This post makes a point that I already made last Monday, but it bears repeating—this time in the context of cap-and-trade.
Chaz Teplin gave some approximate numbers for how much Obama’s cap-and-trade plan would raise energy prices (based on a $14.30/MT carbon price):
Effect of the Obama carbon price
- Petroleum fuel: adds 15¢/gallon
- Electricity: adds 0.8¢/kWh (compare to 7-10¢/kWh residential rates)
- Natural gas: adds 8¢/therm (compare to 85¢/therm residential rates)
The conclusion: “... energy prices would increase by about 10 percent. It’s a start, but a very slow one.” But that’s not the whole story.
Suppose the revenue is used to subsidize clean energy. If renewable energy makes up about 10 percent of the market, then the above cost increases would be balanced by the following cost reductions:
Potential effect of the Obama carbon price on renewables (10% of market)
- Sustainable biofuels: subtracts $1.50/gallon
- Renewable electricity: subtracts 8¢/kWh
- Solar heat, CHP, etc.: subtracts 80¢/therm equivalent
The subsidies increase decarbonization incentives by an order of magnitude.
For this to work, auction revenue has to be used primarily to reduce the regulated industry’s carbon emissions. The Obama plan doesn’t do this. Only 20 percent of the auction revenue is slated for “clean energy technologies,” while 80 percent would be returned to taxpayers in the form of a Making Work Pay tax cut. The tax shift mitigates any (minor) demand reduction that might result from the carbon price, and reduces the potential renewables incentive by an order of magnitude. In effect, the dilution effect of the 80 percent tax shift is equivalent to reducing the carbon price by 80 percent, e.g., from $14.30/MT to $2.86/MT.
If we are serious about using cap-and-trade to reduce greenhouse gas emissions, then auction revenue should be used primarily for that purpose. Either way, the money would be feeding back into the economy, creating jobs and investment opportunities. But clean energy subsidies have greater long-term investment value than free handouts.
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Comments
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Gar Lipow Posted 5:56 am
05 Mar 2009
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shellius Posted 6:51 am
05 Mar 2009
I'm one of millions of people in that situation. I won't be able to afford energy in the winter and because I live in Minnesota, I could freeze to death. Cost of energy is no laughing matter when people live in the north.
Cap and trade is a terrible idea: people can't afford the rising energy costs already. We need a tax and dividend system. Stop calling it a cap -- it's a tax. the sooner people get used to the idea, the better! It's a tax. Tax the polluters, and give most of the revenue to the people. Some goes to the government. This is a modification of James Hansen's plan and it would work.
The cost of this can NOT be passed to the people. They can not absorb any more financial pain.
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Bikechess Posted 5:32 am
06 Mar 2009
Increases in energy prices are regressive. But, if you return the money to taxpayers in a way where everyone gets the same rebate, it becomes progressive.
We want to decouple government spending from auction or tax revenue. This way, we can adjust the carbon price or cap in order to achieve the desired emissions goals without worrying how it will affect the ability to fund government programs.
The government will be worse than market forces at choosing the cheapest way to reduce emissions. If the government chooses which technologies (or even energy sector) benefits directly from auction or tax revenue, then we are picking winners. As well as coupling the revenue to a particular program (see second point above).
-Chaz
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