Climate Bill Gives Too Much Away

Donald Marron and I agree about what’s wrong with the House climate bill passed last week–just another example of how economists on different sides of the political aisle often share more common ground than any other two people on different sides of the aisle. I’ve complained before about how odd it is to hear politicians who advocate for stronger environmental goals at the same time claiming that they don’t want a policy that actually raises energy prices. (News flash: then the policy wouldn’t actually change incentives, would it?) Donald emphasizes what a supreme waste of money the House-passed bill is. Even if on net it wouldn’t actually cost the government anything, the opportunity cost is huge:

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 potential revenues from climate change / carbon policy are one of those actually desirable ways to raise revenue that economists (from both sides of the aisle) like to dream about. That and limiting or eliminating the tax exclusion for employer-provided health care–you know, those ideas that go over really well with politicians and lobbyists… We need these additional sources of revenue, because it’s clear our federal revenue base is insufficient and will remain that way even after the recession is over. I’ll write more on that tomorrow.

Comments

[Steven Hansen:]

I am not in favor of playing with economic equilibriums when the economy is weak. here is what Nouriel Roubini's RGE Monitor said on this subject:

"One of the biggest benefits of this legislation is that it provides a mechanism to set a price for carbon over the mid-term. Doing so will help households and businesses make investment and savings decisions. However, economists have long argued that a carbon tax would be more efficient than a Cap-and-Trade system, as it would be less complex and vulnerable to distortions. A carbon tax would set a specific cost per unit of carbon dioxide, thus establishing a clear cost for carbon. A Cap-and-Trade system, on the other hand, would set an upper limit for emissions, but the prices it established for carbon might be variable. Of course, introducing new taxes is rarely popular, particularly not during a recession, even if the tax option would be more efficient and have lower compliance costs. "

"The European Union’s experience with Cap-and-Trade over the past several years provides reason for caution. The first iteration of the policy, issued too many permits, undermining demand. With prices for carbon low, so was the incentive to reduce emissions. A reformulation improved this balance and emissions have been reduced, though European countries still have a significant space to reach their targets. The EU system allows companies to bank or store their allocations for the future or to borrow them from the future. The EU system also illustrates an effect of the global recession. The drastic reduction in industrial output has meant that many companies are producing well lower than their quotas and are seeking to sell their excess allocation. Several companies sought to raise cash by selling their carbon certificates, causing the price of carbon to plummet. A market-derived carbon price might actually be very volatile. "

Jul 01 05:39 AM

[Mad Hedge F...:]

Only if you don't plan on breathing. It’s amazing that Al Franken won his state Supreme Court case over Norm Coleman for the Wisconsin Senate seat, just as the Clean Energy Act of 2009 comes up for a vote. Now the Democrats can ram the bill through, no questions asked, leaving fuming Republicans on the sidelines bitching to Fox News. This is one of those seemingly insignificant events which will have a huge impact on history. The last one of these I can remember was when a Cuban orphan named Ellia Gonzales washed up on a Miami beach, and ultimately threw the Cuban vote, the state of Florida, and the entire national election for Al Gore. The bad news is that the cost of your utility bill, gasoline bill, tax bill, and everything else you buy is going up. Those unhappy readers in the Midwest and South can expect more of their income to get shifted towards the two coasts. The good news is that you get to breathe, and your kids will live a full life.

Jul 01 10:13 AM

[Danny Newton:]

I don't see the difference between granting allowances and counterfiting. The worth of the paper is to be established later and then we can use our real money to by this allowance. This is a psychological investment much like piling blocks of stone in Egypt to make sure Pharoah had eternal life.

Another thing I can not figure out is the attitude about the increase in energy always being a good thing. It takes a lot of energy to do an MRI and make all of the plastic stuff used in medical treatments. Increased energy prices will hit all sectors of the economy and all sectors do not have the same ability to pass that along. It is going to cost more to operate a school if energy prices go up and I don't see any mitigation except raising taxes. If it cost more to go to work then the area around the potential employer and the potential employee will shrink, This has to shrink the opportunity to find workers or jobs. The probability of a worker replacing a lost job with a better one is going to be changed and I see no way of assuming that will be good except in the occasional anecdotal instance.

Another thing I don't understand is the expectation that all sectors of the government have the same willingness and talent to actually respond rationally to the increase in price of things that have carbon in them . Only those organizations that are using classical benefit costs analysis have a prayer of optimizing their choices, but in the government, benefit-cost analysis is not rational because of monetizing too many indirect costs and benefits.

The CBO did not even try to monetize the benefits of Global Warming Mitigation in their lousy appraisal.

I don't understand how the Keynesians are on board for this because of the probability that the program will reduce demand and thus will snuff out the demand that the stimulus so urgently is trying to create.

Jul 01 03:27 PM

[Tony Petroski:]

The Madman back with the same comment on another article.

Wealthy countries are clean countries, poor countries are dirty countries. Allowing the left to do more to "clean up the environment" is like allowing the left to run our big cities--oh wait, we already do that. How did that work out? The dirtiest places in our country also happen to be the bluest places of our blue states.

Jul 01 09:07 PM