National Journal reports that Obama is preparing to appoint Peter Orszag, current director of the Congressional Budget Office, as head of his Office of Management and Budget (the White House equivalent of the CBO). OMB chief is an important Cabinet-level position that will oversee some 500 employees that monitor and assess the performance and spending of federal agencies.

Orszag is widely respected in both parties as an objective analyst. Under his watch the CBO has done important work on questions of climate and energy (among other things), some of which Orszag covered on the blog he started as OMB chief.

The two most significant contributions of the CBO to the climate debate were summarized by Orszag in an op-ed in the Washington Post earlier this year. Both are about minimizing costs while achieving the ambitious GHG reduction targets set by lawmakers. First, he argued that entities covered under cap-and-trade need year-to-year flexibility, though he remained relatively agnostic on the means (price floors or ceilings, banking and borrowing, etc.).

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The second and more significant argument is that auctioning 100 percent of the permits under a cap-and-trade program is macroeconomically preferable.

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By contrast, granting allowances free to emitters would not be well suited to reducing either the macroeconomic costs or the distributional effects of a cap-and-trade program. Businesses would raise energy prices for their customers regardless of whether the allowances were auctioned or given away. Indeed, providing free permits to energy producers and energy-intensive firms would be equivalent to auctioning the permits and simply giving the proceeds to the firms. The result would be a lost opportunity to use the money to offset the costs of emissions reductions as well as the potential creation of regressive "windfall profits" for the relatively high-income shareholders of those companies.

While Orszag would have no direct role in designing a cap-and-trade program as head of the OMB, his analysis of the cost issues will surely influence the Obama administration’s thinking on this crucial issue.