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Posts Tagged ‘Climate Change’

Over at the National Journal’s Economy blog, John Maggs asks some budget experts for recommendations of how President Obama can bring the budget deficit down by 2016.

Here’s an excerpt from my contribution:

President Obama should combine his concern about climate change with his concern about the budget. …  President Obama should demand … that any climate change bill achieve significant deficit reduction. For example, he could refuse to sign any cap-and-trade bill unless it auctions a large fraction of the allowances and dedicates the resulting revenues to deficit reduction. … A reasonable approach could easily reduce deficits by $300 to $400 billion over the next ten years, including both the value of the allowances and lower interest payments.

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Next February, President Obama will unveil his 2011 budget. Over the past few days, the news media have begun to speculate about  some of the steps that he might propose in order to tame our growing deficits.

Over at Politico, Mike Allen and Jim Vandehei suggest that one policy casualty ought to be the effort to combat climate change:

The big question for Obama – and the country – is whether the sudden concern about deficits will be more rhetoric than reality once his first State of the Union address concludes.

All presidents promise deficit reduction – and almost always fall short. There is good reason to be skeptical of this White House, too, on its commitment.

For starters, the White House has not dropped plans for an aggressive global warming bill early next year that will be loaded with new spending on green technology and jobs – that would be paid for with tax increases. Democratic lobbyist Steve Elmendorf says the White House focus on deficit reduction could easily kill the cap-and-trade effort. “I think this means cap-and-trade has to go to the backburner,” he said.

This line of argument makes no sense to me. And its mere existence reinforces my concern that the politics of climate change are completely dysfunctional from a budget perspective. As I have noted before, the government could combat climate change in a way that would also combat our out-of-control deficits:

A carbon tax, for example, could raise revenue and reduce carbon emissions at the same time.

Alternatively, the government could auction off allowances under a cap-and-trade system and then designate some or all of the resulting revenues for deficit reduction.

Unfortunately, that is not the way our Congressional leaders are approaching this challenge. The House, for example, passed a climate change bill that would create allowances worth almost $1 trillion over ten years. The net reduction in the deficit? A paltry $9 billion since Congress would give most of the allowances away to industries with good lobbyists and would spend almost all of the rest.

Senate leaders, meanwhile, are touting their climate change bill as “not worsening the deficit” — a ridiculously low standard in this new era of trillion-dollar deficits.

My recommendation to the President is quite different from that in the article. If the President is committed to both climate change legislation and reducing the deficit, he should tell Congress to levy a carbon tax or designate a large fraction of the carbon allowances for deficit reduction.

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On Friday, the House of Representatives passed its climate change bill by a slim margin. The bill’s key feature is a cap-and-trade system for greenhouse gases. That system would set national emission limits and would require affected emitters to own permits (called allowances) to cover their emissions.

The number one thing you should know about this bill is that the allowances are worth big money: almost $1 trillion over the next decade, according to the Congressional Budget Office, and more in subsequent decades.

There are many good things the government could do with that kind of money. Perhaps reduce out-of-control deficits? Or pay for expanding health coverage? Or maybe, as many economists have suggested, reduce payroll taxes and corporate income taxes to offset the macroeconomic costs of limiting greenhouse gases?

Choosing among those options would be a worthy policy debate. Except for one thing: the House bill would give away most of the allowances for free. And it spends virtually all the revenue that comes from allowance auctions.

As a result, the budget hawks, health expanders, and pro-growth forces have only crumbs to bargain over. From a budgeteer’s perspective, the House bill is a disaster.

The following table illustrates how much revenue the bill would raise and compares it to the alternative of auctioning all the allowances:

Cap-and-trade revenues

(more…)

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