U.S. Cap-and-Trade Legislation Could Bankroll Economic Development Initiatives

Throughout the presidential campaign President-elect Barack Obama continually emphasized the need for new policies to spur the development of clean and renewable energy technologies. Despite the economic downturn, President-elect Obama has maintained that these new programs will remain a priority for his administration. A key plank of his energy plan is the implementation of a national cap-and-trade program to reduce greenhouse gas emissions by 80 percent by 2050. 

Under a cap-and-trade system, the U.S. would place a legal limit on annual emissions, a cap which would be lowered each year until the goal for reducing emissions is met.  Within that limit, companies would purchase and trade for allowances to release pollutants. The cap-and-trade system internalizes the cost of a negative externality, a cost that would otherwise be paid by society through environmental destruction and clean-up. Such a system would create an increased demand for cleaner technologies and technologies that reduce emissions.

Though the idea of a federal cap-and-trade for carbon emissions program has been around for decades, one underreported aspect of such a program is its implication for technology-based economic development. Under the Lieberman-Warner Climate Security Act of 2007, which was considered earlier this year,  the federal government would have auctioned off some of these allowances through a new Climate Change Credit Corporation. While some of the proceeds would have been used for deficit reduction, most of the new revenue would be used help support programs to develop renewable energy technologies, provide workforce training and fund energy assistance for low-income households. Other allowances would have been distributed to states, which could then be given away or auctioned off to generate revenue for their own initiatives. 

Although the threat of a veto by President Bush caused the initiative to stall in the Senate, the Lieberman-Warner bill provides some perspective on what may happen once President-elect Obama and Congress are able to address greenhouse gas emissions. 

In April a Congressional Budget Office (CBO) report found that the Act as it existed could have generated $1.2 trillion in new federal revenues between 2009 and 2018. An estimated $284.5 billion of that total would have been available for government activities, including TBED-related initiatives. The report is available at: http://www.cbo.gov/ftpdocs/91xx/doc9121/s2191_EPW_Amendment.pdf.

Philip Singerman, Senior Vice President of B&D Consulting, an SSTI Board Member, and former U.S. Assistant Secretary of Commerce for Economic Development, addressed this new potential funding source at SSTI's 12th Annual Conference in October.  Using estimates based on the CBO report, he said that the Climate Security Act, if it had passed and if allowances were set at a price of $28, could generate $161.1 billion in 2012. These funds would have been divided amongst a number of federal programs aimed at preventing economic hardship, creating partnerships with states, localities and tribes and conducting energy-related research.

Progress on cap-and-trade will now have to wait until the next administration takes office, but President-elect Obama has advocated even more ambitious goals for greenhouse gas reduction. This could mean even higher revenues from cap-and-trade auctions and more funding for TBED initiatives.