How likely is that cap and trade revenue?

By Megan McArdle

Kevin Drum crunches a few numbers on Obama's projected revenues from carbon permits and says he thinks they're about right:

That sounds like roughly $100 billion per year.  Is that reasonable?  The United States produces about 7 billion tons of CO2 equivalent a year right now, which means that Obama expects his cap-and-trade plan to generate a price of about $14 per ton in its first year -- assuming it covers every single molecule of carbon emitted in the U.S.  If only half of all emissions are covered at first, it means a price closer to $28 per ton.

For comparison, the European ETS cap-and-trade plan currently prices CO2 at about 10 euros per ton.  That's roughly $13.  And that price has dropped considerably over the past few months thanks to the recession.  By 2012 it's likely to be back up in the range of $20 or more.

I'm going to disagree, for a couple of reasons.  First, spikes like the one we saw between 2004-8 have long lags.  I bought a tiny fuel efficient car, in part because of high prices.  I will now drive it into the ground.  It will be five or ten years before I even have an opportunity to increase my carbon footprint.  Ditto weatherproofing homes, replacing air conditioners, etc.  Moreover, when supply suddenly goes from tight to loose, oil prices tend to overshoot, because big producers, especially those in OPEC, have gotten dependent on the money.  They cheat on their quotas, and the price falls further--look at 1986 or 1998.

Second, I doubt economy-driven demand will have recovered by 2012.  The major economies are crashing so hard that it will take years of growth to get demand back where it was, and the big developing countries that drove demand past capacity are in worse shape than we are; they were depending on growing consumer demand in the US to drive their growth.

Third, I think it is decidedly iffy whether congress actually passes any cap and trade system with teeth.  For a cap and trade system to work, it will have to make energy more expensive at a time when incomes are declining.  This will be very, very, very unpopular.  I imagine the Democrats will try to get the Republicans to kill it for them, but they don't have much margin--one flipping Republican in the Senate and a few in the house should let them pass it.  If the Republicans are smart, they will provide three moderate Republicans in the Senate,  a few Republicans from safe seats in the House, and make the Democrats suffer the consequences of raising the price of gas and electricity.  But I doubt they'll be smart; they'll do Pelosi's dirty work for her.

This article available online at:

http://www.theatlantic.com/business/archive/2009/02/how-likely-is-that-cap-and-trade-revenue/1076/