Investing in a Green Economy
Using Cap-and-Trade Auction Revenue to Help American Families and Spur Clean Energy Innovation
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The U.S. Senate will soon begin debate on a bipartisan bill to cap and reduce greenhouse gas emissions economy-wide. The Climate Security Act, S. 3036, sponsored by Senators Barbara Boxer (D-CA), Joe Lieberman (I-CT), and John Warner (R-VA), is the most comprehensive piece of climate change legislation with the potential for Senate passage. This is a watershed moment, and a sign of our nation’s growing commitment and willingness to address the critical threat of global warming. Regardless of its fate in 2008, the Lieberman-Warner bill will help frame the legislative debate around “cap-and-trade” global warming proposals, and lay a foundation for any future legislation to reduce our nation’s greenhouse gas emissions.
Deliberations on cap-and-trade legislation have so far focused principally on reduction targets, timetables, and where to implement the emissions cap. Another critical question is still unfolding: whether emissions permits should be freely allocated or auctioned, and who will benefit from this process.
The Congressional Budget Office estimates that the monetary value of emissions permits created by a cap on global warming pollution in the United States would range between $50 billion and $300 billion generated each year (in 2007 dollars) by 2020. Deciding how many of these permits will be sold and how many will be given away for free is one of the most vital components of a successful cap-and-trade system. The permits’ valuable dividends will, if given away, provide massive windfall profits for polluters, or, if auctioned, generate capital for major public investment programs to ensure an effective, equitable, and expeditious transition to a clean energy economy. In addition, revenue from the program would also flow to low- and lower-middle income families to help them cope with rising energy costs.
In this context, capping greenhouse gas emissions is as much landmark economic legislation as it is environmental policy.
The Center for American Progress supports auctioning 100 percent of the greenhouse gas emission permits from day one under a cap-and-trade program, which would require large-scale carbon emitters to purchase a permit for every ton of greenhouse gases they release. The resulting revenue could create a dedicated source of public financing to invest in a just and equitable transition to the low-carbon economy. This would include supporting new investments in green technology and energy efficiency; sheltering American households from any economic dislocations due to shifting energy prices; alleviating higher costs for energy-intensive industries; adapting to some of the effects of global warming that we are already experiencing globally; and creating good, “green jobs” and more vibrant, healthier communities in this process. A 100 percent auction will ensure that large polluters, and not the hardworking Americans least able to foot the bill, are financing the investments necessary to carry out these vital public projects.
The Climate Security Act gives away approximately 40 percent of the emissions permits to polluting industries— carbon-intensive manufacturing, fossil fuel-powered power plants, petroleum refiners, and natural gas processors—for free. The remainder is auctioned in order to fund programs such as those listed above. Not until 2032 would polluting industries have to purchase 100 percent of the permits to account for their greenhouse gas emissions, although 1 percent of the allowances would still be available as “bonus allowances” for coal-fired power facilities that have installed carbon capture and sequestration.
The good news is that the Climate Security Act now auctions more of the emissions permits than it did in earlier drafts, but we need to continue to push for an even greater percent auction up front. Other proposals are also moving in this direction; Congressman Edward Markey (D-MA) unveiled legislation last week at the Center for American Progress Action Fund, for example, that advocates for a rapid transition to 100 percent auction under an economy-wide cap-and-trade system. It also supports channeling the auction revenue back into the economy for public policy purposes similar to the ones laid out here.
The choice is ours: how policymakers design the transition to a low-carbon economy will either benefit the economy as a whole and provide new jobs and progressive growth for Americans, or it will reward historic emitters for continuing to pollute. We know that the costs of inaction will be enormous. And if we design our response to this transition correctly, the opportunities will be tremendous. It is time to focus on the benefits—not just the costs—to consumers and ratepayers as a result of taking action to avert the climate crisis and of investing in an economic future built on clean energy.
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