trucking. Trucking companies require large quantities of gasoline. The gasoline will cost more, which means that the trucking company must charge more for the service. Additionally, it is possible that the trucking company will have to purchase permits for emitting carbon dioxide (this remains unclear at this point in time). If permits are required of the company, the service charge will be further increased.

Once the product arrives at the processing plant, it must go through a series of procedures including pasteurization and homogenization. Once again, this process requires energy for the machinery and the large building which houses all of it. The processor typically packages the milk as well. This involves even more machinery and ever more electricity. The processing plant also must store the milk until the next shipment is ready to go out to the distributors. Storage of a perishable item requires refrigerated equipment that yet again runs on electricity.

A shipping company will have to again transport the product; this time the milk will be taken from the processing plant and shipped to distribution points. We will assume that there are no middle-men or warehouses and that it goes straight to your local supermarket. The shipping company, as stated previously, uses gasoline that is now more expensive and must charge more to cover the increased burden.

Once the milk arrives at the local grocer, it must be stored. The storage yet again requires the use of refrigerated coolers which run on electricity that has become more costly. The end result of all these costs is a more expensive gallon of milk for the consumer. The cost added to each layer will increase the final sales price.

When you review all of the costs passed down the chain, it becomes obvious that the ultimate burden falls upon the consumer. He pays for all of the increased costs to the farmer, the transportation from farm to processing plant, the higher energy bills of the plant, a second round of higher transportation costs, and finally the more expensive energy at the supermarket. These numbers don’t even include things like the suddenly more expensive gas used by the consumer to get to the store, the increased costs of buying machines and other supplies to run the farm and the plant, or the more expensive parts used to maintain the trucking fleet. The previous sentence’s examples are but a few of the dozens of inputs necessary to keep the supply chain functioning.

Although the explanation was simplistic, it clearly makes the point that passage of the ACES legislation will significantly impact the standard of living of the American public. To make this point stronger, think about how many products you buy weekly and look to the higher costs passed through the supply chain for each of them. The price of any one is bearable; however, the aggregate cost to the consumer becomes exponentially burdensome and oppressive. What is more disturbing is the regressive nature of the proposed law; it disproportionately saddles costs to those in society with the least available means to bear the burden. Those in government must educate the public on the cumulative effect of this bill and the impact it will have on every sector of the economy. Explaining the impact ACES will have on individuals should build a groundswell of opposition to this destructive policy. As in sports, sometimes the best offense is a good defense. In this case, an educated populace is the best defense available.