Making Cap and Trade Regressive

Apparently the White House is considering caving on the principle that carbon permits should be auctioned rather than given away. Given the political realities, I’m hardly shocked to see that compromise is in the air. But this, it should be said, is a really crappy compromise. The key thing to recall when this is described as a more “moderate” position is that you need to understand what the real consequences are. For that, you need to turn to this CBO analysis of the distributional consequences of some different options. Auctioning the permits and rebating the money is on the left, giving the permits away is on the right:

In terms of environmental goals, the giveaway plan can be made to work (it can also be riddled with loopholes and rendered unworkable, but that’s a separate debate). It, however, actually does have the negative consequences often ascribed to any serious carbon policy — it’s bad for the economic interests of the poorest 80 percent of Americans. Auctioning the permits and rebating the money, by contrast, is good for economically vulnerable Americans.


And note that there’s no advantage to the giveaway approach in terms of short-term economic growth. Either way, there’s a modest short-term macroeconomic cost in exchange for a long-term gain of a sustainable climate. The choice is between different ways of allocating the cost — you could make polluters and the wealthy pay, or you could make the vast majority of us pay.