Carbon permits: who pays?

Matt says that Obama has McCain beat all hollow on energy policy:

And it's true. Barack Obama's energy policies -- focused on improving efficiency and developing renewable energy sources -- are pretty much party line answers because the Democratic party line is largely correct. McCain, by contrast, is a mess. He wants a cap and trade system to combat global warming (good) but wants to organize it so that the costs are borne entirely by consumers rather than polluters (bad). He says he's against subsidies for renewable energy because subsidies are a bad idea (understandable if a little pie in the sky) but wants massive subsidies for nuclear energy (because nuclear firms give him campaign contributions). McCain wants to get us off our addiction to oil (good) but he has no record of improving mass transit or fuel efficiency (bad) and his big idea is to wreck the economy of the coastal United States through offshore drilling which he falsely claims will lower short-term fuel prices. On top of all that, he proposes to lower gas prices through a "gas tax holiday" that's been denounced by experts across the ideological spectrum.

The question of auctioning carbon permits, vs. giving them away to companies, is often framed as a question of whether companies or consumers pay the cost. This is false. Consumers are going to pay the cost no matter what. Oil is in short supply, which means they'll pay to the point where the market clears no matter who gets the revenue. And utilities are generally heavily regulated companies with so-so profit margins--Con Ed, for example, which provided electricity to both me and Matt growing up, has a 7% net margin and an ROE of roughly 11%. Pepco, which currently serves us (I think--my rent includes utilities), does 4% and 9-10%. The costs of carbon, whatever they are, will pass through.

As they should. The only reason to have a carbon trading scheme, or a carbon tax, is to force carbon emissions down; otherwise it's just a stupidly inefficient tax that requires a gigantic new collection bureaucracy. And unfortunately, for the foreseeable future the main way we're gong to do that is to get people to use less energy. Taking money from Conoco doesn't further this goal unless the cost is passed through to consumers.

The core issues in the auction vs. giveaway question are two:

1) The distribution of costs between consumers and the government. A giveaway leaves the surplus in the hands of consumers; an auction gives the money to the government.

2) The distribution of benefits within the energy sector. A giveaway benefits industry incumbents, who can use their lobbying power to secure them. An auction benefits the holders of capital.

Austan Goolsbee talked a lot about that this weekend; he argues (correctly, I think) that a giveaway carries a high risk of corruption/regulatory capture. But he didn't frame the question as a showdown between consumers and power companies, because no matter how the permits are allocated, the consumer is going to pay the price.