The Obama Administration has released its proposed FY2010 budget. In it, there is a tax increase called “climate revenue” which is identified in the budget as offsetting new spending on energy R&D and a middle class tax cut (details here in PDF). The tax increase is called “cap and trade” but its net effect will be to increase the costs of energy with the revenues raised added to the treasury. The notion that the climate revenue will go to a tax cut and energy R&D is of course just symbolic as that revenue could equally be identified to offset NASA spending, health care, or the military or anything else on the spending side. The positives about the plan are the investments in clean energy technologies, an investment which I, along with Chris Green suggested be funded by a low carbon tax.

To understand why the plan has little hopes to reduce greenhouse gas emisisons, consider this comment by White House spokeman Peter Orszag, as reported by Greenwire:

But White House Office of Management and Budget Director Peter Orszag insisted that Obama’s budget takes into account projected increases in Americans’ energy bills as utilities pass on their compliance costs. The OMB chief said Obama’s cap-and-trade program would provide taxpayers with direct payments to help them cope with higher energy prices.

If (a) you raise the costs to utilities of providing energy, and (b) the utilities then pass those costs onto consumers, and (c) then the government gives people money to then help pay those increased costs, guess what is going to happen to consumer behavior? Just about nothing. Some might argue that consumers could become more efficient and save some money, and this is true, but consumers already could become more efficient today with the exact same incentive. Balancing cost increases with direct payments does nothing to alter this incentive.

More generally, as cap and trade legislation works its way through Congress you can fully expect a very loose cap to result because policy makers will never let it constrain GDP growth. So the cap will have loopholes and safety valves and other such back doors. What we will then have is a highly inefficient carbon tax, with lots or room for games and shenanigans (and making money for clever investors) in the carbon derivatives market. Only a subset of the new revenues will actually be going to clean energy technologies, the most important element of Obama’s climate policy, with the rest going into the general treasury. The plan will have very limited prospects for actually reducing emissions, unless the investments in energy technologies actually result in market-ready technological advances that change how energy is produced or consumed. Expecting large changes in technology by 2020 is a big gamble, but it must be what the Obama administration is betting on.