Earth Equity News

If Sticks Don't Work, Try Carrots. By Ken Johnson, Grist, March 21, 2009. "For an $80 billion program, President Barack Obama's cap-and-trade proposal is very short on specifics. His budget plan [PDF, 142 pp] provides only the briefest policy rationale for cap-and-trade, describing it as 'a policy approach that dramatically reduced acid rain at much lower costs than the traditional government regulations and mandates of the past.' The acid-rain program's regulatory costs were indeed low, partly because emission allowances were freely allocated to industry. But Obama's plan calls for 100 percent auctioning of allowances, which erases the perceived cost advantage and puts cap-and-trade on par with carbon taxes in terms of political viability. To ameliorate cost impacts, the plan would allocate most (80 percent) of the auction proceeds to a permanent $800 Making Work Pay tax cut for working families; but with cap-and-trade nothing is ever 'permanent.' Carbon trading prices in Europe have dropped from over $30 to $10 per ton CO2 over the last year, and in the U.S. northeastern states allowances are currently selling at a meager $3 per ton. Obama's plan is betting on $20 per ton, but linking the nation's tax system to an erratic revenue source would be imprudent. The obvious, but unanswered, question is why a 100-percent auction would be preferable to a fixed-price sale of allowances, i.e. a carbon tax, which could simply be set at $20 per ton. There would be no price volatility... Irrespective of whether carbon pricing revenue comes from an auction or from a fixed-price sale of allowances, the allocation of the revenue to a Making Work Pay tax cut would be problematic because consumers would not be equitably compensated for high energy costs... A simpler and more direct way to mitigate energy costs -- one that is not discussed or considered in Obama's plan -- would be to apply most of the carbon pricing revenue to subsidize energy prices... In essence, the subsidized-energy approach replaces the big 'stick' of a high tax with a big 'carrot' of high subsidies, which can be equally effective at incentivizing clean energy deployment. Carrots might succeed where sticks have so far failed to achieve political consensus on federal climate policy."