The Case for Auctions

Ryan Avent and Kevin Drum focus attention on an important difference between the Obama and McCain climate change plans, Obama would auction tradable emissions permits to would-be emitters, whereas McCain would give them away. Either plan would increase the price consumers pay for energy and reduce the overall quantity of emissions (Obama sets more aggressive targets, but that's a separate issue) but the differences comes into play in terms of who gets the extra money generated by the higher energy costs.

In the case of the McCain plan, most of that money goes right back into the pockets of polluting industries in order to compensate them for the costs of no longer destroying the planet. In the case of the Obama plan, the money will accrue to the U.S. Treasury whence it can be spent to alleviate the burden on consumers by offering offsetting tax cuts, investments in transportation alternatives, subsidies for fuel efficient vehicles and alternative energy, etc. The McCain plan would be an improvement over the status quo, and certainly if compromising on the goal of 100 percent auctions is necessary to get a bill through the Senate I'm prepared to compromise, but the 100 percent auction is really a dramatically preferable option. The costs to individuals of adapting to a new low-carbon economy will be bearable but quite real and it's a very good idea to generate as much cash as possible to plow into helping people out with the transition.

Comments

Not to mention, some of that money could be plowed into mass transit. Like you say, if the rails aren't there, people can't get out of their cars and ride them.

Posted by low-tech cyclist | May 13, 2008 11:06 AM

One major problem with not auctioning them is that giving them away serves as yet another barrier between the price you pay and the cost of carbon emissions.

Posted by Me | May 13, 2008 11:14 AM

Either plan would increase the price consumers pay for energy and reduce the overall quantity of emissions

That's some great wishful thinking. In fact, either plan would simply move polluters (a silly idea itself, since CO2 is a necessary compound for green plants) outside the US and away from punitive price-jacking schemes. Those polluters who have enough money will spend it on seeking rents by lobbying politicians and regulators.

The whole show could prove costly -- and entertaining! Better buy your popcorn now, before its price rises due to carbon emission permits.

Posted by MarkG | May 13, 2008 11:18 AM

I like the spirit of the Obama plan, but someone explain how one determines the portion of the higher energy costs that get skimmed off?

Posted by Kurzbein | May 13, 2008 11:20 AM

and certainly if compromising on the goal of 100 percent auctions is necessary to get a bill through the Senate,

What that would mean would be a highly regressive financial to cure global warming. We’d fixing the problem by creating tremendous poverty.

I’m not sure that’s a compromise we should be making. It would push people into poverty, I suspect in a greater numbers and to a greater severity then anything since the great depression.

Certainly the increased costs would generate a lot of pressure to create further legislation to ameliorate the problems, so a solution might be reached at a later date, but still I think people need to realize the dangers involved here.

Posted by Christopher Colaninno | May 13, 2008 11:21 AM

Interesting situation, politically its easier to get to 50 Senate votes if we give away the permits, but I'm not sure there are 60 votes to override a filibuster.

On the other hand, since an auction raises revenue, you could sidestep the whole filibuster issue. Tax bills are exempt from filibusters, otherwise Clinton never would have gotten his '93 tax increase through on Al Gore's tiebreaker vote.

I suppose the political sweet spot would be a revenue neutral auction. Any revenue it raises would be matched by a decrease in corporate or (even better) FICA taxes.

Posted by beowulf | May 13, 2008 11:54 AM

Auctioning off permits is certainly preferable to giving them away, but the fact is that any form of cap-and-trade is significantly inferior to a carbon tax.
Allowing some flexibility in emissions from year to year (e.g. not setting a quantity limit, as under a cap) gives firms much greater flexibility in reducing emissions, and thus facilitates greater long-term emissions reductions than are feasible under a strict cap. This is why CBO has estimated that, for a given economic cost, a carbon tax could achieve five times the emissions reductions of a comparable cap-and-trade system.

