The cost of US climate regulation

We’ve heard about the White House’s plan to implement a carbon cap and trade (C&T) system under the EPA’s proposed budget, and that has produced a flurry of mixed reactions, debate and economic implication forecasts.

I will try my best to understand some of this studies as trying to learn how the C&T system works sometimes makes my head spin.

According to consulting firm Point Carbon, the numbers crunched by White House’s Office of Management and Budget for a carbon cap program is unrealistic and its estimated price for carbon allowances not reflecting the market’s real price.

President Obama’s budget presumes a price for US carbon allowances at $13.70 in 2012. Presently, European Union Allowances (EUAs) are priced at €10.50 (US $13.35), according to Point Carbon.

“A carbon price of $13 per ton would produce an increase in the cost of gasoline of $0.12 per gallon, a six percent increase over current retail gasoline prices,” said Point Carbon. “This would also result in a 6.8% increase for average retail electricity rates although more coal heavy regions might see higher increases.”

Some of the increase might be offset by new renewable energy construction under renewable electricity standard proposals in the House and Senate.

According to energy and carbon information provider ICIS Heren, European energy traders are pegging the probable price of US carbon allowances around $11-$14/ton. ICIS Heren also noted that it might be unlikely that a proposed US emissions bill will pass before December this year.

“However, the ‘unusually detailed proposal’, as the newspaper Chicago Tribute pointed out, indicates that Obama would be less willing to change his climate change policies than he would be in areas where the budget is less specific like healthcare,” said ICIS Heren.

Consulting firm McKinsey recently put out a debate piece on Which is better: Carbon tax or C&T?

According to Greg Easterbrook of Brookings Institution, the simplest, most efficacious, least bureaucratic, and best-for-the-nation initial move against greenhouse gas buildup would be a carbon tax. Carter bales of private equity firm Wicks Group and Richard Duke of the Natural Resources Defense Council said a C&T policy is more likely effective in reducing greenhouse gases.

You can read more about their pros and cons and great comments on McKinsey’s new blog What Matters. Here are some of the more colorful comments about the carbon debate:

“This is dangerous. It seems to me this debate is the equivalent of what is the best way to commit suicide – shoot yourself or slit your wrists. These types of programs would have catastrophic economic and societal impacts that would make the four horsemen of the apocalypse seem like a barber shop quartet.

- by John Passyn

“What part of scam and hoax do you not understand? Let me keep MY money! Cap someone else NOT me!” – by Mike Abels

“Of course, a cap and trade approach would also raise the price of energy, but it’s big political advantage is that it doesn’t come with the dreaded term, “tax.”

- by John Carey

“For evidence that “cap and trade” does not work, we need only look at Europe, which has not reduced emissions since implementing its system.

- by Eddie Correia

By the way, the George C. Marshall Institute also put out a recent study “The Cost of Climate Regulation for American Households.”

According to the study, the C&T approach is the equivalent of a permanent tax increase for the average American household, which was estimated to be $1,100 in 2008, would rise to $1,437 by 2015, to $1,979 in 2030, and $2,979 in 2050.

The study also estimated resulting rising energy prices such as electricity prices jumping 5-15% by 2015, natural gas prices up 12-50% by 2015, and gasoline prices up 9-145% by 2015.

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One Response to The cost of US climate regulation

  1. Pradeep 5 March, 2009 at 10:42 am #

    C&T will raise energy (gasoline/electricity) prices. If the price increases from C&T regulation are not passed on to the consumers, who would bear the cost and how would actual CO2 reductions happen?

    Here is a link to a discussion on a blog I follow, on how best to allocate carbon credits to polluters.

    I would like to reply to one of the commentators:
    ” “This is dangerous. It seems to me this debate is the equivalent of what is the best way to commit suicide – shoot yourself or slit your wrists…”
    The alternative, in my opinion is to be hanged, drawn and quartered. The costs of inaction simply outweigh the costs of action.

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