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Worried about the economic cost of greening the economy? Bjorn Lomborg, concerned that fear-mongering is spurring protectionism, sure is. But two prominent economists, Paul Krugman and Greg Mankiw, think carbon caps can be designed with minimal economic damage. And a pair of big-name bloggers agree. But they disagree on the best way to do it.

In a blog post Friday, Krugman argues that opponents of a cap-and-trade system like Glenn Beck and conservative Harvard economist Martin Feldstein exaggerate the cost to middle-class consumers of an emissions tax to drive down pollution by putting a price on carbon. The tax, Krugman writes, is "just a transfer from one set of people to another--from the emitters, and ultimately those who buy their products, to whoever collects the taxes or gets the permits, and ultimately whoever benefits from the revenue or rents thus generated." Under the Waxman-Markey bill that passed the House, "many of the permits are initially granted to utilities--but since these utilities’ profits are regulated, many of the rents would end up being passed on to consumers through lower prices." This would spare the middle class the brunt of the cost.

Other bloggers agree, but don't necessarily think Krugman's plan is the best option.

  • How to Design A 'Pro-Growth Carbon Cap'  Matt Yglesias notes that while both producers (sellers) and consumers (buyers) lose when government imposes a tax--since taxes cut sellers' profits and raise prices for buyers--there are ways to offset some of that loss. The government could protect producers by giving away carbon permits for free. Or it could "sell the permits" and protect consumers by passing the money to them. Another option is that government could "auction the permits, have the government keep the money, and use the funds to reduce some other tax." If the other tax is more harmful to economic growth than the carbon tax, which Yglesias considers likely, using carbon-cap revenue to reduce it would benefit the overall economy.
  • Krugman Wrong About Consumers  Harvard economist and blogger Greg Mankiw takes issue with Krugman's evaluation of the Waxman-Markey plan: Mankiw doesn't think passing rents to consumers "through lower prices" is a good idea: "To promote an efficient allocation of scarce resources, relative prices should reflect true social costs." That means that if consumers are forced to deal with real prices, instead of artificially lower ones, they're more likely to "make optimal decisions regarding energy consumption"--that is, curb their energy consumption. But Mankiw would prefer that they "be compensated...via cuts in income or payroll taxes...financed by the revenues received from the auctioning of carbon rights (or, better yet, a carbon tax)."
  • Mankiw Wrong About Consumers  Reuters finance blogger Felix Salmon isn't a fan of cutting income taxes due to worries about inequity: "[Y]ou end up giving more benefit to high earners than to low earners, and people who pay little or no taxes at all (e.g., the unemployed) get precious little benefit at all." He doesn't like the alternative, either--a "flat refundable tax credit" to each taxpayer.  That would mean "three college roommates sharing a small city apartment would get three times the amount going to a single mother trying to raise three kids in the countryside." Any equitable solution "is going to be complicated."

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