legislation

What is Obama’s proposed price on carbon?

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, its 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. Its 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.

Don't treat the budget like a bill

There's been some amount of disgruntlement regarding President Barack Obama's proposed carbon cap-and-trade system, as laid out in the budget he just submitted to Congress. David really doesn't like the way the administration proposes to handle proceeds from the auction of emissions permits. Brad Plumer objects both to the "timid" emissions cuts baked into the plan as well as to the low estimate for the price of carbon under the proposed system. Meanwhile, Kevin Drum wonders why the revenue estimates are so low.

But Ezra explains it all to you: "this really seems a case where the administration is on the cutting edge of the political conversation, but the political conversation is lagging far behind the severity of the crisis."

Exactly. And the "political conversation" isn't just between Democrats and the GOP. Or between coastal Green State Dems and Midwestern Brown State Dems. Remember that Obama first had to negotiate the split between climate czar Carol Browner's support for cap-and-trade with economics adviser Larry Summers' and OMB head Peter Orzsag's support for a carbon tax. I'm not surprised that the budget stayed light on details.

What's most important are the set of basic assumptions the administration uses (and "assumption" is the right term since it's effectively Congress that designs the plan): an economy-wide carbon market. Check. Auctioning 100 percent of the permits (instead of giving some away to polluters). Check. Rebates for taxpayers. Check. Funding for renewable energy and efficiency. Check. Capping and then reducing emissions to well below 1990 levels by 2050? Check.

The fact is, it's just not wise for the administration to get too deep in the weeds on this. Ezra Klein has observed regarding health care that "the skeletal health plan outlined in [Obama]'s budget has been built to fit the work Congress is already doing on health care reform." Now I don't think you can say that there is quite the same "congressional consensus" on cap-and-trade that there is on health reform. But at least among House Democrats (and hopefully among Democratic Senators) there is an emerging consensus regarding the elements Obama has included.

On climate, how should progressives respond to the conservative strategy of 'obstruct and delay'

When I first read the E&E News PM story ($ub. req'd), "Boxer eyeing bold move to thwart GOP filibuster on emissions bill," I was skeptical of the strategy described:

The chairwoman of the Environment and Public Works Committee is considering a bold budget move aimed at passing global warming legislation in the Senate without having to deal with an expected Republican filibuster.

Sen. Barbara Boxer (D-Calif.) said that she is researching the use of the budget reconciliation process as an avenue for passing cap-and-trade legislation now considered a key agenda item for President Obama.

"We're certainly exploring it as a possibility," Boxer said of budget reconciliation, a bill that cannot be filibustered and therefore does not require meeting the 60-vote threshold that has consistently been a key hurdle to passage of global warming legislation.

After all, the climate bill will be among the consequential pieces of legislation ever considered by Congress given that failure to solve the climate problem will grievously harm the health and well-being the next 50 generations of Americans (see here). Shouldn't that issue be debated extensively?

But then I read William Kristol's Thusday op-ed, which argued Republicans need to "find reasons to obstruct and delay" (see here) Obama's agenda. I guess that's why they I call it the conservative movement stagnation.

Conservatives have no strategy for averting catastrophe. Indeed, they have chosen to tie the fate of their entire movement stagnation to humanity's self-destruction (see here). It is now taken for granted that one must get 60 votes for every piece of legislation because it is taken for granted that conservatives will filibuster anything Democrats tried to do, including trying to pass legislation aimed at preventing the unimaginable horror of 5.5° to 7°C warming and 850 ppm.

I still think Obama and his team must actively work to explain to the public the urgent need for action and the availability of myriad affordable solutions (see here). But I think Boxer's strategy may be worth considering. Here are more details:

Carbon policy = tax cut

A final note about cap-and-trade auction revenue in Obama's budget.

I know some folks (see Sean) object to the whole notion that climate policy should be viewed as a means of raising (and spending) revenue. And there are good policy reasons to fear the conflation.

