Common Tragedies

Thoughts on Environmental Economics

Follow the money

Posted by Rich Sweeney on February 26, 2009

Over on Env Econ Tim lays out the Habb Haab Climate Security Act of 2009. It basically involves auctioning 10% of allowances in year one, and then increasing this by 10% per year until we have 100% auctioning. The remaining permits will be given away to polluters so that they have “time to adjust”. While this would have been a pragmatic compromise as recent as 12 months ago, today I’d say its a non-starter. Polluters totally dropped the ball on this one, preffering the to play hardball rather than getting in early when they could have essentially written the bill themselves. Now that ship has sailed.

Under President Obama I really can’t see more than 25% of permits being given away for free initially, with a much quicker phaseout. BO repeatedly emphasised his support for 100% auctions during the campaign. And this position wasn’t simply some calculated play for votes. Unlike almost every other politician in Congress, Obama grasped the fiscal opportunities of carbon revenue very early on. At a time when Senator McCain was touting cap and trade because it could be implemented without a big check going to the federal government, Obama started talking about killing two birds with one stone: we could address climate change and raise money for other programs.

Then this week President Obama came out and said that he would halve the federal deficit. This surprised many, as he’s also stated ambitious spending goals, particularly on health care. Then people noticed something funny in the budget: revenue from a cap and trade program that doesn’t yet exist. Now I’m not sure how hidden this line item was supposed to be, but its clearly not the most transparent move we’ve seen from Obama. Instead of getting into a big public debate about cap and trade, he appears to have opted to show congress the money first, and then let them decide if they’d like to give it away to polluters for free (Remember that Peter Orzag is in Obama’s cabinet. This is the man who was in charge of the CBO when it ruled that free permits would be scored as spending outlays). I wonder what they’ll do (sarc.)

Like almost everything that’s come out of the Obama team in the past year, they appear to be one step ahead of everyone else. While I’m actually pretty apprehensive about the symbolic implications of sneaking climate policy in the backdoor, I’d have to admit that this strategy increases the probability of some form of cap and trade program getting passed in the next two years. And if the carrot’s insufficient to tempt Congress, he’s also promised that the EPA would comply with the Supreme Courts ruling that it must regulate carbon dioxide under the clean air act. This would would probably cost businesses more and raise less money for the federal government.

Touche Mr. President. Touche.

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3 Responses to “Follow the money”

  1. Hydra said

    In other words the money from cap and trade means that people earning less than $250,000 a year WILL see a tax increase. And, as a sales tax it will be more regressive than a graduated income tax. Nice going BO.

  2. Rich Sweeney said

    hydra, i have no idea what you’re talking about. the net effect on households in different income brackets depends on how the auction money is spent. as far as i know that hasn’t been decided yet. dallas burtraw, margaret walls and i have a discussion paper estimating these effects if you’re interested. a revision should be coming out in the next few weeks.

    http://econpapers.repec.org/paper/rffdpaper/dp-08-28.htm

  3. Carlos Ferreira said

    Maybe I’m still looking at the Economics book and imagining sustainability, but I’d be happier if the proceeds from the auctions would go into a fund to finance renewable energy. At least a part of it! If the government uses is all elsewhere, there might be a lack of funding to the conversion of the energy production base.

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