Jun 16 2009, 9:22AM
Will Cap And Trade Raise The Income Tax By 50 Percent?
Martin Feldstein got kicked around the blogosphere a couple of weeks ago for an op-ed in the Washington Post arguing against cap-and-trade legislation. (See, eg, David Roberts, Matt Yglesias, Mark Thoma, Paul Krugman, Daniel Drezner and Henry Farrell.) Upping the ante, I see Feldstein's now gone and published an even longer version of the exact same argument in the current issue of the Weekly Standard.
The portion of Feldstein's argument that had to do with international relations -- basically, that the US shouldn't act on climate change without extracting similar agreements from China and India -- got picked over pretty well last time around. But the rest of Felstein's argument -- basically, that cap and trade would impose a huge cost on the average American family -- is worth noting:
The Congressional Budget Office estimates that reducing the level of CO2 to 15 percent less than the total level of U.S. emissions in 2005 would require permit prices that would increase the cost of living of a typical household by $1,600 a year. To put that $1,600 carbon tax in perspective, a typical family of four with earnings of $50,000 now pays an income tax of about $3,000. The tax imposed by the cap and trade system is therefore equivalent to raising the family's income tax by about 50 percent. (Some advocates of a cap and trade program argue that the cost to households could be much less than $1,600 if the government uses the tax revenue to finance transfers to low income households and tax cuts to others, but since there is no way to know how the future revenue would actually be used, the only number we have to consider is the $1,600 direct increase in the burden on households.)
As a philosophical matter, it is no doubt always difficult to know "how future revenue [will] actually be used." Today's social security trust fund is just tomorrow's government-financed army of bloodthirsty robot tyrants. The future is uncertain and the end is always near.
Still, I'd note that virtually everyone who has studied and endorsed cap and trade suggests that the revenue should be used to offset the increased cost of living. This "virtually everyone" certainly includes Senators Waxman and Markey -- theirs is a flawed bill, but the value of the auctioned permits will be used to offset energy costs for low income houses -- and also includes, oddly enough in this context, the Congressional Budget Office. In every CBO analysis of cap and trade that I've seen -- including the one Feldstein cites -- they have a nice long discussion how you could use the value of the emission allowances to fund such-and-such tax cut or such and such transfer payment. (I've put one CBO chart on this at the end of the post.)
That doesn't equal an argument in favor of Waxman-Markey, largely because a big portion of the bill's emmission permits aren't going to be auctioned off. But then why not make the argument for auctioning off more permits, instead of summarily dismissing the very idea of cap and trade? Does Feldstein think the government will throw the money onto a bonfire?
Artsy, dark pollution photograph via A6U571N's photostream
What I thought happened in Europe under cap and trade was that they issued too many permits, because no politician wanted to hurt the industries in his country. Because of the oversupply of permits, the price crashed. No CO2 output was actually restricted, since permits were cheap.
In other words, the thing turned into a worthless political stunt.
From what I've read, the program is going the same way here, with government planning to issue (rather than sell) permits to a large range of industries.
And that's one big problem with it from my point of view -- it puts (more) politics into every business in America. If you have political clout, you get your permits for free. If not, you pay market rate. So it's in the best interest of the business to start lobbying and throwing campaign contributions around. If you can't do that, look at moving your factories overseas. Neither are what we want if we care about American jobs and productivity.
Secondly, there's no scenario where cap and trade makes sense. If global warming is heading for a "tipping point" that really heats up the planet, cap and trade is too little too late. You have to put it in place, then browbeat China and India into doing the same. And it has to work. That all takes decades.
If on the other hand, the IPCC consensus forecast is right, the next 100 years don't see any real threat from warming anyway, and the whole thing is pointless.
And even if warming long-term is dramatic, if only the U.S. and Europe do cap and trade, again it's worthless.
I really think if you care about this issue, you want more money into geoengineering research (and start painting your roof white!) and carbon sequestration, which would work even if no one else goes along.
I agree with your first point (which I've written elsewhere): I'd prefer auctioning off all the permits, and I'd prefer a carbon tax to cap and trade. But there is a difficult balancing act that needs to happen here a cap and trade system that gives away from the permits is not ideal, but it might be worth it to produce a bill that reduces the overall level of emissions.
To the scond poin -- I do agree with the IPCC/CBO estimate: there's no real threat till 2080 or 2100. At least to US economic interests. But there are real threats earlier than that to places in the dveloping world (India and Bangladesh are the places that come up most), and the harms to the US in 2100 do have a value in the present.
The very least it there is a problem here that no disputes: we have a market with a negative externality. Why does anyone dispute that firms should internalize all the costs of their actions?
Conor