Carbon cap-and-trade proposals have carried staggering price tags, but check out the carbon whopper in President Barack Obama’s budget plan.
In the section entitled “Jumpstarting the Economy and Investing for the Future,” the President proposes an “auction” of initial carbon allowances. Sound market friendly? Not really! This is a new tax per ton of manmade carbon dioxide (CO2) imposed on current levels.
A tax pure and simple, the budget tables list the anticipated “climate revenues” at $646 billion. Senior White House staff later revised that estimate upward, to a range of $1.3 trillion to $1.7 trillion in the first eight years.
Texas stands in the crosshairs of this policy. The nation’s leading energy producer with an economy larger than Canada’s, Texas could pay seven times more carbon tax than most other states.
The President’s budget would impose the tax through an initial 100 percent auction of carbon allowances for baseline emissions of CO2. This forced purchase of federal permission for business-as-usual activity adds a massive upfront cost to a cap-and-trade scheme and increases the cost of compliance with future caps.
In contrast, the cap-and-trade systems in the Lieberman/Warner bill and the European Union’s Emission Trading System grant most of the initial baseline allowances of CO2.
According to the President’s budget: “Through 100 percent auction to ensure the biggest polluters do not enjoy windfall profits, this program will fund vital investments in clean energy …. The balance of the auction revenues will be returned to …. Especially vulnerable, families, communities, and businesses.”
The budget tables dedicate 20 percent of the revenues to clean energy technologies. The remaining 80 percent goes to the President’s “Making Work Pay” program for tax credits to low and middle-income individuals.
The President explained that these tax cuts will help defer what he characterized as the “skyrocketing energy prices” caused by carbon tax and cap. Yet his “Making Work Pay” tax cut would redistribute the carbon tax revenues on a per capita basis.
People living in cold climates and who rely on coal-based power would face higher costs. The “skyrocketing” electric rates, however, would likely exceed the planned tax cuts. Thus, the initial carbon tax creates an indirect power tax on all consumers, contradicting the President’s campaign promise to lower taxes on all but the wealthiest Americans.
Allocation of carbon allowances by forced purchase at a federal auction is not slightly but vastly more expensive. A major U.S. power company estimates that initial auction would increase electric rates four times more than allocation of allowances.
And this huge carbon cost would begin at the inception of the program, denying the time and money necessary to retrofit plants with control technology in advance of the lower caps. Without time to develop controls or to deploy carbon-free nuclear power, reducing generation is the likely alternative.
Don’t count on the appealing renewables. Wind and solar provided less than one percent of U.S. electric power last year. With no alternative, an initial carbon tax leads to energy rationing.
Texas is the CO2 state and would pay a disproportionate amount of this carbon tax. For a thumbnail estimate, take the annual volume of man-made CO2 attributed to Texas multiplied by $20 to $50 per ton of CO2, the predicted range in a federal auction. The EPA estimates that Texas currently emits about 664 million metric tons of CO2 per year.
In this range, Texas would pay a carbon tax between $13 billion and $33 billion. No other state approaches the CO2 volume from Texas. Second place California is well below Texas at 391 million metric tons. The average among all states is roughly 100 million metric tons. With a carbon tax, Texas is hit seven times harder.
When 87 percent of energy derives from fossil fuels, CO2 emission levels are proportional to economic activity. Texas fuels the country, provides 60 percent of the chemicals and feedstocks, has a robust manufacturing sector, the second largest state population, and long roads! This proposed carbon tax would transform Texas’ energy income into federal tax revenue to be redistributed across the country.
The economic stakes for Texas could not be higher. Texas must demand a wiser path forward.
Kathleen Hartnett White is Distinguished Senior Fellow in Residence and Director of the Center for Natural Resources at the Texas Public Policy Foundation, a non-profit, free-market research institute based in Austin. White is the former Chair of the Texas Commission on Environmental Quality.