Every public policy has winners and losers. Sometimes it's obvious who those are, but more often, it takes some digging to understand how the money flows.
The typical way special interests get money from government is through subsidies and tax breaks. In those cases, all taxpayers pay, and favored companies gain.
Subsidies and tax breaks are very much on the table in climate policy debates. But the climate crisis presents several other ways for businesses to enrich themselves at public expense, and citizens must watch carefully.
For example, one proposal to cap carbon emissions would give polluting companies free emission permits worth billions of dollars. Other proposals would create a loosely regulated system of carbon offsets that would help traders profit, but add little public benefit.
The big economic question in climate policy is whether polluters should pay or be paid. If carbon permits are given free to historical polluters, energy prices will rise and we'll all pay more to whoever gets the permits. That wealth transfer ? which over time could exceed a trillion dollars ? will flow straight from our pockets to the shareholders of polluting companies.
If rewarding polluters is the wrong way to go, the right way is to make them pay. That requires a well-designed system.
Taxes vs. caps
Economists agree that, one way or another, we must raise the price of dumping carbon into the atmosphere. The debate is about how to do that.
A carbon tax is one way. Initially, fuel companies would pay the tax and government would get the revenue. But fuel companies would pass the tax on to consumers, so in the end, a carbon tax is like a sales tax on necessities. As such, it's a regressive tax ? that is, the lower your income, the bigger the bite a carbon tax takes.
A carbon cap is an indirect way to charge for dumping carbon dioxide into the atmosphere. It puts a physical limit ? a cap ? on the supply of fossil fuels or the quantity of carbon dioxide emissions. To implement the cap, the government issues a gradually declining number of permits. As the supply of permits declines, the price of carbon rises. Since this price is ultimately paid by consumers, a carbon cap is as regressive as a carbon tax.
How much will a carbon tax or cap cost the average household? According to the Congressional Budget Office, when the cap is 15 percent below the current level of emissions, the average U.S. household will pay $1,160 a year in higher energy prices. As the cap goes down from there, the cost to households goes up. A tax that achieves the same reductions would cost as much.
That's no small burden to be adding to the already tight budgets of American families ? it will pinch not just the poor, but the entire middle class. And it could dampen consumer buying power just when the U.S. economy needs a boost.
Fortunately, there's a way to offset this hit on household incomes ? it's what economists call 'revenue recycling.' The idea is to return to households, in aggregate, the extra money they'll pay when carbon prices go up. Some households will pay more in higher prices than they get back, while others will pay less, but overall, household incomes will be maintained.
Most economists agree that revenue recycling in some form is a good idea.
Among political figures, Al Gore has come out squarely for it. "We need to put a price on carbon," Gore said in his Nobel acceptance speech, "with a tax that is rebated back to the people progressively." His preferred recycling method is to refund a portion of workers' payroll taxes.
A better way to recycle carbon revenue is to do what Alaska does with proceeds from its oil leases ? pay equal dividends to all residents. This would cover everyone who pays higher energy prices, not just wage earners who pay payroll taxes. Refunding only those who pay payroll taxes would leave out retired people, young people, stay-at-home parents, workers in the informal economy, and half the poorest people in America.
By returning higher carbon prices to all Americans equally, we'd have a system in which everyone pays to pollute, but conservers come out ahead. People who drive big cars and heat large homes would pay more in higher energy prices than people who ride buses and live in small apartments. Since all would get the same amount back, conservers would gain and guzzlers would lose. Green behavior would be rewarded while polluting behavior is penalized.
I'll say more about Alaska-style dividends in my next post. Suffice it to say here that a cap-and-dividend system would be the simplest, fairest and most effective way to solve the climate crisis ? and the most politically popular way as well.