Cap and Trade Rules
Cap-and-Trade in Context

By Tom Laskawy
March 1, 2009

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.

Will Midwestern Dem Senators balk? Maybe. But the rebate provisions and
potential for billions in R&D dollars to flow to the Midwest's "Saudi
Arabia of wind" will probably start to look pretty good. And if Sen.
Barbara Boxer, who chairs the Senate Environment Committee, follows
through with her thought of using the budget reconciliation process for
climate change legislation (which would avoid the threat of a filibuster)
it may not even matter what Republicans think.

And personally I like the taxpayer rebate provisions -- and I don't mind
Obama's name for it: the "Making Work Pay" measure. I suspect that giving
it an identity outside of its status as a "green" funding mechanism will
accrue to its benefit. Meanwhile, as Dave Roberts explains, the provision will:

offset payroll taxes, [while] 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.

The system "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)." If that sounds familiar, it's
because Carol Browner's mentor, Al Gore, has been hawking this idea for a
while now. He tied it to a carbon tax, but it works the same in a
cap-and-trade system.

Finally, regarding the science: this one is tricky. Having just said
goodbye to an administration that was barely willing to acknowledge global
warming and spent a lot of time undercutting the research behind it, it
may be too much to ask for Obama to incorporate cutting-edge science in
his budget. Yes, the Intergovernmental Panel on Climate Change's most
recent report -- the "Fourth Assessment" -- released in 2007 and
representing the benchmark for climate science, says that we need to get
emissions to 20 percent below 1990 levels by 2020 (to which NASA agrees).
And yes, those are steeper cuts that the budget includes. And yes, since
the release of this report, warming has already outstripped the IPCC's estimates.

But the budget is a frame to hang numbers on. It shouldn't be confused
with a legislative proposal. I don't think Congress will look at those
numbers as the outer limit of what the President will support. If Obama
had gotten too far out in front in his budget, he risked leaving the issue DOA.

So when all is said and done how much will the final cap-and-trade bill
resemble Obama's blueprint? That's entirely up to Reps. Henry Waxman and
Ed Markey who are writing cap-and-trade legislation as we speak (which I
suspect will become the "controlling" version, i.e. stricter than the
Senate version, more likely to include all the necessary provisions and
probably the version that the Senate will ultimately have to vote on).

With the sausage-making just getting underway, let's not start the hand-wringing, too.


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