Un-Regressing a Carbon Tax

UN-REGRESSING A CARBON TAX….The other day I mentioned that a cap-and-trade system for greenhouse gases would be a huge windfall for power companies if the permits are given away based on past history instead of being auctioned to the highest bidder. What’s more, energy prices would rise substantially (that’s the whole point) and the poor would be hit much harder by this than either the middle class or the affluent.

A cap-and-trade scheme that auctions off 100% of its emission permits would eliminate the windfall profits, but it would still act essentially as a regressive carbon tax, raising the price of energy and hitting the poor disproportionately. The nice thing about the auction, though, is that it provides government revenue that can be used to offset the regressivity of the original tax. But if we did that, would there be any revenue left over for anything else?

An analysis by CBPP says yes. They conclude that about 15% of the revenue would be needed to compensate companies for their losses and about 14% would be needed to hold low-income consumers harmless. That leaves more than 70% for other purposes, including funding of green R&D. Here’s their basic recommendation for helping the poor: “We propose pairing a tax rebate with climate rebates issued through the electronic benefit transfer (EBT) systems that state human service agencies use to provide assistance to many poor people….Funds set aside for climate rebates should go to intended beneficiaries, not administrative costs or profits. Accordingly, policymakers should provide relief as much as possible through existing, proven delivery mechanisms — such as the EITC and state EBT systems — rather than new public or private bureaucracies, which entail very substantial administrative costs.”

More here if you want to read up on this stuff.