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The Real Price of Obama’s Cap-and-Trade Plan

A carbon-emissions limit will raise energy prices unevenly.
March 4, 2009

President Obama’s budget numbers depend heavily on revenues from a proposed cap-and-trade program for reducing carbon dioxide emissions. Under the plan, these revenues will come at the cost of higher energy prices, with some states being affected far more than others.

The cap-and-trade program does not yet exist: it will need to be established in future legislation. But the inclusion of future revenues in the budget, and a promise to pursue necessary legislation, is the strongest commitment yet that the administration will follow through with one of Obama’s campaign promises and establish a cap-and-trade system for carbon dioxide emissions.

Under such a system, the government sets an annual cap on carbon dioxide emissions–the budget calls for a cap of 14 percent below 2005 emissions levels by 2020, and 83 percent below 2005 levels by 2050. The government then issues a set number of credits for the total emissions allowed under that cap. Under Obama’s plan, those credits won’t be given away, as they were in the initial version of a cap-and-trade system employed in Europe. Instead, the credits will be auctioned off, and that money will be the source of government revenue. Polluters will be required to buy enough credits at the initial auction to cover their carbon dioxide emissions, or acquire more by trading with others at a later stage. Alternatively, they can reduce their emissions by investing in more efficient technologies. Either way, these costs will result in higher energy prices.

The budget includes $78.7 billion in projected revenues from the cap-and-trade system in its first year, 2012, and $525.7 billion total by 2019. According to Point Carbon, an energy-market analysis firm based in Olso, Norway, these numbers are based on the assumption that credits for a ton of carbon dioxide will sell for $13.70 in 2012 and $16.50 by 2020. These estimates are in line with carbon credits issued in Europe, says Veronique Bugnion, a managing director at Point Carbon. The 2012 price for carbon dioxide emissions will increase gasoline prices by 6 percent compared to current prices, she says. Average electricity prices will increase by 6.8 percent–perhaps more. According to calculations by Gilbert Metcalf, an economist at Tufts University, the average electricity price increase would be 9.7 percent by 2012 and 11.7 percent by 2020.

What’s more, the impact of the cap-and-trade system will vary by state. Electricity prices will rise more in states that rely heavily on coal, such as North Dakota, than in states that rely on sources of electricity that produce little carbon dioxide. According to Bugnion, prices could increase by 19.2 percent in North Dakota by 2012 but only 2.6 percent in Washington State, which relies heavily on hydroelectric power, over the same period.

To offset some of these price increases, the budget includes provisions to use some of the auction revenue for tax relief. From 2012 to 2019, $15 billion a year from the carbon-emissions program will be used to pay for “vital investments in a clean energy future”–funding for clean energy technology. The remaining money from the auction is expected to be just enough to pay for a tax credit that is an extension of the “Making Work Pay” credit–a $400-a-person credit included in the recently passed stimulus bill.

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