Obama’s Carbon Tax Cools Down

Although there is some controversy over the issue, human-induced green house gas emissions are generally considered to be the primary cause of global warming. Carbon dioxide is considered to be the most important of these “greenhouse” air pollutants, and the burning of fossil-fuels a main source. This is because fossil fuels have carbon atoms that are released as carbon dioxide when they are burned. For example, gasoline consists of atoms of hydrogen and carbon (about two hydrogens per carbon). When it burns, the hydrogen combines with oxygen to make water, and the carbon combines with oxygen to make carbon dioxide. If the combustion is incomplete, it also makes carbon monoxide.

In contrast, renewable non-combustible energy sources (such as wind or sunlight) do not convert hydrocarbons into carbon dioxide. That means that renewable energy technologies have a better chance at competing with fossil fuels (such as petroleum and coal) if you take into account the full energy cost, including the amount of carbon dioxide emitted during energy production. Solar plants cost more to construct than coal plants, but they don’t pollute. So economists argue that solar might actually be cheaper if you include the damage done by carbon dioxide pollution in the cost of coal. Basically, if you give a monetary value to the cost of polluting the air, then emissions become an internal cost of doing business that is visible on the balance sheet.

In order to address this issue, President Obama has pushed to establish carbon emission trading (known as “cap-and-trade”). The basic idea of this carbon exchange market is that the government sets a limit (cap) on the total amount of greenhouse gases that can be emitted nationally, and the market sets the price. In other words, a business would have to pay a carbon tax, buying the right to emit carbon dioxide from the government. The basic idea is to create a financial incentive to reduce greenhouse gas emissions, while boosting energy efficiency and renewable energy efforts.

President Obama specifically proposes a 14% emission reduction from 2005 levels by 2020 (and 83% reduction by 2050). He also proposes that companies buy an allowance, or permit, for each ton of carbon emitted at an estimated cost of $13 to $20 per ton to start. Rather than following Obama’s proposed system of “full permit auctioning,” the House of Representatives passed a bill last June that would establish a variant of a cap-and-trade plan for greenhouse gases. I’m not going to get into the details of this American Clean Energy and Security Act of 2009, which is still under consideration in the Senate. However, I did want to note that this bill’s cap-and-trade program allocates 85% of allowances to industry for free, auctioning only the remaining 15%. There is a tremendous amount of debate on the best system to curb emissions of climate-changing gases. There are other competing bills currently in the House and Senate. However, it appears that none of these bills are likely to pass Congress. “Realistically, the cap-and-trade bills in the House and the Senate are going nowhere,” said Senator Lindsey Graham, who is trying to create bipartisan climate and energy measures. “They’re not business-friendly enough, and they don’t lead to meaningful energy independence.”

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