Ezra Klein over at the American Prospect disputes this last blogpost of mine. He offers three points in reply. Answers to each in turn:
[David Frum] says that the Obama administration plans to “use the revenues generated by cap and trade to pay for health care tax credits for lower-income people.” That’s not true. The revenues from cap and trade will be used to fund the $800 Making Work Pay tax cut, which is a refundable income-tax credit. It has nothing to do with the health care plan.
He’s right, I’m wrong. I scrambled my notes and inserted an erroneous “health care” before the correct “tax credits.”
He says that cap and trade “only generates revenue if American utilities emit more carbon in future years than they have done in past years.” Again, not accurate. Imagine I pass a law taxing potatoes at the rate of one dollar a potato. This year, Americans eat a billion potatoes and I make a billion dollars. Next year, they eat a half billion potatoes and I make a half billion dollars. A half billion dollars is still more than I made when I wasn’t taxing potatoes.
The big decision in cap and trade is whether existing emitters have to pay to retain the right to emit – or whether they will be capped at present levels and only pay if they exceed those levels. During the campaign, candidate Obama endorsed the first and more radical idea, and Ezra is assuming that this campaign trail idea is the one that will become law. Not so fast. The bill actually introduced in Congress by Henry Waxman in 2007 allowed existing emitters to continue their emissions at only gradually reducing levels over multiple years in future. The 2007 bill is the basis for the bill taking form in Congress right now. My description of the revenue effects of the actual law is almost certainly closer to what Congress will produce than Ezra’s.
Finally, Ezra argues that taxes on carbon
fall on users of electricity [only] if the corporation passes them on to the users of electricity. They will do this to some degree. Probably not 100 percent, as that would be a fairly sharp price increase. But it’s important to remember that the tax only falls on users of electricity insofar as people use electricity.
Since the corporations in question are (above all) regulated electrical utilities, they will of course pass on the price in full. Indeed, that’s the idea. If the utilities swallowed the tax, rather than passing it on, there would be no effect on consumer behavior – which is the main point of the cap-and-trade regime after all. Yes people can escape the tax by using less electricity. But the tax is still falling on them – they are just feeling its effects in a different form, by reducing their consumption. They are still worse off, just worse off in a different way. And again: that’s the point.
(Sorry – I know Ezra will say that the point is to persuade the utilities to rely on windmills instead. But that’s energy fantasy, not energy policy!)
5 responses so far
1 gblittle // Feb 26, 2009 at 4:10 pm
This has to be the dumbet comment I’ve heard in some time: Finally, Ezra argues that taxes on carbon “fall on users of electricity [only] if the corporation passes them on to the users of electricity. They will do this to some degree. Probably not 100 percent, as that would be a fairly sharp price increase. But it’s important to remember that the tax only falls on users of electricity insofar as people use electricity.” In business anything that has a cost associated with it is PASSED ON to the buyer, in this case the electrical consumer. The real money shot however is the last sentence of Ezra’s comment, “in so far as people use electricity”. Tip for everyone — buy candles and load up on blankets.
2 fact based // Feb 26, 2009 at 4:24 pm
Mr, Frum:
Go to wikipedia and look up the term externalities. Your argument presupposes that our current use of energy is cost free. In your world the following argument would have been made 30 or so years ago : “to force corporations not to dump raw chemical waste into the great lakes and the hudson river imposes a cost on businesses that they will pass onto consumers thus harming our economy and society”. Which of course would be true….if there was no cost to society. And the David Frum of that era would have told the advocate of clean rivers and clean chemical production “that’s environmental fantasy, not economic policy”
3 sinz54 // Feb 26, 2009 at 6:47 pm
fact based: There is a big difference here: If an American company dumps waste into the Hudson River, they are hurting mostly AMERICANS. So that’s a national problem for our fellow citizens. Whereas if an American company dumps carbon dioxide into the atmosphere, it is primarily the undeveloped world that will be hurt by it. Unlike America, nearly all of Bangladesh (population 200 million) will be flooded out when the north polar ice cap melts. So we Americans are essentially restricting our economy, and impoverishing our own people, to keep the undeveloped world safe from global warming. Why are we doing them this multi-trillion-dollar favor without them paying us for it? The world cannot control global warming without U.S. cooperation. We should strike a very hard bargain for that cooperation. For example, I would insist that Bangladesh clean up its act and kick *ALL* radical Islamists out of their country before we do anything to keep their country from being flooded. We’ve got the political leverage. Let’s use it!
4 sinz54 // Feb 26, 2009 at 6:52 pm
gblittle: “In business anything that has a cost associated with it is PASSED ON to the buyer, in this case the electrical consumer.” But a regulated utility, like a power company or water utility, isn’t always allowed to do that on its own. It has to appeal to the local or state Rate Commission. The Rate Commission will decide how much profit (sales price – cost) the utility is allowed to make in any given year.
5 joemarier // Feb 26, 2009 at 7:26 pm
**The Rate Commission will decide how much profit (sales price – cost) the utility is allowed to make in any given year.** Sinz, allow me to introduce you to my friend “regulatory capture.”
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