Fiscal Policy and Cap and Trade

February 26th, 2009

Posted by: Roger Pielke, Jr.

I have long thought that for many politicians the most compelling reason for cap and trade legislation is not just an effort to reduce carbon dioxide emissions, but to tap a new source of revenue in an era where explicit tax increases are politically dangerous. The economic meltdown coupled with the large deficit spending, along with President Obama’s commitment to reduce the deficit make it more likely that cap and trade legislation will in fact be passed as a mechanism of revenue generation. Whether or not it will actually reduce emissions is a separate question. A story in today’s E&E Daily discusses this process, asking whether or not expected cap and trade revenues will appear in the Congressional budget resolution. Even though the resolution is non-binding, if the cap and trade revenue appears in it, then the commitment to cap and trade as a source of general government revenue will have been made. Here is an excerpt:

President Obama will submit a budget proposal to Congress today that urges it to plan for passage of a mandatory cap-and-trade program, raising questions about whether Democrats will push to include such revenue in the annual budget resolution.

Key Democrats and sources close to the administration confirmed Obama’s plan to submit a fiscal 2010 budget blueprint suggesting lawmakers make assumptions for new cap-and-trade revenue over the next five years as companies are forced to comply with the market-based system.

Obama administration officials have not provided exact details on the climate elements of the budget plan, though the president’s own speech Tuesday night to a joint session of Congress included a hint when he said his cap-and-trade plan would drive a $15-billion-a-year investment “to develop technologies like wind power and solar power, advanced biofuels, clean coal, and more efficient cars and trucks built right here in America.”

Government estimates from last year’s Senate climate debate suggested the permits from a cap-and-trade program could raise around $50 billion in the initial years of its operation and up to $300 billion a year by 2020.

On Capitol Hill, top Senate Democrats have been talking throughout the week about the climate funding expected in the Obama budget.

“I knew there was going to be an item in the budget that was revenues from cap and trade,” Senate Environment and Public Works Chairwoman Barbara Boxer (D-Calif.) said Tuesday night after Obama’s speech. “I have been very pleased about that for a few days”

“It’s in the president’s budget,” added Senate Budget Chairman Kent Conrad (D-N.D.). “We’re going to have to have a discussion about it. It’s clearly by all reports in the president’s budget.”

Conrad and House Budget Chairman John Spratt (D-S.C.) will be key decisionmakers when it comes to writing the nonbinding fiscal 2010 budget resolution. Asked if he had included the funding assumptions for cap-and-trade, Conrad replied, “I learned a long time ago not to buy a pig in the poke. I want to see the details. And I want to understand fully how it affects the people I represent before I sign off on it.”

Lawmakers would be making a major statement should they agree to include Obama’s request for funding assumptions on cap-and-trade legislation, an issue that will no doubt split members of Congress by both regional and party lines.

3 Responses to “Fiscal Policy and Cap and Trade”

  1. Maurice Garoutte Says:

    This morning president Obama made a televised speech previewing the upcoming budget bill. Several large spending promises were made that were to be paid for by raising taxes on the top 2 percent of tax payers. The math only works with some other source of revenue such as cap and trade.

    Do we know if the revenue generated by cap and trade is progressive like the income tax, or regressive like the sales tax? My first blush guess is that it will be regressive.

    This post works very will with

  2. 2
  3. David Says:

    Roger – this reinforces your view that cap and trade will be unworkable. With more emphasis on general revenue generation than sending the “correct” signal to the market, there are likely to be more loopholes granted to extract votes, in which case it becomes “cap and evade.” I have maintained that cap and trade will not become law this Congress but instead in 2011 because of the sheer scope and the size of the potential spoils. Expect the House to ram it through by the end of this year for the president to have something at the big international get-together; do not expect a law going into presidential mid-terms when incumbents will be afraid to run on having raised energy prices. If there is a law by the end of this Congress, it will be so watered down as to just generate some revenue with minimal behavior change.

  4. 3
  5. Roger Pielke, Jr. Says:

    -2- David, I like “cap and evade” but my favorite is “tax and charade” ;-)