The US budget deficit has more than tripled to a record $1.4trn (£877bn, €948bn) in the year to 30 September 2009, due to increased government spending and a big drop in tax revenues. This represents almost 10% of US GDP. The previous record deficit was $459bn, set last year (see BBC news: US deficit ‘hits record $1.4tn’).
Some of the additional spending has been on low-carbon technologies. The American Recovery and Reinvestment Act included roughly $100 billion in climate-friendly spending (see Peterson Institute for International Economics: Green and Mean: Can the New US Economy be both Climate-Friendly and Competitive?), including a $3bn renewable energy fund and $2.4billion for carbon capture and storage (CCS). However, much more of the deficit is due to non-climate issues, particularly the bail-out of failing banks. The war in Afghanistan, which unlike Iraq is not a war about energy, will almost certainly require additional spending.
So how can the Obama Administration finance the essential transition to a low-carbon economy? Three steps are necessary, though not sufficient:
- Cut subsidies to fossil fuels. This was agreed at the G20 meeting last month:
“During the fiscal years of 2002-2008 the United States handed out subsidies to fossil fuel industries to a tune of $72 billion, while renewable energy subsidies, during the same period, reached $29 billion…The funds provided to renewable energy sources plunges further when one takes into account that of the $29 billion, $16.8 billion went to subsidizing corn-based ethanol, an energy source that numerous studies have shown is not carbon neutral and has been blamed in part for deforestation in the tropics and the global food crisis…Of the $72 billion given to fossil fuels, $2.3 billion went to carbon capture and storage. The rest of the funds went to oil and coal.“
- Significantly increase gasoline taxes. The federal US taxation of gasoline is less than 10% of average EU taxation (see Blogactive: No Rapid Prospect for higher US gasoline taxation) and, even with State taxes added, gasoline is much cheaper in the US than in Europe. As a result, the US spends $450bn each year importing oil and petroleum (although this is not paid for by the government).
- Increase tax on electricity. President Clinton tried to do this in 1994, but Congress refused to do so (making a minor increase in gasoline taxes instead). Higher taxes on electricity would cut the wastage of electricity and also raise revenue.
A high price of electricity is less damaging in social terms than a high price of gas, since most heating runs on gas (though cooling requires electricity and will become more necessary for health reasons as global temperatures increase). However, there are nevertheless reasons to protect those on low incomes from electricity price rises and the best way to do this is through a social tariff. This would involve those on low incomes paying less per unit used than those on higher incomes. All US energy suppliers should be required to offer a social tariff, as they will be in the UK from 2011.