Could Cap & Trade Fix the Deficit?


Photo via the Wall Street Journal

The future of climate policy is very much up in the air right now. With comprehensive energy reform evidently dead in Congress -- though Obama's press secretary Robert Gibbs says this isn't necessarily the case -- many are wondering how efforts to curb carbon nationwide can proceed from here. I've stated that it looks like it'll be years before we get another opportunity to pass legislation that prices carbon, and it looks like statistics superstar Nate Silver agrees with me. Interestingly, he says that the next time we see cap and trade come 'round, it will be to the tune of reducing the national deficit. How would that work?The truth is that in coming years, we're going to have to locate additional revenue streams to address the ballooning deficit. Since few politicians are actually willing to get serious about addressing it, and say, make major cuts to social programs or defense spending, we're going to have to get that revenue from somewhere.

And Nate Silver thinks that cap and trade could very well be the best candidate for doing the job -- it's less painful than strict tax increases, and it would generate a major revenue stream, up to $145 billion per year. Here's Sliver's reasoning:

my premise is that tax increases are inevitable: it's a question of who bears those taxes and how they bear them. And at some point Congress -- which is surely headed for some massive showdowns over the budget at some point in the next several years -- might conclude that cap-and-trade is a more acceptable way to raise revenues than an omnibus tax increase. In fact, cap-and-trade actually polls rather well ... other than increased taxes on the very wealthy, and some gimmicky stuff like sin taxes and windfall profits taxes that don't have all that much revenue-generating potential, it polls a lot better than other types of tax increases, and may be a more politically palatable compromise.
Note that in this scenario, permits would have to be auctioned to polluting companies, not given away like they are in the House bill. Silver also assumes that in the deficit-cutting version of cap and trade, citizens would assume the burden of raised energy costs, slight as they may be. In the House bill, a large amount of the revenue generated from cap and trade was to be redirected to the energy consumer in the form of tax rebates, to soften the blow of those raised energy costs. And other large chunks were to be funneled into clean energy development programs. I'm assuming Silver is discounting the possibility of this happening again, and instead having those funds redirected towards cutting the deficit.

It's an interesting idea, framing cap and trade as a deficit cutting measure -- and interesting that doing so would necessitate a climate bill having serious teeth right out of the gate, and charging polluters for their carbon emissions. The sizable amount of funding for clean energy R&D; and deployment generated under the current scheme would be the provision that I'd be worried about losing. However, a deficit-minded climate bill is indeed a curious prospect.

More on the Climate Bill
The 7 Things That Killed the Climate Bill
How Much Compromise Would Make the Climate Bill Worthless

Tags: Congress | Global Climate Change | Global Warming Solutions | United States

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