Varun Sivaram

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How Much Would Utility-Only Cap-and-Trade Cost?

by Michael Levi
July 8, 2010

Bryan Walsh, over at TIME, has a solid post on the cost of cap-and-trade, noting that the Congressional Budget Office has found that Kerry-Lieberman would shave $19 billion dollars off the deficit. At the end, he speculates on how utility-only cap-and-trade would differ:

“The CBO hasn’t done an analysis—because there’s been no bill written—but on his blog Michael Levi of the Council on Foreign Relations has written that a utility-only cap could have fewer sources of revenue because the carbon market itself would be much smaller than with an economy-wide cap. It’d be ironic if, in trying to craft a climate bill that is less ambitious and costs less, the Senate actually produces one that’s a greater drain on the budget.”

I wouldn’t worry too much. Utility-only cap-and-trade would indeed generate less revenue, since there would be fewer emissions permits for the government to sell. (I’d also guess that any utility-only system would be engineered to generate a lower price for each permit.) But a utility-only system would also have fewer interests to compensate. Heavy industry, for example, would incur fewer costs, and hence need fewer free permits; ditto for refineries. There would inevitably be less money for supporting clean energy innovation, and probably less money to rebate directly to consumers (depending on the details of a bill). My guess is that a (politically realistic) utility-only bill would still deliver net benefits for the deficit, though probably smaller ones than under Kerry-Lieberman. Whether the difference would be substantial would depend fundamentally on the details.

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