Cap and Trade Rules
Obama’s Greenhouse Gas Gamble

By John Broder
New York Times
February 27, 2009

In proposing mandatory caps on the greenhouse gases linked to
global warming and a system for auctioning permits to companies that emit them,
President Obama is taking on a huge political and economic challenge.

Business lobbies and many Republicans raised loud objections to the
cap-and-trade program Mr. Obama proposed as part of his budget this week, saying
the plan amounted to a gigantic and permanent tax on oil, electricity and
manufactured goods, a shock they said the country could not handle during economic distress.

Green groups and supportive members of Congress applauded, saying the proposal
was long overdue after eight years of inaction on climate change under President
George W. Bush. The costs, they said, would not begin to bite until at least 2012.

But the full costs and benefits of controlling greenhouse gas emissions remain
unknown, and perhaps unknowable. While there is rough consensus on the science
of global warming — with some notable and vocal objectors — there is less
agreement on the economics of the problem and very little on the policy
prescriptions to address it. And while a cap-and-trade approach bears
substantial cost, it also brings a benefit whose value is incalculable — a
steady decrease in emissions that scientists say will over time reduce the risk
of climate catastrophe.

Mr. Obama’s budget estimates $645 billion in cap-and-trade revenue over the next
10 years that will largely be paid by oil, electric power and heavy industries
that produce the majority of carbon dioxide and other gases blamed for the
warming of the planet. Many of these costs are expected to be passed on to consumers.

But Mr. Obama offered a sweetener in the form of tax relief for lower- and
middle-income families and billions of dollars in new spending for renewable
sources of power to cut emissions and ultimately, it is hoped, bring down the
cost of energy. He also plans to spend billions to weatherize homes to bring
down heating costs for the poor.

Congress has debated versions of a cap-and-trade regime for years but never
enacted one, in part because it would become so complex. The House is working on
such legislation now; Senate leaders promise action later this year. Mr. Obama
laid out only broad principles and targets, and his aides admit that revenue
estimates are only a rough guess and will depend on whatever emerges from
Congress. The White House projects the program to be in place starting in 2012.

Mr. Obama and his allies have a steep hill to climb. The recession-scarred
public rates global warming low on its list of priorities. Lobbyists for
business interests are lined up to weaken or kill any carbon regulation effort.
The president’s own party is divided over costs, and many Republicans hate the whole idea.

“Let’s just be honest and call it a carbon tax that will increase taxes on all
Americans who drive a car, who have a job, who turn on a light switch, pure and
simple,” said John A. Boehner of Ohio, the House Republican leader. “And if you
look at this whole budget plan, they use this carbon tax as a way to fund all of
their big government ideas.”

One utility executive, Thomas Williams of Duke Energy, predicted that
electricity rates would jump as much as 40 percent in states that are reliant on
coal for much of their power, like Indiana and Kentucky.

“It’s a coal state stickup,” he said. He based his figures on a first-year price
of $20 per ton of carbon dioxide emissions, a higher price than used by others
who have studied the Obama proposal.

Some economists support Mr. Obama’s approach to curbing emissions because they
say the other main alternative, a tax on polluting fuels, is politically unpopular.

But others warn that a cap-and-trade bill could produce great volatility in
permit prices and drive up energy costs.

“It’s much easier for me to think of scenarios where cap-and-trade goes crazy,
prices fluctuate like mad, and people get turned off,” said Martin Weitzman, a
Harvard economist. “That could end up discrediting the system for a decade or a generation.”

Supporters of the plan acknowledge that there will be price increases and an
uneven distribution of costs. But the White House allocates tens of billions of
dollars in tax relief and promises to return any excess revenues directly to the
public. Over time, officials contend, new technologies, like hybrid-electric
cars and more efficient power plants, will lower energy costs and greenhouse gas
emissions at the same time.

“We’re in a different world,” said Nathaniel Keohane, director of economic
policy at the Environmental Defense Fund, a supporter of strong and immediate
action on climate change. “The president understands, and the world is coming to
understand, that the costs of doing nothing are high to catastrophic.”

Dr. Keohane said numerous independent studies, as well as the United Nations
Intergovernmental Panel on Climate Control, estimate the cost of a
carbon-reduction program like that advocated by the president would be around 1
percent of gross domestic product per year by 2030, which he considers a
reasonable trade-off. Industry-financed studies, not surprisingly, found a higher cost.

Veronique Bugnion, managing director for research at Point Carbon, a consulting
firm on emissions trading, said the Obama plan would lead to gasoline price
increases of about 6 percent, or 12 cents a gallon at current American prices,
starting in 2012 and rising gradually until 2020. Average utility rates would
rise about 7 percent nationwide, she predicted, although with significant regional variations.

Mr. Obama’s plan dedicates $15 billion a year of revenue from the sale of
emissions permits to develop new sources of clean energy. But that leaves a
large pool of potential government income — by some estimates, as much as $200
billion a year by 2020. How that money would be spent is expected to lead to a
huge battle in Congress.

Paul Bledsoe, a spokesman at the National Commission on Energy Policy, a
bipartisan research organization, said policy makers should not forget that the
purpose of a cap-and-trade plan is to reduce carbon emissions and global
warming, not to finance pet projects or balance the federal budget.

“A cap-and-trade system is absolutely essential to spur private sector
innovation, but must be combined with clean energy technology funding to meet
the president’s ambitious emissions goals,” he said. “This funding should be a
top priority when dealing with revenue generated by the program.”


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