Still, political reality being what it is, I can't help but think this is a stroke of genius. What you've got now is a tax cut for 95% of American workers, paid for by wealthy industries and individuals. It's flipped the "war on the poor" attack on cap-and-trade completely. Now blocking carbon legislation is a war on the poor.

"Mr. Inhofe, why do you oppose a tax cut that will help so many hard-hit Oklahoma families? Whose interests are you defending?"

Heh.

Van Hollen to introduce cap-and-dividend bill

Fans of carbon-pricing schemes that would return the vast majority of tax or carbon auction revenue to consumers think there’s increasing political momentum for their proposals in Congress these days. Proponents of cap-and-dividend — a carbon-pricing plan that would auction off pollution credits to industries and send roughly 90 percent of the resulting revenue to […]

Washington's cap-and-trade legislation gutted by Senate committee

So remember how I was all "your days are numbered, pollutey companies of Washington state! mwahaha" because the cap-and-trade bill "whizzed" through the House committee? Yeah, I might have spoken too soon, because not so much with the Senate version.

The Committee on Environment, Water, and Energy yesterday passed a version of the bill that makes the program voluntary, which kinda defeats the purpose, doesn't it? Still, hopeful enviros are quick to note that it's a "work in progress." Sigh.

Cap-and-trade rebates to taxpayers favor efficiency over equity

UPDATE: There are two important updates at the bottom of this post.

Another striking feature of the way cap-and-trade is treated in Obama's budget: rebates to taxpayers are administered through a payroll tax deduction. This is interesting stuff indeed.

The question of how to rebate auction revenue back to people (to offset the increased costs of energy under a cap) reveals a tension between equity and efficiency.

If the goal is equity, the payroll tax rebate is probably not the way to go. On one hand, it's far more progressive than an income tax rebate (about a third of U.S. workers pay no federal income tax at all). On the other hand, there's reason to believe it's less equitable than a simply writing an equal check to every citizen. That's what a recent report from the Center on Budget and Policy Priorities recommends. (Technically it recommends refundable tax credits, more or less the same thing).

CBPP says flat rebates would be more equitable than income or payroll tax cuts -- the latter would less regressive, but regressive nonetheless:

CBO found that if all the revenue from auctioning emissions allowances were used to reduce payroll tax rates, households in the bottom 60 percent of the distribution would get a smaller benefit from the tax cut, on average, than they would lose from higher energy prices. Those in the next 20 percent would come out even and the top 20 percent of the population would get a tax cut that exceeded their increase in energy costs. [my emphasis]

In addition, "seniors and others without earnings would receive no rebate" -- no pay, no payroll tax.

To solve the first problem, you could put a cap on payroll tax rebates, so higher income workers don't get a windfall. To solve the second problem, you could make seniors, the disabled, and other folks with no earnings eligible for a special tax credit. But if you're going that route, why not just use the same tax credit for everyone?

If your goal is efficiency, however, the payroll tax rebate is better. Efficiency here means emission reductions with the least macroeconomic impact. A cap-and-trade refunded through payroll taxes effectively raises one tax (an fossil energy tax) and lowers another. The idea is to get less of what you're taxing (fossil energy) and more of what you're taxing less (work). That's why Obama's people are calling it the "Making Work Pay" measure.

Still, the CBPP says it's not worth it:

The efficiency gains are largest -- although still quite small -- when the rebate comes exclusively in the form of a payroll tax cut. But that approach leaves millions of low-income and senior households out in the cold.

Guess efficiency beat equity in the Obama budget team. That would be Summers and Orszag at work. Yay economists!

UPDATES: Two important notes to add:

First, there is a cap on the payroll tax deduction: the tax credit offsets payroll taxes "up to the first $6,450 of earnings." So that does reduce the regressivity somewhat. Thanks to Kate for pointing this out.

Second, it might not be clear in the post that the tax credit's effect is to offset payroll taxes, but the credit itself is administered via the income tax. Those who pay payroll tax but no income tax will just receive an income tax credit -- a check. The payroll tax is the target but the income tax is the instrument. Why this is, I'll leave for people who know way more about the tax code than me.

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