Will Obama Regret the House’s Cap and Trade Give-Away?

During the presidential campaign, Barack Obama and John McCain profoundly disagreed on many issues, among them climate change legislation and the tax treatment of health care. Now, President Obama seems to be bowing to one of McCain’s poor ideas while resisting one of his better proposals. 

It is funny how the politics of these issues is playing out. Many economists agree that McCain had the right idea on health care—the Arizona senator proposed replacing the current exclusion for employer-sponsored insurance with a generous tax credit. Yet, Obama continues to resist (though with increasingly less vigor) any change in the tax treatment of insurance.

On the other hand, when it came to cap and trade legislation, McCain favored giving away credits to create a market for CO2 pollution. Obama preferred auctioning those rights to pollute. The difference is more than technical. While in the long run both versions promise to reduce carbon emissions by raising the cost of fossil fuels, an auction could generate $100 billion or more annually in new federal revenues. By contrast, giving away the credits would create a windfall for those companies that produce fossil fuels. 

Surprisingly, both Obama and the House Democratic leadership seem to have abandoned the idea of an auction in the face of opposition from Republicans (who called it a huge tax hike) and energy and farm state Democrats (who steered the new subsidy to their local industries). The result: The cap and trade bill passed by the House last week would give away about 85 percent of the credits. 

Before he so quickly capitulated, Obama had big plans for that new revenue. His 2010 budget would have spent about $120 billion on clean energy technology over the next decade. But Obama would have used the biggest chunk, more than $500 billion, to extend his signature middle class tax cut, the Make Work Pay credit. His idea was to use the credit to help offset the higher energy costs for middle-class families. Now, I have no idea where he’ll get the money for either initiative.

I am not so worried about the clean technology subsidies since this sort of industrial policy rarely works anyway. But helping out low- and moderate-income taxpayers who end up paying more to air condition their homes or fuel their cars seems to be a necessary step. Now, my biggest fear is that Obama and Congress will merely extend Make Work Pay without finding the offsetting revenues. Something else for those Chinese bondholders to finance, I suppose.

With so much attention paid to health care, this massive energy bill slipped through the House with barely a notice. Now, it goes to the Senate where, I fear, it will only be made worse. After all, there are still about 15 percent of the credits to be given away.