Mr. Obama's press secretary kind of understands it:

Q The budget foresees $645 billion over 10 years from cap and trade. Can you tell me who pays that?

MR. GIBBS: I understand the -- as I understand the notion of cap and trade, you would create a market for renewable energy through a cap and trade system that sets a level of pollution that, if somebody exceeds that level of pollution, they would pay. As the cap slowly ratchets down, I think the -- probably the best example of something like this -- maybe not totally analogous, so bear with me -- but in the late '80s to deal with acid rain we set a level, and if companies exceeded that level -- but understand what --

Q Companies initially pay, but then what happens? Are those costs not, in many cases, transferred to the consumers or the utility consumers?

MR. GIBBS: Well, here's what we hope happens: Businesses become more efficient because -- building on Chip's question about job creation and the free enterprise system -- companies understand there's a value now to that. Therefore, money is used and garnered through this that increases research, develops greater efficiencies, and ultimately makes it more valuable for someone to reduce their pollution out-take than it does to pay for that pollution being emitted. When that happens, we create jobs; we put people back to work; we provide a market and an incentive for alternative energy and for renewable fuels; and that over time, while that cap goes down, businesses find the most efficient way to make smart economic decisions.

What you mentioned --

Q Do consumers along the way pay for something?

MR. GIBBS: What you mentioned is there is likely to be -- and I think Peter talked about this -- there could be instances where higher electricity costs are passed on, which is why the budget that you talked about equates, or connects a Making Work Pay tax credit -- or I'm sorry, tax cut -- with revenue that's received through that cap and trade program. So that if higher electricity costs are passed on, that consumers have money to pay for it. Leftover money in a cap and trade system that isn't used for increased research and efficiency would also be passed on.

So...is this the first necessary step towards reducing the effects of global warming, and an economic stimulus (as Mr. Gibbs hopes)or...

is it a regressive tax nightmare?


Obama's Energy Tax
Friday, February 27th 2009

The 2010 Obama budget reveals the major tax hike that Pelosi, Reid, and Obama are counting on to fund the outrageous bailout and stimulus spending that is propelling federal spending to record levels-27.7 percent of GDP in 2009, an all-time record other than the four peak years of World War II.

The tax hike is a broad-based energy tax that will wallop every American who fills a gas tank, pays an electric bill, or buys any product that has to be grown, shipped, or manufactured.

The mechanism is cap-and-trade, which is like a tax on coal, oil, and natural gas but instead of being set at a specific amount, the total level of use is capped and companies are forced to pay the government for emissions permits-which Wall Street wizards at companies like AIG and Goldman Sachs can in turn trade on sophisticated exchanges and derivative markets.

White House Budget Director Peter Orzcag admitted that decreasing carbon emissions imposes costs on the economy, and "much of those costs will be passed along to consumers in the form of higher prices for energy and energy-intensive goods."

Page 21 of the Obama budget proposal highlights his cap-and-trade proposal:

After enactment of the Budget, the Administration will work expeditiously with key stakeholders and the Congress to develop an economy-wide emissions reduction program to reduce greenhouse gas emissions approximately 14 percent below 2005 levels by 2020, and approximately 83 percent below 2005 levels by 2050.

The economic impact of such a policy would be devastating. Even using the Obama administration's own numbers, it would amount to a tax hike of $645 billion over the first 8 years, about $80 billion per year. But as the cap becomes more and more strict over time, those costs would skyrocket into the trillions of dollars.

Obama's proposed 83 percent reduction below 2005 levels by 2050 dwarfs the proposal from last year's Lieberman-Warner bill, which included a 63 percent reduction.

While we don't have numbers yet on the new proposal, the cost of last year's bill is instructive. A study conducted by SAIC (the same modeling firm the Energy Department uses for its own projections) for the American Council on Capital Formation, found that electricity prices would be expected to increase under anywhere between 101 percent and 129 percent by the year 2030. Prices at the pump would jump 77 percent to 145 percent-bringing not just $4 gasoline, but very possibly $8 gasoline or higher.

The estimated impact on disposable household income due to rising energy prices would then reach anywhere between $4,022 and $6,752. And because an energy tax is regressive, it will fall heaviest on poor and lower middle class folks who spend more of their income on energy.

The new version of the plan in the Obama budget is much more aggressive, and reducing emissions another 20 percent will be dramatically more costly-possibly as much as double the cost since the additional cuts will come in the most difficult and expensive areas, like transportation and agriculture.

