A Question For Megan McArdle!

610 pollution on Y river.png

Concerning the history of the Waxman-Markey cap and trade bill, Megan writes:

Now, everyone on the left was united in favoring auctions over giveaways. Auctions also had a fair amount of support on the right, mostly from people who hate corporate welfare even if they also oppose cap-and-trade. ...[B]ut the fact is that at the end of the day, you couldn't do this perfectly obvious thing that has surprisingly broad support among the policy elites of both parties. Instead, the bill was passed in a form that makes it more expensive, and almost totally ineffective.

I agree with Megan that auctions were a perfectly obvious thing to do. Still, I have a question for her: What's the connection between the the fact that the permits are being given away and the fact that the bill is now "almost totally ineffective"? I'm not sure I see a connection between these things.

A little plagiarism from last week: Waxman-Markey has warts, and in many ways a carbon tax would be simpler and fairer than a cap and trade system. Nonetheless, it seems to me that C&T does have one feature that is a nice bulwark against the harms of lobbying: It puts a strict cap on emissions. This means that industry lobbyists can affect how permits are distributed -- who gets them and when -- but changing the permit distribution process cannot raise the overall level of emissions that will occur.

I still think the distribution of permits is important. By giving some portion of the permits away, the government might be rewarding one industry over another, or rewarding firms that currently occupy a market over firms that might want to enter it in the future. That is unfair. But those concerns about fairness can and should be separated from concerns about the environmental effectiveness of the bill. Or do you disagree, Megan?

Nota Bene: Two additional thoughts. First, it's possible that the offset program in the bill will raise the overall level of emissions, if it is subject to lax oversight. Second, it's possible that the C&T giveaways will raise the number and amount of transaction costs in the carbon market, per this helpful comment from last week. Photo: Pollution along the Yangtze River, China. I continue to find Wikimedia's collection of air pollution photographs oddly striking.