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The AP reported today that the Democrats in Congress are releasing details of their American Clean Energy and Security Act, also known as the Carbon Cap and Trade Bill. This bill, in theory, aims to put a price on Carbon Dioxide emissions that contribute to climate change, which will cost an estimated 20% of the global GDP according to the Stern Report.
The reason why this pricing of carbon is needed is because currently, pollution causing this environmental damage can occur for free. This pollution and its costs are not priced into the market. Putting a cap and trade (or carbon tax) in place would put a price on these emissions and allow us to meet emissions reduction goals by forcing companies to pay to pollute. A similar system has helped reduce sulfur dioxide emissions contributing to acid rain in half from 1980 to present.
The good news is that the US is finally jumping on board with a carbon pricing system. The bad news is that they are giving in to industry lobbyists to the point of negating much of the impact of the bill and potentially raising costs on consumers and/or expanding the national debt. A cap and trade system works by having a limited number of pollution permits that can be bought and sold on the free market to allow those who wish to pollute more than their share to buy permits from those who pollute less.
A key part of any cap and trade system is that these permits must be auctioned for two reasons. The first reason is that auction prices set a base value for the permits, actually putting a price on a certain amount of carbon emissions (which was the original point). This allows low carbon or carbon-free technologies to have an economic advantage over those that emit carbon dioxide and contribute to climate change and global warming. Each company would decide how many permits it needed and buy that many, and clean, efficient companies would not need to buy nearly as many, giving them a financial advantage.
The second reason is that any increase in the price of carbon emissions, which run much of our economy, will result in an increase in energy prices. This cap and trade system is being called a national energy tax. While it's truly only a national dirty energy tax, the idea isn't too far off. Auctioning off permits generates income for the Federal Government to provide a tax break to the average consumer to offset these higher energy costs. That was, in fact, the plan. President Barack Obama actually took some criticism for only wanting to direct 90% of auction proceeds to this tax cut, and diverting 10% into research and development into clean energy sources.
Now, however, we have seen the Democrats in Congress bend to the will of industry lobbyists and agree to give away 85% of the permits for the proposed cap and trade system. This is the same problem the the EU had when they introduced a cap and trade system where they had too many permits and gave most of them away, resulting in an expensive headache that didn't produce much in the way of reductions. The EU has learned their lesson and plans to begin auctioning permits in 2012.
Giving away these permits does not, as is claimed, fund improvements in energy infrastructure, it just removes the price on carbon that would provide an incentive to reduce emissions. It also removes funding for the tax cut that has been promised to offset higher energy costs, which shouldn't be a problem, because energy costs shouldn't go up, because we aren't actually putting a meaningful price on emissions. Except that if energy prices do go up in response to this "national energy tax", the Federal Government will not have money from the auction process to pay for a tax cut. Giving away the permits actually makes it more likely that the customer will ultimately end up paying more for their energy.
Another potential consequence of giving away permits is that it may actually cause a short term increase in emissions during the time that the Federal Government figures out a baseline emissions state to decide how many permits to give away. We are actually creating an incentive for companies to pollute more to claim that they need to be given more permits.
You do not create something very valuable by having a limited, but adequately large supply, and then giving most of it away for free. Yes, perhaps in the future, if there are few enough permits, they will become valuable on the free market, but then energy prices will go up and we will have no means of funding reimbursement for the average consumer without going into more debt.
The ultimate point of a cap and trade system is to put a price on carbon emissions. That price will be mostly set by the cost of acquiring permits to pollute. That cost will then be passed down to the consumer and should be offset with tax breaks. Giving away 85% of our permits drastically undercuts the cost of polluting and also reduces the revenue for a tax break to offset increases in energy costs, ultimately potentially costing the customers more. Please call your Congressperson to try to explain that this would be a terrible mistake.
Source: http://www.google.com/hostednews/ap/article/ALeqM5h5iS14YOIUrpdmPuNylwKcVpSnmAD986SQK80
The reason why this pricing of carbon is needed is because currently, pollution causing this environmental damage can occur for free. This pollution and its costs are not priced into the market. Putting a cap and trade (or carbon tax) in place would put a price on these emissions and allow us to meet emissions reduction goals by forcing companies to pay to pollute. A similar system has helped reduce sulfur dioxide emissions contributing to acid rain in half from 1980 to present.
