The Kerry-Lieberman Climate Bill: Ch-Ch-Changes and Lots of Loose Change

Crossposted with

The new bill is not your economist's version of cap and trade.

First, Some Cap-and-Trade Basics

In its purest form, cap and trade is supposed to be a simple, market-based mechanism to cap emissions of a pollutant and use the marketplace and the profit motive to get emitters not only to cut emissions but to innovate. The government stays largely in the background, establishing the cap and letting the rest happen on its own.

The "rest" is:

  • the distribution of emission allowances to the emitters (whose total adds up to the emissions cap) and
  • the trade of those allowances as the emitters individually (and collectively, at least theoretically) find the most efficient, least expensive paths to meeting the cap. (For more details, see my series on cap and trade.)
A Big Deal: How to Treat Allowances

A major issue is how the allowances are distributed. One approach is to simply give the allowances to emitters free of charge (for example, based on their historical emissions). But many folks, typically from the liberal side of the aisle, object to this as rewarding emitters for their legacy of pollution. An alternate is to auction the allowances to the highest bidders.

If you follow the auction path, the question that naturally follows is: what happens to the proceeds of the auction? It's not a trivial issue -- based on Obama's initial budget offering, the estimates add up to nearly $79 billion from a climate cap and trade on carbon dioxide (CO2) in 2012, climbing to a total of $645.7 billion by 2019.

A simple approach is to just let the government keep all those billions. But that proposal has been met with howls from conservative parties such as the Wall Street Journal which derides it as "cap and tax" -- a phantom attempt by big government to collect revenue for its own, so-called in their lexicon, "socialist agenda."

Some of the anti-giveaway liberal-types have countered with a so-called cap-and-dividend proposal. In this version, the allowances are auctioned, but the government returns all of the income from the auction back to consumers in some egalitarian way -- for example on a per capita basis. Since such a program is revenue-neutral, it is argued, it is clearly not a tax.

Horse-trading on KL's Version of Cap-and-Trading

But of course, once you get legislators together, things tend to get ever more complicated. To get anything passed in our Congress, there's gotta be a whole lotta horse-trading. Horse-trading on a climate bill? Some might call that a euphemism for giving critical interest groups cash for their support. The cash hand-off is done discretely, for example in the form of subsidies, tax breaks, and loan guarantees, but $s are definitely involved.

Which brings us to the Kerry-Lieberman bill, formerly known as the Kerry-Graham-Lieberman bill. In the first place, despite what you might have thought, this bill is a far cry from cap and trade. With its separate treatments of the power and petroleum sectors and its price collar, it has a high chance of turning into a de facto tax.

But call it a tax or a cap and trade or whatever, who would profit from the revenues? Would it be a windfall for the feds, something that could possibly even close the federal budget? Or would it be a windfall for special interests? Or both.

Hard to say at this point. But here's an early thumbnail sketch of some of who's getting what in the Kerry-Lieberman (and perhaps Graham) bill.

Federal Income:

  • Major emitters -- utilities (2013) and industry (2016) -- will buy an as-of-yet-to-be-determined percent of allowances that will gradually phase to a 100 percent auction by 2030. All details to be filled in.
  • Petroleum refiners to pay a fee pegged to the allowance auction price. Auction price has a strict range of $12-25 per ton beginning in 2013 that will be tied to inflation in subsequent years.
  • Federal Giveaways:

    The "dividend" part

    • Two-thirds of all revenues to go to consumers, primarily to assist those disproportionately impacted by increased energy prices. This grows to 75 percent in the form of a universal rebate in 2026.
    The "giveaway" part
    • Major emitters are given some percent of allowances that will gradually phase into a 100 percent auction by 2030.

  • Energy-intensive, trade-exposed industries to net 15 percent of allowances for free during transition period, as well as a border adjustment for carbon-intensive imports beginning in 2025.
  • The clean-energy manufacturing tax credit is expanded by $5 billion.
  • States that pursue offshore
    drilling to receive 37.5 percent
    of federal revenues.
  • Nuclear loan guarantees to grow by $36 billion (to bring total to $54 billion) with $500 million per reactor for up to 12 reactors in case of regulatory delays (in addition to other financial incentives).
  • About $6 billion a year to go to transportation, including both highways and mass transit.
  • $2 billion per year for 10 years for R&D for "effective" carbon capture and sequestration (CCS) as well as "significant incentives" for commercial deployment of 72 gigawatts of CCS.
  • Up to two billion tons annually for offsets primarily benefiting farmers; international offsets begin in 2018.
  • Of course, all this money is flowing in various directions for a specific purpose: to cut U.S. greenhouse gas emission by 17 percent by 2020 and 83 percent by 2050.

    The trillion dollar question: Will the bill succeed? To do so, it will have to pass two formidable hurdles:

    1. It will have to somehow tunnel though, run around, or jump over the political roadblocks in the Senate; and
    2. In the unlikely event that it gets past #1, it will have to actually work.
    Further Reading on the Kerry-Lieberman Climate Bill