A Piece of Budget Pie

There are so many facets to President Obama's proposed budget that we will have to focus on each independently. First out of the gate is what common vernacular has deemed "cap and trade."

The motivation behind "cap and trade" is to reduce US emissions from carbon to well below the level set in 2005. To be precise, the goal is to drop the pollutions to 14% below former levels. As altruism is to often only the stuff of fairy tales, a more effective means of motivating businesses to reduce carbon emissions is by a system of taxation. Essentially, the government will auction off the chance to pollute. A business can purchase pollution access for some dollar amount per ton of CO2 to be released into our atmosphere. The government will limit the amount of pollution allowed (the cap part), and in the event that a company has leftover, unused pollution units, then can sell these to another company (the trade part).

The first, and most obvious, upside is the limit of CO2 pumped into Mother Nature. I don't honestly know how much of a difference this is going to make on her at this point, but everything we can do to ameliorate the disease, we must do. The second upside is what happens to the revenue. Conservative (as in cautious, not Republican) estimates suggest that the system will bring in 645 billion dollars over the next 10 years. A significant portion of this money will be used to fund research in alternative sources of energy, while some of the money will be given back to the consumer in the form of tax credits and refunds for transitioning to energy efficiency.

Oops. You caught me. I said it - "given back" to the consumer. The reality of the situation is that it is very likely that electricity, gas, and other utility costs will increase to offset the taxation of pollution. One report claims that the energy bills will jump by as much as 7%, and that the average tax will jump from 1,100 to 1,437 by 2015.

While I do concede that there will be an increase in the price of energy in the future, I want to break down these numbers to show just how dramatic they really are.

7% increase on energy bills. If you pay $50 per month throughout the year, then the bill will increase by $3.50 each month for a grand total of $42 per year.

Average tax to jump to $1,437 in 2015. Considering that inflation is hovering around 3% and will get the "average" up to $1,313, the additional $124 doesn't seem as significant. The other confounding factor that dramatic effect always omits from these kind of statements, is the definition of "average." Mathematically speaking, one takes all of the numbers in a set, adds the value together, and then divides it by the total number in the set. This analysis is great when the values are distributed equally above and below the average. For example, let's say that 10 different people pay taxes. Seven of them pay $20, one pays nothing, one pays $45 dollars, and one pays $2000. The average of the set is $218.50, but the majority of people pay $20.

The same it is with averages so often cited in reporting (by both factions). In the case of the increase in the average amount of tax is that there will be a return to the pre-Bush tax rate for the most wealthy from 33% to 36%. More later, but this return to 36% was decided on by the people that initially came up with the break. It was meant to be temporary, and thankfully it will be.

So back to the main issue. You will pay more for coal derived power in the future. Your money will be invested in developing alternative forms of energy production, and more efficient consumption of energy. The increase in rates is therefore a transient event - as alternative sources of energy become available, and as our ridiculously inefficient machines become more efficient, the cost of energy will come down. Minimal sacrifice now, maximum return later.

The alternative is to not have a cap and trade, not to invest in alternative energy, not to stop polluting, not to become more efficient, and not to save anything.