Cap and Trade Auctions

Fri, 08 May 2009 14:38:52 +0000

Yesterday, CBO Director Doug Elmendorf testified to the Senate Finance Committee on the distribution of revenues from a cap-and-trade program for carbon dioxide emissions. The most important part of his testimony makes the case for auctioning off the permits. From the overview at his blog:

Giving allowances to energy-intensive manufacturers would not, by itself, hold down the price of their output, which would rise to reflect the private market value of the allowances. The result could be windfall profits for these firms, which would tend to benefit higher-income households who own most stocks.

I prefer a carbon tax to cap-and-trade, but if we are going to have cap-and-trade, it is critical that we auction the permits. In this report by the AFP, we get OMB Director Orszag holding to that point:

WASHINGTON (AFP) – The White House is committed to auctioning off polluter permits under a "cap-and-trade" system to fight climate change, a top official said Thursday in remarks likely to anger US industry.

"You should anticipate no changes in our climate proposals," Office of Management and Budget chief Peter Orszag told reporters, despite reported hints that President Barack Obama might now compromise about the auctions.

It would be a shame if that "compromise" happened. It is exactly the potential for those sorts of deals to be cut that lead me to favor the carbon tax over cap and trade.

I also think AFP has no business inserting a line like this into its article:

Meanwhile the head of the Congressional Budget office told a Senate panel that cap-and-trade would adversely affect both consumers and producers at a time of national economic distress.

The phrase "national economic distress" doesn't appear anywhere in Elmendorf's testimony. Elmendorf's testimony is entirely about the changes in the distribution -- not the level -- of the tax burdens inherent in a cap-and-trade system. Changing the distribution of burdens will adversely affect some consumers and producers. It will positively affect other consumers and producers; specifically, the ones who are responsible for less emissions in their activities. One might have thought that an entity like AFP would like to highlight that.