A Permit Trading Program for Carbon Dioxide (Cap and Trade)

Illinois is faced with seemingly insurmountable fiscal problems. Public pensions are still not out of the woods. Bills aren’t getting paid on time. The state’s credit rating is in the dungeon. Ideas for curing the state’s fiscal illness are many, and nearly every one of them predictably includes the need to raise more money, reduce spending, or a combination of both. One way to raise more money would be to “tax waste, not work” by creating a cap-and-trade policy for greenhouse gases (GHG). We explore that option here. A cap-and-trade program has the potential to raise significant revenue because almost half of the electricity generated in Illinois comes from coal-fired power plants (see Figure 1). We calculate that permit auctions could raise $1 billion to $4 billion per year, with a reasonable estimate of $2 billion in the initial years. Figure 2 shows that this $2 billion would balance the budget in FY2015, and fill almost half of the projected deficits for fiscal years 2016-2018. Illinois has a significant fiscal crisis, with projections for multi-billion dollar budget deficits. Yet, a reasonable cap-and-trade program to reduce greenhouse gas emissions could significantly reduce future deficits. Specifically, under a program similar to California’s AB-32, a full auction protocol could raise $2 billion annually in the initial years of a cap-and-trade program. Most of the economic burden of the program would fall on stockholders of the covered industries, and most of those stockholders live outside Illinois. In addition, Illinois businesses could gain experience operating in a GHG-limited environment ahead of possible future federal limits. Illinois researchers could invent patentable technologies that other states and countries would want in their later efforts to reduce GHGs. Implementing a revenue-raising cap-and-trade program mitigates the need to revoke the sunset provisions on the income and corporate tax rates or to increase the state’s sales tax.