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.