House Throws Away Big Money in Cap-and-Trade Bill

On Friday, the House of Representatives passed its climate change bill by a slim margin. The bill’s key feature is a cap-and-trade system for greenhouse gases. That system would set national emission limits and would require affected emitters to own permits (called allowances) to cover their emissions.

The number one thing you should know about this bill is that the allowances are worth big money: almost $1 trillion over the next decade, according to the Congressional Budget Office, and more in subsequent decades.

There are many good things the government could do with that kind of money. Perhaps reduce out-of-control deficits? Or pay for expanding health coverage? Or maybe, as many economists have suggested, reduce payroll taxes and corporate income taxes to offset the macroeconomic costs of limiting greenhouse gases?

Choosing among those options would be a worthy policy debate. Except for one thing: the House bill would give away most of the allowances for free. And it spends virtually all the revenue that comes from allowance auctions.

As a result, the budget hawks, health expanders, and pro-growth forces have only crumbs to bargain over. From a budgeteer’s perspective, the House bill is a disaster.

The following table illustrates how much revenue the bill would raise and compares it to the alternative of auctioning all the allowances:

Revenues under the House Bill

The first column shows the revenue implications of the House bill. Over the next ten years, the bill would auction only 28% of the allowances; the rest would be given away for free. CBO estimates that those auctions would raise $276 billion.

But that doesn’t mean that overall revenues rise by that much. Because firms would have to pay for allowances, they would have lower profits; some firms might even lay off workers or reduce their pay. As a result, the government would receive lower revenues from income taxes (both individual and corporate) and payroll taxes; CBO estimates this offset as $116 billion.

The House bill would thus increase revenues by a net of $159 billion ($276 billion – $116 billion) over the next ten years.

Revenues If All Allowances Were Auctioned

The second column shows what would happen if, instead, the government auctioned all of the allowances (CBO doesn’t report these figures but they are implicit in the cost estimate for the bill). In that case, the auctions would raise $989 billion over the next ten years, just shy of the trillion mark. That revenue gain would, in turn, be offset by a $247 billion reduction in income and payroll taxes.

Auctioning all the allowances would thus increase revenues by a net of $741 billion ($989 billion – $247 billion) over the next ten years.

Bottom line on revenues: Auctioning all the allowances would generate $582 billion more in revenue ($741 billion – $159 billion) than would the House bill. That’s real money, even in Washington.

I should emphasize that the idea of auctioning all of the allowances is almost certainly impossible as a political matter. Affected industries have enough clout to oppose anything quite that ambitious. And, indeed, one of the beauties of a cap-and-trade system (from an environmental point of view) is that politicians can use free allowances as currency to reduce opposition to the policies. Unfortunately, such horse-trading can easily transform into the pure power politics of pork.

When that horse-trading gets done, it’s important that the taxpayer has a voice at the table. But when you see more than 70% of the value of the allowances going out the door — netting to almost $600 billion dollars in a time of incredible budget challenges — you have to wonder whether the taxpayer is even in the same room as the table.

Spending Under the House Bill

That conclusion is reinforced by the fact that, as noted above, almost all of the net revenue gets spent and thus isn’t available to cut the deficit, pay for health care, or improve the economy:

Bottom line on spending: This trillion dollar bill improves the budget outlook by a minuscule $9 billion over the next ten years. That’s rounding error relative to the size of the bill and relative to our budget challenges.

In fairness, I should note that the main spending items are efforts to help the poor adjust to the higher cost of energy that would result from this bill. There’s logic to that. But it doesn’t take away from my larger point that the bill does nothing to address larger budget or macroeconomic concerns. I should also note that the fraction of allowances given away goes down in subsequent decades; but that doesn’t address our near-term economic and budget needs either (and seems to be an invitation for future lobbying).

Economists have spent decades demonstrating the potential benefits of using environmental taxes to help finance the government (and make no mistake, a cap-and-trade system is a tax; the Congressional Budget Office, much to its credit, even scores it that way). But that economic logic works only when a substantial fraction of the revenues are used to improve fiscal policy — e.g., reducing deficits or reducing distortions from the tax system. The House bill does neither. Let’s hope the Senate does better.