A carbon tax also avoids the huge volatility in energy prices which flows from a cap-and-trade system (see volatility under the European ETS).

Matt, anyone who cares about climate change for fault both Obama and McCain for being too timid to propose a carbon tax.

Posted by Reid F. Capalino | May 13, 2008 11:56 AM

Auctioning off permits is certainly preferable to giving them away, but the fact is that any form of cap-and-trade is significantly inferior to a carbon tax.
Allowing some flexibility in emissions from year to year (e.g. not setting a quantity limit, as under a cap) gives firms much greater flexibility in reducing emissions, and thus facilitates greater long-term emissions reductions than are feasible under a strict cap. This is why CBO has estimated that, for a given economic cost, a carbon tax could achieve five times the emissions reductions of a comparable cap-and-trade system.

A carbon tax also avoids the huge volatility in energy prices which flows from a cap-and-trade system (see volatility under the European ETS).

Matt, anyone who cares about climate change for fault both Obama and McCain for being too timid to propose a carbon tax.

Posted by Reid F. Capalino | May 13, 2008 11:56 AM

Auctioning off permits is certainly preferable to giving them away, but the fact is that any form of cap-and-trade is significantly inferior to a carbon tax.
Allowing some flexibility in emissions from year to year (e.g. not setting a quantity limit, as under a cap) gives firms much greater flexibility in reducing emissions, and thus facilitates greater long-term emissions reductions than are feasible under a strict cap. This is why CBO has estimated that, for a given economic cost, a carbon tax could achieve five times the emissions reductions of a comparable cap-and-trade system.

A carbon tax also avoids the huge volatility in energy prices which flows from a cap-and-trade system (see volatility under the European ETS).

Matt, anyone who cares about climate change for fault both Obama and McCain for being too timid to propose a carbon tax.

Posted by Reid F. Capalino | May 13, 2008 11:56 AM

Auctioning off permits is certainly preferable to giving them away, but the fact is that any form of cap-and-trade is significantly inferior to a carbon tax.
Allowing some flexibility in emissions from year to year (e.g. not setting a quantity limit, as under a cap) gives firms much greater flexibility in reducing emissions, and thus facilitates greater long-term emissions reductions than are feasible under a strict cap. This is why CBO has estimated that, for a given economic cost, a carbon tax could achieve five times the emissions reductions of a comparable cap-and-trade system.

A carbon tax also avoids the huge volatility in energy prices which flows from a cap-and-trade system (see volatility under the European ETS).

Matt, anyone who cares about climate change for fault both Obama and McCain for being too timid to propose a carbon tax.

Posted by Reid F. Capalino | May 13, 2008 11:56 AM

Auctioning off permits is certainly preferable to giving them away, but the fact is that any form of cap-and-trade is significantly inferior to a carbon tax.
Allowing some flexibility in emissions from year to year (e.g. not setting a quantity limit, as under a cap) gives firms much greater flexibility in reducing emissions, and thus facilitates greater long-term emissions reductions than are feasible under a strict cap. This is why CBO has estimated that, for a given economic cost, a carbon tax could achieve five times the emissions reductions of a comparable cap-and-trade system.

A carbon tax also avoids the huge volatility in energy prices which flows from a cap-and-trade system (see volatility under the European ETS).

Matt, anyone who cares about climate change for fault both Obama and McCain for being too timid to propose a carbon tax.

Posted by Reid F. Capalino | May 13, 2008 11:56 AM

Auctioning off permits is certainly preferable to giving them away, but the fact is that any form of cap-and-trade is significantly inferior to a carbon tax.
Allowing some flexibility in emissions from year to year (e.g. not setting a quantity limit, as under a cap) gives firms much greater flexibility in reducing emissions, and thus facilitates greater long-term emissions reductions than are feasible under a strict cap. This is why CBO has estimated that, for a given economic cost, a carbon tax could achieve five times the emissions reductions of a comparable cap-and-trade system.

