Carbon Giveaways Hammer the Poor, Auction & Rebate Gets Fair Environmental Sustainability
Lurking in the background of the cap & trade debate is a quasi-technical issue. Capping the amount of allowable carbon dioxide emissions creates a new source of wealth in the economy—permission to emit carbon dioxide. This, in turn, raises a question about how to allocate that resource. One suggestion, popular with industry and its tame dogs in congress, is to allocate it to industry. Give the permits away, and let companies either use them themselves or sell them to others. Another suggestion, more popular with environmentalists and economists, is to auction the permits and then use the funds thereby raised to accomplish something useful. David Roberts observes that recent Congressional Budget Office testimony has produced some important analysis of this issue that’s conveniently summarized in the following mostly-legible graphic:
On the top you see the distributional impact of three different policy options. On the bottom, you see the macroeconomic impact. The middle option is to auction the permits and use the funds to cut corporate taxes, this is something I’ve never heard anyone propose but maybe Doug Elmendorf thinks it’s a good idea because it scores well on the macro measure, albeit with catastrophic distributional consequences. The options on the left and on the right, by contrast, are options that are under consideration. They have the same macroeconomic impact, and presumably the same ecological impact. But the cap-and-rebate proposal results in gains for the bottom 40 percent of households, a tiny loss for the median quintile, and small losses for the top 40 percent. The cap-and-giveaway proposal results in large losses for the bottom 80 percent of the population and a large gain for the top 20 percent.
Naturally “moderate” Democrats such as Jeff Bingaman prefer the cap-and-giveaway out of what they deem pragmatism, but what looks a lot like fanatical devotion to the interests of the well-off to the exclusion of other concerns. Larry Bartels has done research that seems to indicate that members of the Senate are responsive to the views of their middle-class constituents, very responsive to the views of their well-off constituents, and not-at-all responsive to the views of their poor constituents. So if a cap-and-trade bill does pass, I assume it’ll take a cap-and-giveaway form, and you can bet that opponents of auctions will specifically cite the interests of the economically struggling as their main motive for screwing the economically struggling over.
28 Responses to “Carbon Giveaways Hammer the Poor, Auction & Rebate Gets Fair Environmental Sustainability”
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March 16th, 2009 at 5:52 pm
Capping the amount of allowable carbon dioxide emissions creates a new source of wealth in the economy—permission to emit carbon dioxide.
This is a poor way of phrasing it. It only creates a ‘new source’ of wealth in the same way that the alcohol permits do, in the post you had earlier today.
(you know how to make it so it doesn’t matter if the graphics are legible – make it so if you click on the pic it goes to a full size version (like gristmill does))
March 16th, 2009 at 5:56 pm
Auctioning of the cap-and-trade permits is good to the extent that it gets you partway to where you would be if you had a carbon tax, and seems like it should be at least a little bit less amenable to gaming by lobbyists. As for what the revenue might be used for, shouldn’t that be considered as an entirely separate problem?
March 16th, 2009 at 6:12 pm
I hadn’t heard the corporate tax cut idea either, but since Obama has expressed interest in making deals (such as closing loopholes) in exchange for lowering the corporate tax rate, why not throw the cap-and-trade in that bowl instead? In other words, maybe the mega bill shouldn’t be energy + cap-and-trade, but instead corporate tax reform + cap-and-trade. Big business would have a lot harder time standing up against cap-and-trade if a corporate tax cut was dangled in front of them.
March 16th, 2009 at 6:13 pm
This analysis is somewhat silly. The government has an income which, like all of our incomes, is not in any sense connected to the particular things we use to spend with that income. A carbon tax/auction increases government income; if that income is used for redistribution it helps the poor at the expense of the rich because that’s what redistribution does regardless.
The reason we want a carbon auction rather than a carbon giveaway has absolutely nothing to do with that (we can decide redistribution policy independently of carbon policy); auctions are better because giving carbon permits away acts to grant monopoly power to certain businesses just because they happen to be in business now, and you explained the problem with that in the case of topless businesses a few posts back.
March 16th, 2009 at 7:00 pm
Only in liberal la-la land could a massive new tax, combined with unprecedented governmental interference in the economy be interpreted as “creating wealth.” Cap-and-tax is the largest wealth destroying measure since the creation of the credit default swap.
March 16th, 2009 at 7:11 pm
Just what the economy needs right now: more new taxes and fees to be passed on to the consumer.
March 16th, 2009 at 7:18 pm
Cap-and-trade allows pollution to accumulate at sites and in neighborhoods where the companies who paid for the right to poison the environment do the deed, while other areas of the country reap the benefits. Who lives in the places that will be polluted? Not rich people. My suggestion is that ONLY the residents of the areas that will be most negatively affected receive ALL the financial recompense. Cancer, neurological damage, and other side-effects of being on the wrong end of cap-and-trade have high price tags.
March 16th, 2009 at 7:42 pm
Shorter Matt: Higher energy prices for the poor = good!
March 16th, 2009 at 8:32 pm
“They have the same macroeconomic impact, and presumably the same ecological impact.”
This is incorrect. In the long run, free allocation of permits leads to too many firms being in carbon producing industries, compared to if you auction all of the permits. This is a further advantage to auctioning permits.
