Obama's Carbon Cap-and-Trade Plan Can Boost Growth

Well-structured carbon emissions caps would foster clean-energy technology at scant cost to consumers. The program would even create jobs

President Barack Obama hits three nails on the head with his plan to cap carbon emissions: weaning us off fossil fuels, spurring a wave of investment and job creation, and putting cash in the pockets of Americans who most need it.

In his budget, Obama included a "cap-and-refund" proposal that puts a strict limit on pollution that causes global warming and uses a permit auction to make large companies pay for the right to pollute. The cap on emissions will increase the price of fossil-fuel-based energy to encourage efficiency and new technologies. To protect consumers from rising prices, Obama's plan refunds the revenue from the auctions directly to the American people through a tax credit.

The point of a carbon cap is to make energy efficiency and renewable energy sources more competitive by removing hidden subsidies for dirty energy such as coal. Pollution from fossil-fuel-based energy is known to impose important external costs, from health impacts today to climate change risks tomorrow. By raising the price of carbon emissions, a cap will create incentives for clean energy, efficiency, and conservation.

Sparing Consumer Electricity Costs

Leveling the playing field by forcing fossil-fuel prices to reflect their true cost will spur a wave of clean-energy investment: research and development in new technologies, new factories to produce solar panels and wind turbines, and energy-efficiency retrofits of commercial and residential real estate. That means jobs, and lots of them. While some businesses that rely on dirty energy will be hurt, many others will thrive in the clean-energy economy.

Most carbon cap plans are set up to fail because they reward energy companies with permit giveaways and fail to compensate consumers for increased electricity bills. One such proposal hit the Senate floor last year, only to collapse under the weight of too much spending and not enough protection for the middle class. Obama's cap-and-refund plan avoids these mistakes.

As stated clearly by Peter Orszag, President Obama's budget director, giving away the permits would be nothing more than "the largest corporate welfare program that has ever been enacted in the history of the United States." A cap is going to increase the relative cost of dirty energy whether permits are given away or auctioned because companies will have to use permits they could otherwise have sold in the market. Either way, in deregulated markets, energy companies will pass those costs to consumers. Giving away permits doesn't help consumers; it just transfers wealth to utility companies. The exception is in regulated energy markets, where consumers would have to count on utility regulators to protect their interests.

Add Nonworkers to the Refund Flow

Just as important, almost all of the revenue from the permit auction is returned to the American public, recycling revenue directly into the U.S. economy and protecting consumers. Although prices for energy and energy-intensive goods are likely to rise, the refund can make up and even exceed the additional expenses for most Americans. As an added bonus, since lower-income Americans tend to spend new disposable income quickly—and they benefit the most under a tax-and-refund plan—we can actually expect a jump in consumer spending.

The President's budget is only the very beginning of this process. There are ways to improve it and to involve more Americans.

Under the President's plan, the refunds are distributed by extending the Making Work Pay tax credit, which applies to 95% of working Americans. If all, or nearly all, of the revenue from an auction is directly refunded, most Americans will receive more from the refund than they pay in increased energy prices. Unfortunately, this tax credit would not reach nonworkers, including retirees, people on disability, and the unemployed. Because these populations are among the most vulnerable, the refund should take them into account. As the cap declines, the auction revenue will actually increase, and a plan should be made to distribute the additional funds directly to the American public.

A Cleaner, Healthier Economy

These are important issues, but they deal with how to implement what is a genuinely transformative policy for this country. Right away, the President's proposal will create new investment incentives and get cash into the pockets of working Americans. In the future, as we adjust to a new green economy, the cap will be lowered, generating even greater revenue that will be distributed to the U.S. public.

The results of America's fossil-fuel addiction are clear: We send billions overseas for foreign oil, muck up the environment with coal pollution, and stunt economic development. Breaking that addiction will cause withdrawal symptoms for some, but it is necessary to build a cleaner, healthier economy for all.

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