This is a guest post by Chaz Teplin [ChazTeplin@gmail.com], who works at the National Renewable Energy Lab developing cheaper materials for efficient photovoltaics. His opinions are his own and do not represent the views of his employer.
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The new Obama budget is striking because a cap and trade program is specifically called out and, critically, actual numbers are offered for the revenue raised from the program.
For years environmentalists have argued over the tradeoffs between a carbon tax and cap-and-trade, but either approach, if well-implemented, forces energy users to pay a price for carbon emissions. The actual price is crucial. A high carbon price financially motivates companies and individuals to increase energy efficiency and switch to carbon-free energy sources. With a low carbon price, the incentive for change is small.
So what is the Obama carbon price?
Obama’s proposed budget anticipates about $80 billion in auction revenue in 2011 (Table S-6). Starting from this figure and some reasonable assumptions, it’s quite simple to get an approximate carbon price. (While we can hope for dramatically reduced emissions before the first year the plan takes affect, it seems unlikely.) The Obama plan explicitly calls for auctioning off 100 percent of the emissions permits, so we can get an approximate price of a permit by dividing the $80 billion auction revenue by current U.S. emissions.
With 2006 numbers for CO2 emissions, the Obama carbon price is $14.30 per metric ton of CO2. I don’t know about you, but I don’t buy my energy by the ton of CO2. Here is what $14.30 per ton would do to common energy costs*:
Effect of the Obama carbon price**
- Petroleum fuels: adds 15¢/gallon
- Electricity: adds 0.8¢/kWhr (compare to 7-10¢/kWhr residential rates)
- Natural gas: adds 8¢/therm (compare to 85¢/therm residential rates)
In other words, energy prices would increase by about 10 percent. It’s a start, but a very slow one.
For wind energy, the added cost to burn coal would be a small help because wind is already cost competitive. For solar, the increase in competing electricity prices would be irrelevant in comparison to existing federal subsidies. Considering the recent volatility in oil prices, I doubt many drivers would even notice the 15¢/gallon.
Of course, these numbers are just for 2011. But the Obama budget anticipates only small increases in auction revenue through 2020 and the stated goal is only to hit “14 percent below 2005 levels by 2020.” Assuming this target is achieved, the Obama carbon price would remain below $20/ton.
I doubt that such small carbon price signals will significantly impact energy choices. Perhaps the administration is relying on the recessionary economy and a smaller GDP to reduce emissions.
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* Using commonly available data on the emissions intensity of various fuels and electricity generation. (Calculations available in this spreadsheet [XLS].)
** These numbers will not be exact, but they should be as close as anything else in a projected budget.
John McCain’s troubles are the world’s troubles
Comments
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sindark Posted 6:22 am
02 Mar 2009
Once you start giving permits away, it will be very hard to stop.
a sibilant intake of breath
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Ken Ward Posted 11:16 pm
02 Mar 2009
Ken Ward
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Sam Weaver Posted 12:56 am
03 Mar 2009
thanks for the back-of-the-envelope look at the proposed carbon pricing in the Obama proposal. First, let me state that I am an advocate of a straight-up carbon tax-and-refund rather than cap-and-trade system. Second, let me emphasize that I understand that C&T is coming, regardless of whether it is a jobs guarantee program for lobbyists and lawyers. Third, I recognize it as a step in the right direction, and one that does not preclude a tax-and-refund approach.
But to your pricing numbers, I would expect that the C&T revenues would come only from stationary sources such as power plants and potentially concrete plants, etc. So wouldn't it be a more appropriate calculation to exclude transportation fuels and distributed building heating fuels from the calculation? Doing so would likely double the price on stationary emissions, adding about 1.5 cents/kWh to the cost of electricity, a more meaningful (but still small) bump to the most polluting sector of the economy.
Of course, this is why I favor a tax-and-refund - it hits all relevant emissions sectors, does not choose technology winners, and is harder to game.
But cap-and-trade is a disguised tax, a touch more palatable than a straight tax, even with refunds. The fiction (exposed by the EU experience among many) is that a cap is truly rigid, and that we will therefore meet our emissions targets under C&T with more certainty than with a tax. The truth is that the cap is no more rigid than the penalties associated with failing to meet the cap, so the de-facto carbon pricing is at the penalty rate or lower. Thus if the penalties are set too low, and emissions are too high, the penalties will have to be adjusted, just as a tax rate would have to be adjusted in the case of too many emissions.
Anyhow, thanks again for the first look at the changes that are coming!
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