Wednesday, February 03, 2010

The Sorry State of Cap-and-Trade

As Donald Marron points out, "At a time of unsustainable deficits, deficit neutrality is a remarkably lame vision for climate policy."  He explains:
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.