Peter Barnes: How President Obama Can Spur Economic Growth and Fight Climate Change

Posted on Thursday, November 6th, 2008 at 3:46 pm by dpacheco

This is a very exciting time. We now have a President-elect who understands the urgent need for action to reinvigorate our economy, and who recognizes how it must be inextricably tied to fighting climate change.

Throughout his campaign, Barack Obama pledged to make the new energy economy a cornerstone of his presidency. His plan would create millions of new jobs in the burgeoning “green collar” sector, strengthen our national security by reducing our dependence on foreign oil, and reduce carbon emissions by 80% below 1990 levels by 2050.

From BarackObama.com:

Implement Cap and Trade Program to Reduce Greenhouse Gas Emissions. Barack Obama and Joe Biden support implementation of an economy‐wide cap‐and‐trade system to reduce carbon emissions by the amount scientists say is necessary: 80 percent below 1990 levels by 2050. This market mechanism has worked before and will give all American consumers and businesses the incentives to use their ingenuity to develop economically effective solutions to climate change. The Obama‐Biden cap‐and‐trade policy will require all pollution credits to be auctioned. A 100 percent auction ensures that all industries pay for every ton of emissions they release, rather than giving these valuable emission rights away to companies on the basis of their past pollution. A small portion of the receipts generated by auctioning allowances ($15 billion per year) will be used to support the development of clean energy, invest in energy efficiency improvements, and help develop the next generation of biofuels and clean energy vehicles – measures that will help the economy and help meet the emissions reduction targets. It will also be used to provide new funding to state and federal land and wildlife managers to restore habitat, create wildlife migration corridors, and assist fish and wildlife to adapt to the effects of a warming climate. All remaining receipts will be used for rebates and other transition relief to ensure that families and communities are not adversely impacted by the transition to a new energy, low carbon economy.

Peter Barnes, author and senior fellow at the Tomales Bay Institute in Point Reyes Station, CA, recognizes Obama’s difficult path, and offers his own version of the Cap and Dividend plan—one that would be effective, popular, and politically expedient without being gimmicky.

From CapandDividend.org:

In facing this challenge, Obama will be constrained both by a gargantuan budget deficit and his campaign vow not to raise taxes on anyone earning under $250,000 a year. And because of the recession, he can’t suck buying power out of the economy. On the contrary, he needs to stimulate spending by consumers.

He also faces a tight international timetable: in December 2009, the nations of the world will assemble in Copenhagen to negotiate a successor to the Kyoto Protocol. If Obama is to have any credibility in those negotiations, he must pass significant legislation before then.

How, then, can he fulfill his No. 1 priority?

There are many opinions about what should be part of a comprehensive energy policy, but the centerpiece nearly everyone agrees on — the great lever that will tip the whole economy toward clean energy — is a steadily descending cap on carbon emissions. If done correctly, such a cap will raise the price of polluting, spur innovation and conservation, and shift billions of dollars of private investment into new technologies for the next 40 years. But designing the cap correctly is critical; a half-baked, loophole-ridden and overly complex system will do more harm than good. The devil is in the details — and, of course, the politics.

The most critical details involve where to place the cap and what to do with the permits the cap will create. The simplest and most effective place to put the cap is upstream — that is, on the small number of companies that bring carbon into the economy. An upstream cap could be administered without monitoring smokestacks, without a large bureaucracy, and without favoring some companies over others. It would work for the obvious reason that, if carbon doesn’t come into the economy, it can’t go out.

The declining number of permits that would be issued under the cap would then be auctioned rather than given away free — all polluters would pay, there’d be no politically chosen winners, and no windfall profits. Fortunately, Obama pledged during the campaign to do just this. But that leads to another crucial detail: what to do with the auction revenue, which over time will total trillions of dollars?

There are two possibilities: spend the money on a variety of energy-related programs, or give the money back to the people. While there’s broad agreement that some public spending is necessary to solve the climate crisis, it’s by no means clear that permit revenues should be used for that purpose. The reason is that permit revenues, though initially paid by energy companies, are ultimately paid by consumers in the form of higher energy prices. They are, in effect, a sales tax on carbon — a tax that will fall on millions of Americans earning under $250,000 a year, and that will rise as the cap tightens.

Obama’s best choice is to fund energy-related programs from other sources (including long-term debt) and return all the carbon revenue to the people. This can be done through yearly tax credits, or better yet, through monthly cash dividends wired like Social Security payments to people’s bank accounts or debit cards. The advantage of cash dividends is that they’d tangibly and frequently remind people that higher carbon prices are coming back to them — and help them pay mortgages and other bills that fall due on a monthly basis. The whole system might then be called ‘cap and dividend’ or ‘cap and cash back.’

Like Social Security benefits, carbon dividends would be taxed as ordinary income; the government would then recoup about 25% of the revenue and could use that money as it sees fit. More importantly, ordinary families would get the lion’s share of the auction revenue, and get it in a way that rewards conservation. Since everyone would get the same amount back, those who use the most carbon would lose and those who use the least would gain — their dividends would exceed what they pay in higher prices. Low-income families in particular would gain because they use less energy than others and would pay little or no taxes on their dividends. In addition, the overall economy would benefit from this periodic replenishment of consumer demand.

The most persuasive argument for cap and dividend, though, isn’t economic but political. As the presidential campaign revealed, energy prices are an explosive issue. A carbon cap will raise fuel prices not just once, but for decades — indeed, that is its purpose. The potential for backlash — for frenzied cries of “Drill, baby, drill!” — is thus ever-present. If America is to reduce carbon emissions to the level scientists say is necessary, it’s crucial that families’ pocketbooks be protected for the duration. Cap and dividend does this by permanently linking dividends to carbon prices. As carbon prices rise, so — automatically — do dividends. If voters scream about rising fuel prices — as they surely will — politicians can truthfully say, “How you fare is up to you. If you guzzle, you lose; if you conserve, you gain.”

Moreover, for a carbon cap to endure, it must have broad bipartisan support. A revenue-neutral cap is far more likely to garner Republican support than is one that’s linked to a large increase in government spending. Consider, for example, Senator Bob Corker of Tennessee, who supports a declining cap on carbon but not a spending bill that earmarks trillions of dollars over 40 years. Though it’s not glaringly evident, there are more Republicans like him. This doesn’t mean Obama shouldn’t spend public money on energy; it means he should separate such spending from the cap.

The ultimate reason for paying equal dividends from carbon revenue may be this: it fits Obama’s vision of how government ought to work. In this vision, the government’s job is to serve ordinary people, not special interests. It is to be fair and transparent. And it is to unite rather than divide us, to move us from a “you’re on your own” society to one in which “we’re all in this together.”

Read Peter Barnes’ entire essay here.

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