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…
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.
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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…
What most people do not think about is the fact all costs to corporations get passed down to the consumer in the prices of the goods and services. You can tax the corporations, give that money to the consumers, and the consumer has to spend that extra money on the higher prices of the goods and services. This yields no increase in disposable income to the individual. There is no benefit to the consumer or the environment. By only taxing the emissions and other earth damaging activites, you only raise the prices of the goods to the consumer. The corporations will continue to practice unethical methodologies to produce their goods. The real solution is for individuals to become more responsible.
The effect that smokinj describes is already taken into account in the chart. The carbon cap policies are designed to change the relative competitiveness of energy producers so that more carbon-efficient companies win—their products will be cheaper. Basically, the carbon cap policies aim to internalize the costs of pollution within the energy producers that consumers are already paying for indirectly.
Putting all of this in the context of economics reminds me of the guy who comes home late at night and drops his keys at the door to his house, but goes to look for them at the nearby streetlight because that is where the light is. This “economics speak” appears to be mostly useless banter with mixed net effects on the environment and its inhabitants. When emissions are allowed (sold/auctioned), the area polluted is not confined and, ultimately, we all end up sharing in its negative effects. On the other hand, if we strongly implemented dovetailing policies (over only a few years) of increasingly requiring prevention of emissions (or shutting down an operation altogether) with increasingly requiring clean production methods (updating old plants or building new ones), the net results could be solidly positive.
GEO–That is the point of a cap-and-trade program. We set a firm cap and the amount of pollution that can be emitted. Then, over time, we ratchet the cap down so we’re polluting less and less. The difference between that and the policy you describe is that instead of mandating which methods industries use to reduce their emissions, they can decide how to reduce emissions in a way that works best for them.