Budget Expects Revenue From Limits on Emissions

By Juliet Eilperin and Steven Mufson
Washington Post Staff Writers
Thursday, February 26, 2009

A mandatory cap on the nation's greenhouse gas emissions, which President Obama embraced on Tuesday as central to his domestic agenda, would be designed to generate badly needed revenue for the government while addressing arguably the world's most pressing environmental issue.

Today, the White House will unveil a budget that assumes there will be revenue from an emissions trading system by 2012.

Sources familiar with the document said it would direct $15 billion of that revenue to clean-energy projects, $60 billion to tax credits for lower- and middle-income working families, and additional money to offsetting higher energy costs for families, small businesses and communities.

In testimony to Congress in September, Peter Orszag -- then director of the Congressional Budget Office and now Obama's budget director -- estimated that revenue from a cap-and-trade bill that died on the Senate floor last year would have reached $112 billion by 2012 and would have kept rising afterward. By 2020, Orszag estimated, a cap-and-trade program might generate $50 billion to $300 billion a year.

But only hours after Obama's speech Tuesday to Congress, the cap-and-trade proposal triggered a heated exchange among senators on a key committee, underscoring that efforts to come up with a system that limits emissions, puts a price on carbon and allows industries to trade pollution allowances will be a difficult sell on Capitol Hill, especially in the current economic crisis.

A federal cap-and-trade program, which many scientific and policy experts see as key to curbing dangerous levels of global warming, would create a new commodity -- in the form of the allowances permitting industries to discharge specified amounts of carbon dioxide into the atmosphere -- and a market for that commodity that would be worth tens or perhaps hundreds of billions of dollars, along with a complex new regulatory system.

The political battle on the Hill is largely divided along regional, rather than party, lines: Although lawmakers from coastal states see a carbon cap as a critical goal whose public and long-term economic benefits would outweigh its costs, most Republicans and some Democrats from the middle of the country fear that it would hurt their states' economies, dependent as they are on fossil fuels and manufacturing.

At a Senate Environment and Public Works Committee hearing on climate science yesterday, Sen. Christopher S. Bond (R-Mo.) called any cap-and-trade system "a huge unfair tax" that "would devastate the Midwest." Sen. John Barrasso (R-Wyo.) referred to it as "a trillion-dollar climate bailout."

But the panel's chairman, Sen. Barbara Boxer (D-Calif.), countered that a cap-and-trade system "isn't a bailout. It's revenues coming into the government."

"We think it will be a boon for our economy," she added. "To say the people in this room don't care about jobs -- that's ludicrous."

The extent to which states rely on coal-fired utilities, which produce about 40 percent of the nation's greenhouse gas emissions, helps influence how their elected officials view the prospect of curbs on carbon. In Indiana, 94 percent of power comes from coal-fired plants, while in Florida -- which relies more on nuclear plants that do not emit greenhouse gases -- 30 percent of electricity comes from coal. In California and Rhode Island, 1 percent of electricity comes from coal; in Vermont, none.

Most analysts predict that over time, placing a price on carbon will spur technological innovation and ease American dependence on foreign oil, while probably driving up energy prices in the short term.

Although so far the mechanics of a cap-and-trade system have been debated mostly by business executives and a small but growing group of policy experts, the implications could be far-reaching. It would create a new commodity and a market to trade it worth tens of billions of dollars. It would create property rights where none exist today.

"Emission allowances could be the greatest creation of property rights since the 19th-century settlement of the West," Dallas Burtraw, a senior fellow at Resources for the Future, said in a speech last week at Georgetown University.

Carl Pope, the executive director of the advocacy group Sierra Club, said he has been surprised at the extent to which Obama has made green energy a priority and has based his economic plan on the assumption that this sector will drive the nation's financial recovery. "Obama's talking about this as the economic equivalent of war," Pope said in an interview. "His administration sees that the green economy is the only train leaving the station, and they are eager to hitch onto it to pull us out of this crisis."

The cost of carbon emissions, and hence the revenue the government would receive from auctioning carbon allowances or permits, remains highly uncertain. In Europe, which has a cap-and-trade system, the price of carbon has fluctuated between about 10 and 30 euros (currently $13 to $38) a ton. With world economies in recession, European prices have slumped.

U.S. experts have varying estimates for what the allowances might cost, all based on unknowable factors, such as whether the cost of solar and wind power will fall or whether industry will come up with an economic way to capture and store carbon dioxide emissions. Such advances might make it cheaper to cut emissions than to buy allowances.

John W. Rowe, the chief executive of Exelon, the nation's biggest nuclear power producer, said one consultant estimated that carbon allowances would cost $50 a ton. "Personally, I believe they will be closer to $70 or $100 a ton," he said.

Senate Energy and Natural Resources Committee Chairman Jeff Bingaman (D-N.M.) favors a ceiling on the price of carbon allowances, but his ceiling is well below what most energy experts think will be needed to generate the investment and innovation that would achieve big reductions in emissions. Sen. Arlen Specter (R-Pa.), who co-sponsored Bingaman's bill and remains a key swing vote in the Senate, said at yesterday's climate hearing that he sees global warming as "a central issue" but could not support a bill that was based on "speculative" technological advances.

View all comments that have been posted about this article.

© 2009 The Washington Post Company