The President Caves on Climate Policy

At a time of unsustainable deficits, deficit neutrality is a remarkably lame vision for climate policy.

Last year, President Obama proposed to raise $500 billion over ten years through a cap-and-trade system that would limit carbon emissions. This year his climate policy raises nothing.

The president still backs cap-and-trade, but he has caved into congressional pressure to give away or spend all that potential revenue rather than use it to help taxpayers. Cap-and-trade has thus become cap-and-spend.

The new policy is described as follows in a footnote to Table S-2 of the budget:

A comprehensive market-based climate change policy will be deficit neutral because proceeds from emissions allowances will be used to compensate vulnerable families, communities, and businesses during the transition to a clean energy economy. Receipts will also be reserved for investments to reduce greenhouse gas emissions, including support of clean energy technologies, and in adapting to the impacts of climate change, both domestically and in developing countries.

I am sympathetic to the idea that the value of some emission allowances should be used to compensate some families, communities, and businesses as the system ramps up. But studies have repeatedly found that such compensation would require only a fraction of the overall value of the allowances. There should still be plenty of room for allowances that are ear-marked for deficit reduction.

Proponents of the bills currently pending in Congress counter by pointing out that allowance giveaways would get smaller in later decades, helping cut future deficits.

I wouldn’t bet on it. In my experience, these dessert-now-spinach-later policies usually get renegotiated just as the spinach course is about to begin. The alternative minimum tax is about to hit more taxpayers? Let’s patch it for a year. Doctors are about to get their Medicare payments cut? Let’s put that off for another year. Terrorism risk insurance is about to phase out of existence? Let’s extend it for a few more years until we are ready. And on and on.

If we are serious about using some allowances for deficit reduction, we are better off doing it immediately, not creating beneficiary groups who will lobby for extensions when their free dessert is coming to an end.

And faced with $10 trillion or more in deficits over the next decade, we could really use the money.

Note: In his 2010 budget, the president proposed to raise $624 billion in revenues from a cap-and-trade program. $120 billion was earmarked for investing in clean energy technologies, so I netted it out in calculating the $500 billion figure above. The president proposed using those funds to pay for a permanent extension of the making work pay tax program, but they could also have been used to reduce the deficit. (See Table  S-2 from last year’s budget)

11 thoughts on “The President Caves on Climate Policy”

  1. Great post, Donald. Maybe we should have seen this coming since the solution all the experts say would be better in every respect — a carbon tax — was considered politically infeasible due to the “T” word. And even cap-and-trade was soon labeled “cap-and-tax”. How pathetic.

  2. “But studies have repeatedly found that such compensation would require only a fraction of the overall value of the allowances. There should still be plenty of room for allowances that are ear-marked for deficit reduction.”

    Do you know any of these studies off hand?

  3. An increasing cost of carbon would release a lot of small innovations and changes, which would reduce carbon emissions by improving carbon utilization efficiency. The number and complexity of all these small innovations and changes by individuals in their individual situations can’t be directed by government, but will respond to price signals.

    For example, I returned a new expensive All-Clad crock pot after we turned it on and found out that the outside was very hot (energy inefficient) and the manufacture had probably saved a dollar or two on production cost on a $200 item by using inadequate insulation. This shoves an extra $.40 on every meal cooked (my cost, not All-Clad’s) and corresponding extra CO2 emissions. Higher carbon costs would increase that 40¢ and increase the number of people who would look at their design as being what is is — lousy design.

    1. Thanks, that’s an excellent example. And it drives home just how many decisions, big and small, should go into any response to climate concerns. Hence the attractiveness of pricing mechanisms that work their way through the whole economy.

  4. Very good point. Baring a dramatic political reversal by November, cap and trade will probably be off the table until 2013 at earliest so hopefully they will have time to get this right.

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