Comments

[dixie:]

The Democrat House approved the Bill BEFORE readable copies were available for the members and the public.

Only sheep would approve something without first reading it.

Jun 30 09:18 AM

[dcb:]

When are people going to wake up on Obama. One must ignore the rhetoric and just look at his legislative results. he is transferring more money to industry that bush did. the do nothing say a lot president who stole the election from the very people who were conned into voting for him.

Jun 30 12:43 PM

[Henry Buttal:]

I don't believe there was any win possible here from a monetary perspective. With an auction, there were two likely outcomes:

1) A restricted participant auction, with only the targeted GHG emitters. The result is a direct cost increase to certain poltically unfavored industries, which reduces earnings, and/or will be passed on to the consumer eventually.

2) An open auction, where both emitters and speculators could participate. The outcome would be greater revenue for the government, but ultimately the same thing will happen - earnings are reduced, and/or the cost is passed on to the consumer, perhaps at even more leverage number.

If a revenue model was pursued, Congress would spend the money before they even collected it.

There is no free lunch here. And I haven't even to begin enumerating the costs of unfunded add ons to this bill, or the negative impacts to U.S. industries competitiveness internationally.

Jun 30 04:48 PM

[Boxed Merlot:]

Well, since… “a cap-and-trade system is a tax; the Congressional Budget Office, much to its credit, even scores it that way”. I take it Joe tax payer will be able to deduct the amount this bill requires him to pay from his income on his tax return thereby reducing revenues further. Double taxation is still illegal isn’t it? Then again, it might not be anymore, since nobody read the bill before it was passed.

Jun 30 06:48 PM

[TheSnail:]

I see the usual Republican whiners are out tonight.

Screw things up for 8 years. Offer no solutions, then bitch about efforts to solve problems.

Jun 30 09:42 PM

[CuriousMonkey5:]

I see a typical Liberal sycophant is out tonight.

Mischaracterize the last 8 years. Blindly parrot a path to ruin, then bitch about dialogue among people who actually have a clue how dangerous the current administration is to the future of this country.

Jul 01 04:15 AM

[Windsun33:]

I am not a Republican, and I still think that the whole bill is a steaming pile of crap, payoffs, bribery, and gutlessness.


On Jun 30 09:42 PM TheSnail wrote:

> I see the usual Republican whiners are out tonight.
>
> Screw things up for 8 years. Offer no solutions, then bitch about
> efforts to solve problems.

Jul 01 05:21 AM

[c300man:]

This administration and the democratic leadership in the congress (and especially the House) are out of control. Hopefully enough of the country will understand better what they are doing by the time the next elections come around.

Please take the time to read the EPA - Carlin report that has been suppressed by the EPA. It is available from many sources on-line (98 pages). Also, look at Mr. Carlins credentials and papers over his 40 year EPA career. His report should have taken the administration, EPA and congress back to square one about global warming and the need for any sort of cap and trade but instead it seemed to provide the impetus to railroad and foist this legislation all the quicker on the American people.

Jul 01 08:27 AM

[libertyadvo...:]

The fact that this bill will utterly have no effect is why it's bad policy, in addition to the fact that the cost grossly outweighs the benefit. Whether you agree with the effort to regulate emissions or not, one must remember good ideas do not equate to good policy. There are several other "no-regret" ideas for policy floating around. If Congress would simply take the time to come up with something worthwhile, we'd be much better off. We need to stop thinking in crisis mode and rushing to push out poor legislation that simply perpetuates the problem (ie: the stimulus bill).

No Regret Environmental Policy Ideas

mises.org/Community/bl...

cei.org/gencon/025,017...

Jul 01 10:58 AM

[Gregman2:]

Timing's not right. Need to have a firm recovery in place and then gradually phase this one in, if at all. Actually, nuclear is the best option to reduce foreign erl.

Jul 01 06:48 PM