No, this isn’t a post about the goodies at this-coming Monday’s Econ TeaBA (where, rumor has it, Professor Galambos will explain the competitive market model to Professor Corry in 15 minutes. Whether he can make good on this promise remains to be seen. In either case, please, no wagering at the TeaBA).
This is a post about who will benefit and who will lose from the climate legislation. We have been talking about the distributional issues in Economics 280 for a couple of weeks, that there are many ways to get the same “quantity,” but who wins and who loses can vary radically. The projected shares are a big key to determining political feasibility — businesses like free permits much more than auctioned permits, and certainly much more than (egads) paying a tax. On this front, we will be reading a paper called “Carbon Geography: The Political Economy of Congressional Support for Legislation Intended to Mitigate Greenhouse Gas Production” in our political economy course next week. The basic idea here is that representatives from states with high per-capita carbon emissions are less likely to support costly carbon restrictions. (Actually, I haven’t read the paper yet, but I would have bet a dollar that’s what it says. That is, I would bet a if I hadn’t discouraged wagering in the previous paragraph).
As for the distribution front, Ted Gayer from Brookings has some preliminary estimates on who is going to capture the value of freely-allocated and auctioned permits over the first 20 years of the program. The program will start with about 75% of the permits being handed out and more than half of the value of those permits accruing to electric utilities. Less than 10% of the revenue will flow to deficit reduction or to offset other taxes. Between 2026 and 2027, however, the percentage of auctioned permits jumps and ascends from 20% to a full 100%. And, if you believe that is a credible commitment, I would encourage you to sleep it off and rethink your position tomorrow. Consumer relief — that is, higher prices reduce consumer benefits — stays steady about 10% throughout. Believe him or not, Gayer’s short brief is worth reading precisely because he hits the heart of the environmental policy debate.