In testimony today to the House budget committee, Peter Orszag, the head of the Congressional Budget Office, makes an interesting point about the fiscal implications of a cap-and-trade regime for carbon emissions. Suppose carbon permits are given away to suppliers and industrial users of energy. The proper way to score them in that event--"a solid case can be made", is how Orszag puts it--would be to count the value of the permits as both revenues and outlays, as though the beneficiaries had bought the allowances at value and then been handed the money straight back. What difference would that make? None to the budget deficit, or to the price signal for carbon abatement. But it would show a rise in public spending in the form of grants to the companies concerned. That would presumably alter the politics, and for the better.
Thanks to Greg Mankiw for the CBO link. Greg sums the issue up this way, in his "fundamental theorem of carbon taxation":
cap-and-trade = carbon tax + corporate welfare
So those who say a carbon tax is politically impossible are not quite right. If we go to cap-and-trade, we will have one. It will be hidden, and most likely badly designed, but we will have one. That is why an even more solid case can be made for auctioning thepermits, rather than giving them away. And the most solid case of all is the one for a
straightforward carbon tax.