What Will Obama's Energy Bill Look Like Without Cap-and-Trade?

President Obama acknowledged in a meeting with lawmakers that an energy bill this year will probably not include cap-and-trade. Instead the president hopes to pass a bill that provides subsidies and tax credits to companies who explore green technology, eliminates subsidies for oil companies, expands loans for nuclear power, and supports training for "green jobs."

That's a fine energy bill. But it's worse than a carbon price.



The tragedy is that Obama clearly grasps the necessity of a carbon price. Assigning a cost to the negative externality of pollution would encourage the private sector to seek new energy efficient technologies without government subsidies providing the backseat driving. Obama told lawmakers yesterday (via NYT):

"And so the question then is: Does it make sense for us to start pricing in the fact that this thing is really bad for the environment?" Obama added. "And if we do, then can we do it in a way that doesn't involve some big bureaucracy in a control-and-command system, but just says, look, we're just going to -- there's going to be a price to pollution. And then everybody can adapt and decide which are the -- which are the best energies."

Unfortunately Obama's energy policy is at the mercy of a Senate that moves through complicated legislation like fly stuck in amber. Cap-and-trade legislation has passed the House, but in the Senate its caught in the same legislative pipes that have been gummed up by health care reform.

The fact is that a carbon price is far superior to an ad hoc system of subsidies and tax credits sprinkled into the chomping mouths of energy's special interests -- even if those interests are wind and solar energy, rather than oil companies. But what economists call a carbon price, opponents call a carbon tax. And it is an immutable law of politics that policies including the word "tax" are DOA.

Cap and trade was always a hard sell. It would almost certainly "cost" the United States a small percentage of GDP as the economy transitioned to different sources of energy. The way to sell the program, I always thought, was to frame climate change reform as a social insurance policy. Essentially, it's like asking Americans: "Would you rather risk being 1-2 percent poorer while investing in insurance against the likelihood of global climate catastrophic change, or would you prefer to be 1-2 percent richer while risking the melting the ice caps, devastating some food growing regions, and strengthening climate disasters?"

But instead of something transformative, the Obama administration is looking to settle for something nudging. Supported by tax credits and subsidies, our new energy policy is a lot like our old energy policy, with a different host of recipients.