U.S. Clean Power Plan Provides Opportunity for Significant Cuts in State Budget Deficits

Abstract

The 2014 mid-term election that put Republicans in control of Congress reduced any chance of federal legislative action to limit greenhouse gases such as carbon dioxide from electric power plants. However, the executive branch already has authority from the U.S. Supreme Court to limit emissions under the Clean Air Act. In June 2014, the Obama Administration issued its proposed Clean Power Plan, which sets a specific limit on emissions for each state and then allows each state to decide how to meet its target. Comments are invited on this plan, and President Obama can modify the executive order before it is issued in June of 2015. The U.S. Clean Power Plan uses a formula to determine the target for each state, expressed as a maximum emission rate per unit of electricity, but it provides states with exibility regarding how to meet that target. It even allows states to convert that emission rate target to an absolute quantity of emissions and then to sell permits for that many tons of carbon dioxide. Any state that chooses to comply with the federal mandate by selling permits can collect revenue for the state, and this revenue can be used for additional spending, to cut other taxes, or to reduce the projected budget deficit. Indeed, many states since the Great Recession are still facing major deficit projections. This federal mandate provides an opportunity for states like Illinois to address some significant budget problems. In Illinois, for example, projections of the deficit under current law increase from $1 billion in FY2014 to $14 billion in FY2025. Our purpose here is to calculate the fraction of several states’ projected future deficits that can be offset by collecting their own permit revenue.