A carbon tax also avoids the huge volatility in energy prices which flows from a cap-and-trade system (see volatility under the European ETS).

Matt, anyone who cares about climate change for fault both Obama and McCain for being too timid to propose a carbon tax.

Posted by Reid F. Capalino | May 13, 2008 11:56 AM

Auctioning off permits is certainly preferable to giving them away, but the fact is that any form of cap-and-trade is significantly inferior to a carbon tax.
Allowing some flexibility in emissions from year to year (e.g. not setting a quantity limit, as under a cap) gives firms much greater flexibility in reducing emissions, and thus facilitates greater long-term emissions reductions than are feasible under a strict cap. This is why CBO has estimated that, for a given economic cost, a carbon tax could achieve five times the emissions reductions of a comparable cap-and-trade system.

A carbon tax also avoids the huge volatility in energy prices which flows from a cap-and-trade system (see volatility under the European ETS).

Matt, anyone who cares about climate change for fault both Obama and McCain for being too timid to propose a carbon tax.

Posted by Reid F. Capalino | May 13, 2008 11:56 AM

Auctioning off permits is certainly preferable to giving them away, but the fact is that any form of cap-and-trade is significantly inferior to a carbon tax.
Allowing some flexibility in emissions from year to year (e.g. not setting a quantity limit, as under a cap) gives firms much greater flexibility in reducing emissions, and thus facilitates greater long-term emissions reductions than are feasible under a strict cap. This is why CBO has estimated that, for a given economic cost, a carbon tax could achieve five times the emissions reductions of a comparable cap-and-trade system.

A carbon tax also avoids the huge volatility in energy prices which flows from a cap-and-trade system (see volatility under the European ETS).

Matt, anyone who cares about climate change for fault both Obama and McCain for being too timid to propose a carbon tax.

Posted by Reid F. Capalino | May 13, 2008 11:56 AM

Apologies for posting the last point three times...

Anyhow, to understand why a carbon tax is truly the first-best policy option both domestically and internationally, why it does not have to be regressive (can be pared with reduction in payroll taxes), and why cap-and-trade has serious flaws. See

CBO Climate Report: http://cboblog.cbo.gov/?p=65

Robert Shapiro's analysis: http://www.sonecon.com/docs/studies/climate_021407.pdf

Mike Bloomberg's Advocacy: http://cityroom.blogs.nytimes.com/2007/11/02/bloomberg-calls-for-tax-on-carbon-emissions/

Or, especially, the arguments of the Carbon Tax Center: http://www.carbontax.org/issues/carbon-taxes-vs-cap-and-trade/

Posted by Reid F. Capalino | May 13, 2008 12:04 PM

The electric power industry is the biggest industrial source of GHG emissions, and the easiest to regulate (since fuel use data is collected and is sufficient to measure the quantity of GHG emissions.

Most generation in the country is paid under filed-rates regulation; the owners of that generation (mostly investor-owned utilities or public-power entities) are entitled, under law, to recovery of their costs. That setup is, if followed to the letter, neutral to carbon tax or carbon allowances that leave the generator in a carbon "short" position (where they are buying allowances). In both cases the carbon regulation (tax or cap-and-trade) internalizes the cost of the carbon emission, which the generator is, by settled law, entitled to pass on to consumers.

I doubt that these considerations extend outside the power industry; they also might not extend to the "merchant" power producers who are not under a filed rate, but the mechanisms of contract law and bankrupcy law will under either mechanism pass on the carbon costs to the electricity consumer.

There is no pony under the tree. GHG regulation, whether tax or Cap'n Trade, is going to roll that internalized carbon tax onto us, the consumer.

Posted by Marcus Sitz | May 13, 2008 12:20 PM

Auctioning permits also would allow, in theory, for some group like Sierra Club to buy up some permits and then sit on them. At the very least they could bid them up. That's theory.

Posted by ed | May 13, 2008 12:34 PM

Matt, are you reading climateprogress.org? I especially recommend the recent series "Is 450 ppm possible?"

