Thursday, March 5, 2009

President Obama’s Unfortunate Cap & Trade Proposal

Last week President Obama announced his budget proposal. ( On page 21 of the 120-page budget summary, it announces the President’s plan to reduce greenhouse gas emissions through a “cap and trade” program:

After enactment of the Budget, the Administration will work expeditiously with key stakeholders and the 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 FY 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.

Since this program is in a budget bill, it appears that President Obama wants to make the climate debate more about how to raise and spend money than actually reducing GHGs. This is very unfortunate; hold on to your purse or wallet!

Using the phrase “biggest polluters” is also unfortunate. In fact, I think it is both inaccurate and counter-productive. Everyone emits greenhouse gas emissions…we all contribute to the problem when we turn on a light, heat our homes or drive our cars. It’s an “all of us polluters” problem, not just a “big polluter” problem. So, to use such a phase sends the wrong message and undermines the need for everyone to collectively take action. And, without this collective action there will be no solution.

There are several things I can say about the “100 percent auction” approach, but let me focus on one thought: the only thing a 100% auction assures is that all traditional energy sources will be made more expensive. It is also likely to be unfair and economically distorting. Rich entities or entities that can pass the costs along that need GHG credits will pay any price; but poor entities may not be able to afford the price and will be forced out of business regardless of their value to society. Such economic unfairness and distortion in the marketplace is unfortunate.

The proposal says an auction is needed so the biggest polluters “do not enjoy windfall profits.” This is government-speak for saying what you were doing yesterday had no value but now it does and we don’t want you to benefit from the new value so we (the government) will take it from you. This adds insult to injury. And, I find it ironic that at a time when the Federal government is pouring billions of dollars to bail out banks, they are worried about windfall profits of energy producers and users.

While a cap and trade approach may be an effective way of reducing GHG emissions in some situations…it is not effective for every situation. It doesn’t work for transportation and I am doubtful that it will result in reduced GHG emissions from established coal plants, the two largest sector sources of GHG emissions.

The President’s plan is silent on the role of the states. So, since it doesn’t say, “working with the states...,” I assume President Obama’s message is that the Federal government will impose the cap and trade, run the auction, collect the resulting money and then dole it out. But there are states, including Minnesota, that also have their eye on that money for themselves.

Similarly, I wonder whether states will have a role independent of the Federal government in reducing GHG emissions. There are five options for states. The simplest options are pre-emption (which I favor) or grandfathering. Another option is for the Federal government to delegate some controlling authority to certain states that meet a minimum set of conditions. A fourth option is to grandfather a more aggressive lead state (can you say California?) and then allow other states to adopt that state’s standard or accept the Federal standard. Finally, there could be “cooperative Federalism” where the Federal government and states jointly implement a set of standards. It is unclear which option the President wants.

There will be an interesting intergovernmental skirmish and unfortunately, pretty soon everyone will forget that the goal is to reduce GHG emissions.

Thus, in this single paragraph, President Obama is proposing to change the nation’s energy marketplace, affect every Americans’ finances, and reshape the Federal-state relationship. And, would do all this in a way that probably will not even reduce GHG emissions. Very unfortunate and disappointing.

1 comment:

  1. I see that you conclude that a cap and trade with auctions will "not even reduce GHG emissions." Thia is an interesting anti-Pigouvain position, not shared, I must say, by most economists. Which of the attached list of 'Pigouvian' economists would you disagree with and why? If you were going to tell Martin Feldstein, Gary Becker or Joe Stiglitz that they were all wet, what exactly would you say?

    Peter Ciborowski


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