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.