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Going Once, Going Twice: Obama's Cap-and-Trade Flexibility
Thursday, 09 April 2009

The Obama administration is apparently backing away from the idea of selling 100% of the emissions permits that would be the backbone of the future cap-and-trade system.

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Dinosaurs aren’t fans (AP)

What’s the point? The overall burden on consumers will be the same whether the permits are sold or given away; backtracking on permit auctions would only benefit a small group of industries.

President Obama already signaled that selling each and every emissions permit—an approach favored by economists that would provide the $646 billion in new revenue foreseen in the president’s budget—might be a tough sell. Now, administration officials say flexibility on the auctions issue is part of the Congressional poker game, reports the WSJ:

“The road to success is 60 votes [in the Senate], and so we want to make sure that we’re able to address as many members’ needs as possible to try to get there,” Joseph Aldy, special assistant to the president for energy and the environment, said at an energy conference here Wednesday.

What needs might those be exactly?

If 100% of the emissions permits are sold out of the gate, the tab will be picked up by power companies and other big industrial emitters. If some of the permits are given away, the initial burden on those companies will be reduced, and might limit price hikes in those industries; but for the overall emissions-targets to work, prices would have to rise more in other parts of the economy to compensate.

Europe already saw what happened when it gave away emissions permits—utilities gobbled up more than 100 billion euros in windfall profits.

The pain for the consumer—i.e., the voter–will be the same whether the permits are sold or given away.

It’s worth remembering what Peter Orszag, now the White House budget director, said one year ago when he ran the Congressional Budget Office:

In regulated electricity industries, distributing the permits at no cost might mitigate or prevent price increases in those markets but only at the cost of requiring even larger price increases in other markets. Ultimately, consumers will, in one way or another, bear costs roughly equal to the value of the permits […] Giving away allowances would be significantly regressive, making higher-income households better off as a result of the cap-and-trade policy while making lower-income households worse off.

Obviously, clearing the 60-vote hurdle in the Senate will require plenty of horse-trading in coming months, to secure both Republican and Democratic support for a climate bill. Let us channel our inner populist for a second: Shouldn’t that back-and-forth center on ways to ease the burden for regular people?

 

 
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