Carbon Taxes and Auctions:
What to do with $7 trillion
4 Jun 2008 in Regulatory Economics, Regulatory Policy
Robert Reich, secretary of the Department of Labor in the Clinton Administration, addresses the question of what the federal government should do with several trillion dollars worth of new revenue from carbon taxes or auctioned permits.
In a commentary published on the Wall Street Journal editorial page, Reich writes that auctioning carbon emission permits would create extraordinary opportunities for corruption, rentseeking and political mischief:
[C]arbon auctions raise another problem when it comes to Washington. Revenues from the auctions are likely to be fish bait to industries that might qualify for some of them. Sen. Joe Lieberman estimates that the market value of all permits under his bill would be about $7 trillion by 2050. That sum would go into what he calls a Climate Change Credit Corporation, which, operating outside the budget process, would invest in various plans for developing alternative energy. You can bet that lobbyists for ethanol, nuclear and "clean" coal are already salivating at the prospect of a similar fund emerging from a bill championed by a President McCain or President Obama.
Reich focuses only on "industry" special pleaders and does not mention the additional pressure for special treatment Congress would face from sundry political interests. We recently identified a previously obscure regional environmental advocacy group that wants economists to support its preference that 100% of carbon emission permits be auctioned. The Southern Alliance for Clean Energy does not disclose what its leaders think the government should do with several trillion dollars in new tax revenue. In any case, it is certain that industry will not be the only ones seeking ways to benefit.
Economics teaches that taxes are least inefficient when they distort productive incentives least. Taxes on capital and labor both qualify, so an obvious place to direct the additional revenue from carbon taxes (or auctioned permits) is to reduce them.
Reich proposes a different approach that has a certain democratic appeal:
That's why it's important that all revenues from carbon auctions be cycled back to citizens. And rather than launch another endless debate over how and to whom – a payroll tax cut for people earning under the median wage, or a cut in capital gains? – it would be well to agree to the simplest possible formula: Every adult citizen should receive an equal share. If the carbon auction yields $150 billion in the first year, for example, each of America's 150 million adult citizens should receive a Treasury check that year of $1,000.
Sending out checks avoids the temptation to spend this money that Congress otherwise would face, so it surely ranks as less inefficient that alternative. And it short-circuits the twin threats of rentseeking and corruption that a $150 billion annual pot of money otherwise would create. But it does nothing to reduce the inefficiencies of existing taxes, and in that regard it must be considered second-best.By distributing the proceeds of a carbon emission allowance auction or carbon tax, Reich hopes to reconcile the conflict between high gas prices as a burgeoning political issue this year and both presidential candidates' commitment to raise those prices much higher to address climate change. Both candidates have expressed concern and sympathy about gasoline prices; McCain has proposed and Obama has opposed a federal gas tax holiday; neither candidate has publicly explained that he supports legislation that would significantly increase the price of gasoline and all other forms of carbon-based energy.
Another interesting question raised by Reich's proposal concerns eligibility. Why should minor children be excluded? Although Reich probably thought carefully about limiting eligibility to adults, he does not explain why. For all the democratic appeal of tax rebates, Reich's proposal discriminates against families.
A final, and exceedingly important, issue concerns the scale of the proposed program. Reich claims that the cost of the bill under debate this week would be "modest," and thus a similarly modest individual "dividend payment" would be a "welcome offset" to consumers "walloped by high fuel and food costs and who will be in no mood to accept even modest additional price increases." The Environmental Protection Agency has estimated the impacts of a precursor to the current bill. Whether these impacts are "modest" is a matter of opinion, and the bill's provisions do not appear to be stringent enough to actually achieve its stated goals, much less climate stabilization.
US Environmental Protection Agency, EPA Analysis of the Lieberman-Warner Climate Security Act of 2008; S. 2191 in 110th Congress, March 14, 2008* (PDF):
Under S. 2191, GDP is modeled to be between 0.9% ($238 billion) and 3.8% ($983 billion) lower in 2030 and between 2.4% ($1,012 billion) and 6.9% ($2,856 billion) lower in 2050 than in the Reference Scenario. Consumption is modeled to be between 0.9% ($180 billion) and 1.4% ($233 billion) lower in 2030 and between
2.1% ($670 billion) and 3.3% ($843 billion) lower in 2050 than in the Reference Scenario.
The average annual growth rate of consumption is ~0.08 percentage points lower than the reference case. In 2030 per household average annual consumption is ~$1 ,375 lower and gasoline prices increase ~$0.53 per gallon. In 2050 per household average annual consumption is ~$4,377 lower and gasoline prices increase ~$1.40 per gallon.
Electricity prices are projected to increase 44% in 2030 and 26% in 2050, assuming the cost of allowances can partially be passed on to consumers (as is the case in a full auction).
2.1% ($670 billion) and 3.3% ($843 billion) lower in 2050 than in the Reference Scenario.
The average annual growth rate of consumption is ~0.08 percentage points lower than the reference case. In 2030 per household average annual consumption is ~$1 ,375 lower and gasoline prices increase ~$0.53 per gallon. In 2050 per household average annual consumption is ~$4,377 lower and gasoline prices increase ~$1.40 per gallon.
Electricity prices are projected to increase 44% in 2030 and 26% in 2050, assuming the cost of allowances can partially be passed on to consumers (as is the case in a full auction).
EPA estimates that the bill would reduce global CO2 concentrations from about 719 ppm to about 694 ppm in 2095 (slide 192). EPA examined other scenarios in which US legislation is combined with aggressive international action, which the bill cannot compel and would be contrary to the interests of the nations involved. Still, none of these scenarios would actually stabilize atmospheric CO2.
