The Dangerous Politics Of Cap And Trade

I mentioned earlier that I am less hopeful on getting meaningful carbon pricing legislation through Congress this year than getting health care reform. The main reason is that too many Americans experience the broken health care system directly for politicians to evade public anger over it. Climate change is simply more abstract, making it a tougher sell. And you can very easily turn the idea of capping emissions and selling carbon credits at auction to polluters into "an energy tax." This is from a letter from GOPers on the Senate Environment and Public Works Committee to their colleagues, and the rhetorical gambit is clear.

The President's 2010 Budget proposal contains a risky, ill defined new energy tax that has the potential to continue the economic recession for many years to come. We are writing this letter to alert you to this situation and ask that you join us in a budget resolution amendment to strike and such provision.

Specifically, the President's 2010 Budget proposal asks to collect $646 billion dollars in new "Climate Revenues" from the American people. The government will collect these new revenues through a cap and trade scheme in which " allowances" are sold to the highest bidder. The government won't tax consumers directly, but it will impose new costs on energy producers and users who will in turn pass those higher costs on to consumers, which will result in higher electricity bills, gasoline prices, grocery bills, and anything else made from conventional energy sources. In short, consumers will feel as if they are paying a new tax on energy.

The stated price tag for this new energy tax is $646 billion, yet recent news reports indicate that administration officials are privately admitting their program will actually generate between "two and three times" this amount of revenue, or between $1.3 trillion and $1.9 trillion. However, these numbers represent only the cost from 2012 through 2019. The budget summary describes the energy tax extending at least through 2050. At the 2012 through 2019 average annual rate, families and workers would face through 2050 between $6.3 trillion and $9.3 trillion in higher energy taxes.

Left unsaid is that the government would funnel most if not all of that tax to those same consumers in the form of the "Making Work Pay" tax credit. Really this is an effort to keep the oil industry in business - and the industry obviously believes it can work, as they divest from renewable energy and into biofuels, the production of which emits just as much carbon.

There are good signs as well - Lindsay Graham and John McCain have signed on to climate change legislation, but of course they would like nothing more than to eliminate the auction for carbon credits and give away polluting rights for free. That was the structure of the McCain-Lieberman (later Lieberman-Warner) cap and trade bill from last session. The hint toward using budget reconciliation clearly got McCain and Graham out of their chairs on this one. But a bad climate bill that ditches auctioning off pollution rights wouldn't be anything to cheer about. It would reward big business, plain and simple.



As Brad Plumer notes:

You see what happens if the permits are auctioned off and the revenue is divided among Americans equally. The overall impact is actually progressive, and lower-income households come out ahead—the extra amount they pay for dirty energy is more than offset by the rebate. But if the permits are given out to companies for free, it's only wealthier Americans who benefit—they're the ones running the companies making windfall profits, after all—while everyone else gets squeezed.

Given the option of another tax break for the wealthy or movement on other issues like investing in renewables and a hard standard for electricity generation... let's say it's a toss-up.