Cap-in-hand

US budget: The probable demise of President Barack Obama's cap-and-trade plan for carbon emissions would be a much bigger fiscal failure than the implosion of healthcare reform. Taxing carbon was the hidden key to funding his administration's policy agenda while limiting budget deficits. Now the White House is scrambling for a realistic Plan B.

For months, the Capitol Hill consensus has been that a legislative limit on carbon emissions isn't going anywhere in 2010 or beyond. Now the White House seems to agree. Obama's budget last year assumed auctioning emissions permits would generate $646 billion in revenue over 10 years. Of that amount, a fifth would have gone toward funding clean energy research, and four-fifths to funding a worker income tax credit.

The administration's new budget proposal simply contains an accounting line labeled "allowance for climate policy" followed by, well, nothing. Not a single dime of revenue is assumed for the years 2011 through 2020. The line item looks to be nothing more than a placeholder to keep hope alive for greener Democratic voters.

The near-term impact is that the worker tax credit won't be renewed after 2011. But longer-term, the proposal's failure would stymie administration efforts to get closer to balancing the federal budget.

Internal White House estimates predicted cap-and-trade auctions might generate two or three times as much revenue as forecast in last year's budget, or up to $1.9 trillion. By contrast, proposed tax hikes on upper-income Americans would raise $678 billion. The extra money from cap-and-trade could have taken a big bite out of the $8.5 trillion 10-year deficit projected in the latest budget -- just the kind of broad-based, if politically stealthy, tax that Obama's economic advisers think is necessary to balance the books.

The administration's healthcare plan was supposed to knock another $132 billion off the 10-year deficit, according to the Congressional Budget Office. With that on the back burner too, Democrat deficit hawks are left hoping Obama's proposed fiscal commission can somehow create a menu of spending cuts and tax increases that could actually win congressional approval in 2011. Sadly, that's about as likely as cap-and-trade passing.