The good news is that the US is finally jumping on board with a carbon pricing system. The bad news is that they are giving in to industry lobbyists to the point of negating much of the impact of the bill and potentially raising costs on consumers and/or expanding the national debt. A cap and trade system works by having a limited number of pollution permits that can be bought and sold on the free market to allow those who wish to pollute more than their share to buy permits from those who pollute less.
A key part of any cap and trade system is that these permits must be auctioned for two reasons. The first reason is that auction prices set a base value for the permits, actually putting a price on a certain amount of carbon emissions (which was the original point). This allows low carbon or carbon-free technologies to have an economic advantage over those that emit carbon dioxide and contribute to climate change and global warming. Each company would decide how many permits it needed and buy that many, and clean, efficient companies would not need to buy nearly as many, giving them a financial advantage.
The second reason is that any increase in the price of carbon emissions, which run much of our economy, will result in an increase in energy prices. This cap and trade system is being called a national energy tax. While it's truly only a national dirty energy tax, the idea isn't too far off. Auctioning off permits generates income for the Federal Government to provide a tax break to the average consumer to offset these higher energy costs. That was, in fact, the plan. President Barack Obama actually took some criticism for only wanting to direct 90% of auction proceeds to this tax cut, and diverting 10% into research and development into clean energy sources.
Now, however, we have seen the Democrats in Congress bend to the will of industry lobbyists and agree to give away 85% of the permits for the proposed cap and trade system. This is the same problem the the EU had when they introduced a cap and trade system where they had too many permits and gave most of them away, resulting in an expensive headache that didn't produce much in the way of reductions. The EU has learned their lesson and plans to begin auctioning permits in 2012.
Giving away these permits does not, as is claimed, fund improvements in energy infrastructure, it just removes the price on carbon that would provide an incentive to reduce emissions. It also removes funding for the tax cut that has been promised to offset higher energy costs, which shouldn't be a problem, because energy costs shouldn't go up, because we aren't actually putting a meaningful price on emissions. Except that if energy prices do go up in response to this "national energy tax", the Federal Government will not have money from the auction process to pay for a tax cut. Giving away the permits actually makes it more likely that the customer will ultimately end up paying more for their energy.
Another potential consequence of giving away permits is that it may actually cause a short term increase in emissions during the time that the Federal Government figures out a baseline emissions state to decide how many permits to give away. We are actually creating an incentive for companies to pollute more to claim that they need to be given more permits.
You do not create something very valuable by having a limited, but adequately large supply, and then giving most of it away for free. Yes, perhaps in the future, if there are few enough permits, they will become valuable on the free market, but then energy prices will go up and we will have no means of funding reimbursement for the average consumer without going into more debt.
The ultimate point of a cap and trade system is to put a price on carbon emissions. That price will be mostly set by the cost of acquiring permits to pollute. That cost will then be passed down to the consumer and should be offset with tax breaks. Giving away 85% of our permits drastically undercuts the cost of polluting and also reduces the revenue for a tax break to offset increases in energy costs, ultimately potentially costing the customers more. Please call your Congressperson to try to explain that this would be a terrible mistake.
Source: http://www.google.com/hostednews/ap/article/ALeqM5h5iS14YOIUrpdmPuNylwKcVpSnmAD986SQK80
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But I agree, ideally you'd like to be able to make polluters pay for their permits (and reap the tax income.)
This should encourage prices to become relevant (assuming a good baseline and a proper mechanism for judging offsets, which is assuming a lot) in the next 4 or 5 years. The point about losing permit revenue is still very valid and important, however, and is a point for concern.
The point that I didn't make very well in my original post and will clarify here is that if carbon gets a price (as is the goal), it will either get a price from the auction or from the market that arises out of the permit trading. In fact, the price will likely be a combination of these two factors. In an ideal bill, the majority of the price is determined by the auction, so that the government gets the revenue to refund to offset higher energy costs. In the bill that is being proposed, the majority of the price will be determined by the trading market.
Either way works for an emissions reduction standpoint, so long as there is a sufficiently high price created by a low enough supply of permits. The irony is that this system of giving away permits to avoid a national energy tax will either create a system that doesn't work or that is more expensive to the average consumer than an auction-heavy system.
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