Obama's Cap and Trade Proposal Gets Mixed Reviews
No doubt the President's budget includes a very ambitious proposal cap and trade proposal to address Climate Change. The President Budget provides an overview of the proposal in the EPA budget:
After enactment of the Budget, the Administration will work expeditiously
with key stakeholders and Congress to develop an economy-wide emissions reduction program to reduce greenhouse gas emissions approximately 14 percent below 2005 levels by 2020, and approximately 83 percent below 2005 levels by 2050. This program will be implemented through a cap-and-trade system, a policy approach that dramatically reduced acid rain at much lower costs than the traditional Government regulations and mandates of the past.
Through a 100 percent auction to ensure that the biggest polluters do not enjoy windfall profits, this program will fund vital investments in a clean energy future totaling $150 billion over 10 years, starting in fiscal year 2012. The balance of the auction revenues will be returned to the people, especially vulnerable families, communities, and businesses to help the transition to a clean energy economy.
The budget blueprint Obama sent to Congress yesterday foresees revenue of $645.7 billion by 2019 from the sale of permits to polluters from 2012. Obama proposes to use the money raised to pay for other priorities, such as tax breaks for the lower and middle class. Another $150 billion will be used to help spur development of renewable energy.
Early reaction to Obama's plan has been mixed with most recognizing he will have an enormously tough road ahead to pass a Climate bill with the framework he is proposing.
100% Auction... how about 30%?- President Barack Obama may need to give away as much as 70 percent of greenhouse-gas emissions permits to win support for his cap-and-trade program, Merrill Lynch & Co said.
McCain Blasts Obama Proposal- “I don’t think cap and trade should be used for the purposes of generating revenue,” McCain
Environmental groups were jubilant at Obama's proposals on climate change-"It's a hugely important policy direction and another sign that Obama gets it when it comes to building a clean energy economy," said Gene Karpinski, president of the League of Conservation Voters.
Obama team will be pragmatists on climate change- "Todd Stern, the Obama administration’s new top climate-change negotiator, wants to tamp down on the expectations. He talks tough and is all for the shift to a low-carbon economy, but he’s not an ideologue. And he may well be reflecting the White House’s pragmatism in the face of numerous challenges." Its hard to see the pragmatism in a 100% auction, very small offset proposal.
I am a long time supporter of incentive based emission controls and energy conservation (see"Energy: Science, Policy, and the Pursuit of Sustainability", Bent, Orr Baker, Island Press, 2002). This should include fuel taxes where cap and trade is less feasible. They should be imposed gradually to avoid disruption, but with the progression to substantial levels established and announced. We will need to work through international organizations to establish trade restrictions on countries that do not have similar policies. Otherwise energy intensive production will shift elsewhere.
A simple substitution for other taxes should help enhance political feasibility. For example, substitute for the social security tax which is also a regressive tax. Forget the targeted use of revenues. It is likely to be complicated, divisive, and wasteful.
Advantages:
1. Conservation taxes, which increase economic efficiency are substituted for ordinary taxes which decrease economic efficiency.
2. Provides a continuous incentive for private sector innovation, which will be far more rapid and cost effective than any government subsidy program. Public resources can be shifted to alternative important programs like health care.
3. We retain resources for our own use rather than sending them to the middle east.
Lloyd Orr
Professor Emeritus, Economics, Indiana University, Bloomington