OBAMA WANTS TO MAKE CAP&TRADE WORK

Obama compromise on carbon could cut revenues
Timothy Gardner (w/Jeff Mason and Christian Wiessner), March 13, 2009 (Thomson Reuters)

SUMMARY
President Barack Obama indicated he will be flexible in setting the parameters of the U.S. cap&trade system he wants to be a part of climate change legislation passed this year by Congress.

In a cap&trade system, big emitters -- like coal-fired power plants, cement makers and oil refineries -- buy permits to release emissions through a government auction process. The Obama plan presently calls for 100% of the permits for U.S. emitters to be auctioned.

The administration’s February budget estimated revenues of $646 billion from 2012 to 2019 from the permit auction which would fund the planned $150 billion investment in New Energy and Energy Efficiency over 10 years and pay for tax credits and other benefits the federal government would provide taxpayers to offset short term increases in utility bills. (See also Investing in a Green Economy; Using Cap-and-Trade Auction Revenue to Help American Families and Spur Clean Energy Innovation)

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Estimated budget revenues are based on the assumption of an emissions auction price of $20 per ton.

The President suggested he might compromise and, in the initial stages of the cap&trade process, allot free-of-charge some of the credits.

This would, however, reduce the revenues that flow to the federal treasury from the system, make the transition to an emissions-constrained economy more expensive and reduce the money available for tax cuts and other benefits that would offset potential increases in utility bills.

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The compromise might be necessary to get the program started by making it more easily affordable for big industrial emitters in 2012.

An educated guess puts the percent of credits auctioned and the percent sold in 2012 at 50-50 with a rapid increase in auctioned credits as the system takes hold.

Competing climate change bills can be contrasted by the percent of permits they propose to auction. (click to enlarge)

COMMENTARY
- This flexibility, though typical of the President’s approach to political problem solving, will likely be seen as going back on his campaign promise to auction 100% of the credits.
- Senator John McCain (R-Ariz), Obama’s opponent in the 2008 presidential race, favored a cap&trade system but said it would initially require some free but mostly auctioned credits.
- A 100% permit auction puts a bigger price burden on companies that inevitably generate emissions as part of their business.
- By going back on his campaign pledge, the President puts himself in a more politically vulnerable position but allows some leeway to business that makes the innovative cap&trade concept more politcally possible in a difficult economy.
- Moving his position toward his Republican opponent’s could be a compromise that moves the federal government closer to an urgently needed climate change bill and an emissions-reduction program. The move might be the basis for compromise with Senators form the Midwest and Southeast who would otherwise use the power of the filibuster to block passage of the bill.
- Revenues raised from the auctioning of permits, besides funding benefits to offset utility bill increases, would also go to the building of a New Energy and Energy Efficiency infrastructure. That would create competition in the electricity marketplace by increasing supply and reducing demand, both of which would tend to drive consumer utility bills down. It would also generate jobs that would spur economic growth and potentially, over time, more than replace revenues lost from a reduced auction scheme.

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- Map showing revenue benefits from cap&trade with 100% credit auction.
- In an emissions-constrained world threatened by global climate change, emissions could easily auction for greater than $20 per ton, increasing revenues despite the giving away of a portion. The auction price, however, is linked to economic factors and volatile energy prices so it could also be lower than $20 per ton.
- Climate change legislation that institutes a cap&trade system is 1 of the 3 parts in the Obama plan for a New Energy economy. The other 2 parts are (1) legislation funding and facilitating a national, high-voltage transmission system giving priority access to New Energy and (2) an energy bill with incentives for New Energy as well as a national Renewable Electricity Standard (RES) requiring the U.S. to obtain 10% of its power from New energy sources by 2012 and 25% by 2025 and an Energy Efficiency National Standard (EENS) setting a single energy use standard for the country.

From NationalSierraClub via YouTube

QUOTES
- President Obama: "If it's so onerous that people can't meet it, then it defeats the purpose and politically we can't get it done anyway, so we're going to have to find a structure that arrives at that right balance…"
- Divya Reddy, energy analyst, Eurasia Group: "I think that [$646 billion revenues figure] will have to be reduced…It's based on the premise that 100 percent of these would be auctioned…[which is] largely unrealistic…"
- Peter Fusaro, chairman expert, Global Change Associates, on the need to compromise with Senators from the big coal consuming states in the Midwest and Southeast: "Big coal is very strong and there's going to be some kind of accommodation…[but] he can't give too many [credits] away or he's got a revenue hole in 2012…"
- President Obama: "If you're giving away carbon permits for free, then basically you're not really pricing the thing and it doesn't work, or people can game the system in so many ways that it's not creating the incentive structures we're looking for…"