$80b per year in carbon revenue to go to clean energy, tax payer rebates 1

President Obama recently announced a plan to cut the federal deficit in half by the end of his first term, in part by raising revenue through the auctioning of carbon permits under a cap-and-trade system. In one sense, there’s no new information here. Obama campaigned heavily on cap-and-trade and he’s always favored auctioned permits, so the plan is just a restatement of some prior campaign pledges. Right?

Sort of, but this is still a very big deal. The new budget has at least four big implications.

The first is purely political. By including carbon revenue in his budget projections, Obama is not only presenting cap-and-trade as a fait accompli, he’s also casting it as a matter of fiscal responsibility. Deficit reduction is the ultimate bipartisan fetish object, and with this announcement Obama has performed an effective flanking maneuver on opponents who are going to try to worry a climate bill to death over economic concerns. Don’t get me wrong: the political battle over cap-and-trade will be bruising. But the rhetorical ground on which it will be fought just tilted more heavily in the favor of environmentalists.

The second implication concerns policy design. Permit auctions are an important element of a well-designed cap-and-trade system, but also one easily traded away to buy off special interests. It now seems likely that some significant percentage of permits will be auctioned right from the start of the trading system. Obama is sticking firm in his support of a 100% auction, and while I’d be (very pleasantly) surprised if he actually gets this, it’s the right starting point for a negotiation.

The third implication concerns spending. Auctioned permits will raise a huge bundle of cash. The budget projects about $80 billion dollars per year in carbon revenue. Assuming that about 80% of U.S. carbon emissions fall under the cap, that works out to a price of $14 per ton, which is very much in line with what analysts have been predicting for 2012. Oddly, the budgeted revenue stays constant over time, but this likely just reflects the enormous uncertainty around both prices and the shape of future legislation.

There are no shortage of ideas for what to do with the money, and here also the budget places a stake in the ground. 20% of the funds are slated for “clean energy technologies” (think smart grid, clean energy generation, and energy efficiency) and 80% will be returned to taxpayers in the form of a Making Work Pay tax cut. At a high level, this strikes me as an excellent allocation of the funds, balancing investment in new infrastructure with protections for citizens who will be negatively affected by higher energy prices.

The fourth implication is international. It remains unlikely that the U.S. will have a climate bill passed in time for the negotiation of a Kyoto successor treaty in Copenhagen at the end of the year. Given that reality, though, anything the administration can do to demonstrate seriousness helps enormously to unstick the diplomatic process.

So that’s that. There’s still a tough hill to climb before a bill is signed into law, but the contours of the administration’s plans are becoming clear.

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