To Sell Or Not To Sell: That Is The Carbon Cap Question

Barack Obama is projecting massive revenue from a cap and trade system in his current budget. How will he get that revenue? Presumably by selling off carbon credits. But auctioning credits is a tough sell in a recession, as it equates to a tax on business, which in turn could mean increased energy prices.

The revenue the President foresees earning from a cap and trade system will go towards tax breaks for lower and middle income families who might get stung by the cap and trade system. However, that still won’t make it easy to pass the legislation or to sell credits. As a result, the government might have to give away, rather than sell, the large majority of its first credits if a system is implemented:

Bloomberg: Obama will likely have to cut the amount of allowances sold to about 30-50 per cent of the initial total to win support, Abyd Karmali, the London-based head of carbon emissions for Merrill Lynch & Co., the New York investment bank bought by Bank of America Corp., said by phone yesterday.

Under the proposal, companies could trade allowances on an open market, similar to one in force in the European Union, to give them incentives for reducing greenhouse-gas emissions and moving toward cleaner technology. The plan aims to cut emissions 14 per cent by 2020 and 83 per cent by 2050, from 2005 levels.

Auctioning all allowances “may be a very difficult proposition to push through” as lawmakers look to protect the economy and limit power-price rises, Karmali said. The U.S. may reach 100 per cent auctioning by about 2020, he said. “That’s consistent with the European Union,” which has the world’s biggest emissions market.

Under that program, factories and power stations will receive about 95 per cent of allowances for free in the five years through 2012, Mark Lewis, a Paris-based Deutsche Bank AG analyst, estimated in a Feb. 23 research note. That period is the EU program’s second phase. The first phase ran for the three years through 2007.

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