Posted by Sam Penrose | May 13, 2008 1:29 PM

Mr. Yglesias, I appreciate you pointing out the difference between the two plans. Unfortunately, in your liberal orthodox "money to the CEO's" understanding, you make the typical mistake of failing to look at long term consequences. I can already see Obama saying "McCain's plan will put that emissions cap money right back in the hands of the wealthy polluters, while I will give it back to you" (followed by righteous smiles, applause, and pats on the back from liberals of all stripes). Unfortunately, one might want to consider the fact that a higher tax on industry will not simply hurt some rich CEO's ability to buy an island in Dubai. It will affect the behavior of the companies (a concept Obama does not seem to grasp). Certainly if taxes rise, investment will decrease, which will slow productivity growth. Executives will be forced to cut costs, and will likely lay off workers and/or close/relocate plants. Of course if this happens, liberals will rail against the selfishness of business leaders (you see it is an argument they literally cannot lose - someone else, usually the rich, is always to blame). But perhaps one should consider the fact that we live in a capitalist society, most Americans work in the private sector, and therefore a plan that will damage prospects for the private sector will adversely affect many Americans.

Posted by Frog Priest | May 13, 2008 2:11 PM

MarkG says: either plan would simply move polluters...outside the US and away from punitive price-jacking schemes.

If the U.S. economy was still based heavily on manufacturing, as it was 50 years ago, this would make sense. But most of the factories already are abroad.

OTOH, motor vehicles and electric power plants aren't going anywhere. And to quote NRDC, Coal-burning power plants are the largest U.S. source of carbon dioxide pollution -- they produce 2.5 billion tons every year. Automobiles, the second largest source, create nearly 1.5 billion tons of CO2 annually.

Posted by low-tech cyclist | May 13, 2008 3:18 PM

The thing about auctions is that they use market forces to allocate the limited resources. By just giving away carbon credits, McCain is really arguing for a socialist government give away with the largest polluters benefiting the most. Another benefit of the auction is that schoolchildren/charities can pool their money to buy the credits and reduce the total pool (simultaneously raising their prices).

Posted by ben | May 13, 2008 5:01 PM

Allowing some flexibility in emissions from year to year (e.g. not setting a quantity limit, as under a cap) gives firms much greater flexibility in reducing emissions, and thus facilitates greater long-term emissions reductions than are feasible under a strict cap.

Reid F. Capalino: While I quite agree with you about the desirability of plain old carbon taxes, I was under the impression that lack of flexibility shouldn't be an argument against Obama's auction plan, for the simple reason that carbon emmiters can purchase needed permits on the open market (and holders of such permits can likewise sell them).

Does Obama's plan not allow for a market in permits? Anybody know?

Posted by Jasper | May 13, 2008 6:13 PM

Coal-burning power plants are the largest U.S. source of carbon dioxide pollution -- they produce 2.5 billion tons every year.

Much of this is ultimately consumed by light and heavy industry. Of course, we could easily export our coal to Mexico (or any arbitrary Country X) to generate the energy needed to operate the factories producing the manufactured goods we want or "need" to consume. That makes the US superficially cleaner -- and absolutely poorer.

Posted by MarkG | May 13, 2008 6:34 PM

"This is why CBO has estimated that, for a given economic cost, a carbon tax could achieve five times the emissions reductions of a comparable cap-and-trade system."

Wasn't this a comparison with an INFLEXIBLE cap system?

Posted by smuggler | May 13, 2008 6:57 PM

"I can already see Obama saying "McCain's plan will put that emissions cap money right back in the hands of the wealthy polluters, while I will give it back to you" (followed by righteous smiles, applause, and pats on the back from liberals of all stripes)."

Boy, liberals are sure stupid aren't they?

Or, could it be that at least some liberals understand the idea of short run costs versus long term benefits?

Posted by smuggler | May 13, 2008 7:04 PM