CBO said it, Dave Roberts and Matt Yglesias said it, and I’ll say it too:

If we establish a carbon cap, giving away free carbon permits to big carbon emitters will hurt the middle class and poor at the expense of the well-off.

The chart below, from the Congressional Budget Office, shows the effects fairly clearly…

CBO - economic distribution

The the bars to the left show what happens under a “Cap-and-Cashback” carbon policy—i.e., auctioning off carbon permits to major emitters, and giving an equal share of the auction revenue to every US citizen.  Under Cap-and-Cashback, the lower income groups do pretty well; folks with middle incomes are more or less held harmless; and higher-income folks who use more energy, and who also have a bit more give in their budgets, wind up paying a bit extra for their emissions.

The middle and right-hand groups show what happens under various “Cap-and-Giveaway” proposals– that is, if we give the value of carbon permits to companies either directly, or through corporate tax cuts.  Under Cap-and-Giveaway, lower and middle-income folks do terribly, losing a significant chunk of after-tax income.  Even the relatively well-off folks in the next-to-highest income group do worse than they do under Cap-and-Cashback.  But the wealthiest group does great — they actually gain income from carbon giveaways.  After all, the folks at the top own most of the energy companies who will reap the big profit windfalls from Cap-and-Giveaway.

  • Unfortunately, it’s frustratingly difficult to explain why giving free permits to companies is such bad news for ordinary consumers.  If polluters gets something for free, how can they possibly charge for it?  Well, they just can—just the way scalpers can charge for free tickets they find on the ground.  The whole thing is a bit like the Monty Hall brain teaser that made the rounds a decade or so ago—there’s one answer that’s indisputably correct, but it can be very, very hard to see why.

    But precisely because the economics are confusing, major polluters are blowing all sorts of smoke about Cap-and-Giveaway—claiming that the only way to protect consumers is to give big energy companies free carbon permits.  That’s exactly backwards.  It makes you wish that there were some sort of truth-in-advertising law.  But since there’s not, the only antidote I can think of is simple repetition.  So repeat after me:  Giving away free carbon permits to polluters is bad for consumers.  Giving away free carbon permits to polluters is bad for consumers.  If everyone out there starts reciting that, perhaps I’ll be able to take a break someday…