March 16th, 2009 at 8:47 pm
This would be a reasonable objection if we were talking about PCBs or something. But this is about carbon or rather CO2, which disperses worldwide in short order. So you might want to save this talking point for some other discussion.
March 16th, 2009 at 9:43 pm
You reduce emissions of CO2 by setting strict limits on the CO2 that a given activity on a given scale can emit, period. All of these newfangled alternatives, from carbon giveaways to auctions, are more or less prettied-up confessions of our inability as a society to regulate the behavior of corporations.
March 16th, 2009 at 10:03 pm
You might want to actually click through to the CBO testimony so you can see that the assumption behind the chart Matt likes so much is that ALL the revenue gained by the cap and trade auction is rebated to taxpayers. That’s something the Obama Administration has made clear it has no intention of doing.
March 16th, 2009 at 10:34 pm
Why on earth would a “household” be the right unit for rebates? I think per capita makes the most sense, but other options could at least be debated. But “household”? No, there’s nothing there, except smaller households are disproportionately Democratic. Are giveaways to favored interest groups really the point of this exercise?
March 16th, 2009 at 11:25 pm
DTM, yes, as a unit of analysis. But what’s the economic rationale for a tax rebate by household? We usually look into the household before apportioning taxes, so why wouldn’t we do the same for a tax rebate? I mean, other than the fact that smaller households are disproportionately Democratic?
March 17th, 2009 at 12:32 am
except smaller households are disproportionately Democratic.
I wouldn’t be so sure about this. The fundies can sure churn out babies, but so can brown people.
And it seems to me you answered your own question. The basic unit of taxation (for income) in the country is per household, so rebates (like all the checks that came out in both 01 and 08) are also easiest distributed per household.
The tax code assumes all chitlins and some spouses are net consumers of (monetary) wealth anyways.
March 17th, 2009 at 12:35 am
Just so the above doesn’t get taken out of context *poor people* tend to have more kids. And poor people of every color to the extent their not fundies tend to be democratic.
March 17th, 2009 at 12:43 am
I’m starting to think that the chart is driving the proposal–we can’t do per capita because it knocks the quintile analysis off. (The quintiles don’t have equal numbers of people, only of households.)
DTM, those are examples of looking inside the household. We typically don’t treat a single mother with 2 kids just the same as we treat, say, Matt Yglesias. But this tax proposal would.
The pigovian rationale doesn’t justify it. We don’t want single member households to use as much carbon as two member households. We want to reward efficiencies–that’s what will drive greatest reduction in carbon production. And only per capita does that.
Kolohe, the tax rebates in 01 and 08 were actually apportioned by whether the tax filing unit was an individual, a couple, or one of these with one or more children. In other words, it took into account exactly the sorts of facts that we ordinarily take into account in our tax system but that this proposal would ignore.
Poor people don’t tend to have more kids. But single people, old and young, tend to vote Democratic.
March 17th, 2009 at 1:45 am
Where is the comparison with subsidies taking wind to 80% of the least of coal and gas? Since we have all this excess capacity, let’s use it to build a heck of a lot of windmills. We can use cryogenic storage.
March 17th, 2009 at 1:00 pm
DTM, I think it’s just wrong to say that we don’t want a two member household to use as much carbon as two people living apart. The right answer is that we’re indifferent to how people live, so we won’t offer a subsidy for living apart or living together, and everyone will get the same amount. Get a roommate, or don’t. Get married, or don’t. The household approach is particularly odd, because if, say, you and Matt decided to become roommates, from a tax perspective there would be two households. One household for a married couple with two kids, two households–and so twice as much money in rebate–for two unrelated roommates living next door. That’s an odd result, to say the least.
March 17th, 2009 at 2:40 pm
As a practical matter, people who live in small houses, don’t drive a lot, and don’t fly for travel achieve certain efficiencies relative to those who don’t. Should we account for that in constructing our carbon policy? Or should we instead say we don’t care what you do, but we’re going to auction carbon (or, my preference, tax carbon)? We’re indifferent to the particular choices people make, because we’ve priced it already. To account for it otherwise is just a subsidy, and the subsidy seems to me to require an argument. And there isn’t one.
March 17th, 2009 at 11:20 pm
DTM, I think you’re missing the point. We don’t care whether people live alone or with others, or fly or don’t, or drive a lot or not at all. We care only about their carbon usage. So we should give everyone the same incentive to reduce their carbon usage. What you propose is that we take into account how much carbon someone is using today, and set up a system that privileges that usage. Which is, frankly, just bizarre. I mean, folks in the midwest use more energy than folks in NY–they drive more, they live in bigger houses, etc. Should we take that into account when we set up the rebate system? My answer is no, but to consistent your answer would have to be yes, wouldn’t it? I just don’t see the relevance.
To consider your example: Yes, two people moving from two big houses to two small houses saves more energy than two people moving from one big house to one small house. But two people moving from two big houses to one small house–that saves even more! And yet–if those two people were getting married, at least–you’d insist they get less money. And the only justification you offer is that there’s a greater percentage reduction in some scenarios–despite the fact that percentage reduction isn’t the goal. Reduced carbon usage is the goal. Measurement has you confused on this.