US to confront twin cliffs of cleantech and budget

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Obama needs to address a cleantech cliff and a fiscal cliff. A carbon tax, which could slash the deficit in half, is on the agenda.

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Barack Obama’s re-election as US President provides the basis for positive movement on clean tech and climate action once the new Congress meets in the New Year. But silence on climate issues during the campaign until the onset of Hurricane Sandy and continued Republican majority in the House means that scope for strategic action will remain limited.

Obama’s victory essentially protects key climate policies from repeal, particularly the regulation of carbon dioxide by the EPA, most notably in the power and auto sectors. It also offers the chance of extending the Production Tax Credit for wind energy when it expires at the end of this year.

This has generated a ‘clean tech cliff’ with the US wind market expected to contract from 11GW in 2012 to just 3GW in 2013 (Chart 1).

This has already resulted in restructuring of operations by many turbine manufacturers   and component suppliers with the loss of ~4,000 jobs. Bipartisan support for the PTC means that it could be renewed for one year as part of a wider package during the ‘lame duck’ congressional period (before January 2013).

But strategic investor confidence in      the sector requires a multi-year extension as well as a federal clean energy standard which Obama has supported in the past.

A second Obama Administration could also explore the potential for raising revenues from a carbon tax as part of a wider package of measures to avoid the ‘fiscal cliff’. The Congressional Research Service has estimated that a carbon tax starting at $US20/tCO2e and rising at  around 6% a year could raise $US154bn by 2021.

Applied to the Congressional Budget Office’s 2012 Baseline, this would halve the fiscal deficit by 2022 .

Beyond the federal level, California is scheduled to conduct the first auction for its cap and trade system on the 14th November, with trading starting in January 2013. Auction   revenue contribution to the California budget for 2012 – 2013 is pencilled in at $US1bn.

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