While the lost purchasing power for a typical household will decline by many thousands of dollars, the administration promises the plan will be "offset" by the $400 per worker rebate checks that were passed as part of the stimulus bill. Paying thousands and getting back hundreds is a bad deal for American families.

This is not a side-effect of his plan--it's the intended goal, which was clear when Obama said in his address to Congress that he wants to give so-called renewable energies a market advantage, which can only be done by imposing a tax that dramatically increases the cost of natural gas, oil, and coal.

This policy would destroy the only bright spot in the current economic environment, low energy prices, and cause severe economic pain. It should not even be contemplated if we are serious about addressing the country's economic crisis.

http://www.americansforprosperity.org/0 ... energy-tax

Now only the wealthy will be able to pollute!

But don't you see?

Obama is turning pollution into money!


Wine is for amateurs.

you've got a point, let's leave everything just as it is and expect life to get better.

I think it is a shame for all the people who did the environmental thing. That conserved power, paid more for efficient products, and tried to reduce on waste as much as they could in their lives.

All they are rewarded with are higher electric rates, since companies are not pulling in as much money, and everything they buy is more expensive, because it costs more to produce them.

That was a really good article. I'm deeply concerned about all the shell games that could potentially be played under a cap and trade scheme.

If you don't want entities to emit a pollutant, then just restrict the damn pollutant.

Wait just a darn minute. Are you guys suggesting that when a business is taxed it passes the cost of that tax on to consumers?

You know that article is filled with some facts alongside quite a bit of speculation and a smidgen of misinformation. I'm just curious about what people around here know about cap and trade. Why do you think that a cap and trade plan was proposed instead of a plain carbon tax or a mandated deadline for the reduction of carbon emissions?

The first is obvious, calling it cap and trade is a lot more palatable than calling it a tax, but let's face it, it's a tax. It's an appeasement to big business that allows them to invest the cap money internally to their own spposed "green technology" companies. It's a way to buy off big business. Every cent of this will be passed off to the consumer.

The second is pretty straight forward. A straight cap penalizes production rather than consumption. There's no reason the US should get their production penalized for goods being consumed in Europe. The other big downside is that it could result in manufacturing brown outs due to companies hitting their carbon emissions cap.

Its my understanding that the European cap and trade scheme has not performed to expectations. What of that scheme have we adopted and what have we changed or omitted?

I'm not sure about this. I'm wary of the regressive nature of higher energy costs. I would be very supportive if part of the money gained from cap and trade goes to subsidizing green energy, so that it is more affordable and can compete with coal and gas. As long as there is competition and consumers aren't forced to use "dirty" energy, as in they have options to use green, I think this plan could work. For one, dirty energy suppliers would have to find ways to clean up to save costs, and consumers wouldn't be crippled by a unilateral price increase in an uncompetitive environment.

What happens when the revenues of "dirty" energy companies slip below those companies' fixed costs because the market shifted towards subsidized green power?

I get a significantly higher paying job due to artificially increased demand and a grossly insufficient labor pool in green technology?

I'm down.

I was hoping for more replies in this thread.

Phase I of the European scheme has had mixed results although, in my opinion, it has been a success on balance. The biggest problem was that way too many allowances were granted, which essentially crashed the market. But most countries hit their targets, and they are beginning Phase II, which is linked to the Kyoto Treaty.

Energy is a topic that interests me a lot, and I'd like some opinions from other people. Cap and Trade is not a tax. It is a market-based incentive system. In the short term, there will be higher electricity costs which will be offset by rebates gained by selling allowances. But it will result in significantly decreased electricity costs on the back end because of increased efficiency. Energy generation and distribution in the US is a mess. Our current system is massively subsidized, terribly inefficient and in disrepair. We need an incentive to increase efficiency, even without the introduction of renewable sources. Increases in efficiency would result in concomitant decreases in greenhouse gases along with decreases in the cost of electricity. Who doesn't think that we pay way too much right now? In the very near future the Chinese will be well beyond us in efficiency, cost of production and green technology. Do people really not care about letting Europe and Asia surpass us in energy efficiency and new technology? It feels unAmerican.

I wasn't expecting anyone but you to answer my question. It seems that setting allowances would be rather difficult, and would be at best an educated guess. It certainly is admirable that this scheme has a carrot as well as a stick, and may be the only real way to deal with this issue. I don't know.

It certainly is easier for China to set up hydro-electric dams or solar projects when they can choose not to compensate those displaced.

Setting a carbon tax is virtually impossible because it would be very difficult to tally up all the external costs. Setting allowances for cap and trade is a bit easier because we already have a lot of experience with sulfur dioxide allowance trading. You might find this paper interesting:

http://mek1966.googlepages.com/stavins.pdf

Believe it or not, their economists are now telling them that their current command economic system is hindering their ability to recover from the financial crisis.

SLH, I apologize for not replying earlier, I just never saw your direct post.

I think SS reinforced my concerns about such a trading system in particular, regarding its difficulty to define, and I just fear a ripe environment for abuse in a realm that's tough to define.

Another thing that I keep in mind is that any regulation of a certain object (in this case, emissions) will have a regressive effect on the pricing of products made involving that object, as prices are raised on the consumer. Now, this could be mitigated somewhat if the funding for dealing with these externalities was raised separately from the regulation itself. Revenue could be raised in a proportional (my preference) or progressive (others' preference) manner. It could also be structured so that it has far less revenue volatility (i.e., if people buy less, there will be less tax to collect).

Finally, although I don't necessarily subscribe to this, if the problem is really as urgent as advertised, then I've never seen the point of allowing a pollutant to continue to be emitted to some level.

I've thought about this a lot and looked at a lot of data. I think that the problem is urgent, and we're already very late to the game, but solutions aren't necessarily easy to come by. Environmental groups would love to see a command decision to restrict greenhouse emissions, but this would probably take far longer to implement than a market-based solution. It would require an extensive regulatory infrastructure that includes an enforcement arm and would take years to assemble. Then, when emissions targets are met, this entire infrastructure would have to melt away instantaneously. No one supports either the cost or the tinkering such a system would require.

This leaves us with market-based solutions, either a price instrument (a tax) or a quantity instrument (cap and trade). There are still supporters of a carbon tax, but when the practical realities are addressed, it is a very difficult instrument to define. How do we determine the cost of all the negative externalities that would have to be factored into the cost per ton of carbon emitted? It would also hit hardest those emitters that will have the most difficulty reducing emissions. What cap and trade does is spread the cost of reducing emissions among all industries that are emitters, and provide benefits to both those who are heavy emitters and those who are minor emitters. We also have a lot of experience with cap and trade as a mechanism to control sulphur dioxide emissions, and we can call upon the example of the EU's experience with it. In conjunction the pricing scheme for electricity consumption should also be modified in order to increase efficiency, reduce price volatility and save consumers money. What sort of abuses do you anticipate that haven't already been seen and addressed in the previous cap and trade schemes?

How do you come to this conclusion? It seems to me that any emission regulation is going to have to have a method of recording the amount polluted, as well as a method of collecting funds for those who go over the allowable amount. Now, from here you could just simply collect the funds as is, or you have to build a additional mechanism in order to disperse those funds as necessary.

I'm not certain what you're asking, but I'll do my best to mount some sort of logical response. I can write extensively about the pros and cons of each method of carbon emission control, but I'll try to hit some of the salient points. The command and control method, which you are advocating, is simple to mandate, but almost impossible to implement. Every region of the country has a different mix of emission generation. It would be up to the federal government to either mandate one standard which would financially and practically impact each section of the country differently or set up a regulatory code so complex that virtually no one would be able to conform to it. Only the regional industries have sufficient information to determine the most cost-effective means to reduce emissions, but under a command and control system, they have no responsibility or incentive to do so. Instead, they would benefit most by restricting emissions by restricting output thus driving up prices. Power companies have explicitly stated that they would do this and would prefer a market-based solution.

As I said earlier, there are a lot of people who still advocate a carbon tax. It has been used successfully in Europe and Canada. But I don't think that there is political will to enact a Pigovian tax in the US, and CBO estimates of what such a tax would look like are fiercely regressive. There is also the problem of tax avoidance by reducing output in order to reduce emissions thus driving up prices despite tax reductions due to emissions decreases. Still, it could be implemented in conjunction with required performance standards.

If anything at all is going to be done, it will be cap and trade. We have extensive experience with cap and trade for other pollutants, and we've already begun regional programs here in the US. We here in the northeastern United States are anxiously examining the progress of the Regional Greenhouse Gas Initiative. It could possibly be the template for a nationwide intiative. We'll see. If you want to know more about it, here's the website:

http://www.rggi.org/home.