Ian W.H. Parry
(CON TINUED FROM PAGE 19)
Even if CO2 allowances were fully
auctioned, arguably the prospects for
efficient revenue use will be weaker
than under an emissions tax. Revenues under a CO2 tax would be under
the jurisdiction of tax committees
in the House and Senate—and thus
more directly reallocated in the federal budget. In contrast, under a cap-and-trade system, disbursement of
revenues would likely also involve
environmental and energy committees that might be predisposed
to use revenues for other purposes,
holding the risk that—with more
actors involved—revenues would be
earmarked for less efficient spending programs.
Even under an emissions tax, there
is still the risk that revenues may
not be used productively—in fact,
more often than not, governments
have used new revenue windfalls to
expand public spending rather than
reduce other taxes. To the extent that
extra spending results from lobby-group pressure, it may produce little,
if any, benefit to the overall economy.
The devil is truly in the details: the
case for an emissions tax hinges on
accompanying legislation specifying
efficient use of revenues, particularly
offsetting reductions in other distor-tionary taxes.
Cap-and-trade systems currently
seem to have greater political traction than emissions taxes. One reason: the higher energy prices that
would be caused by emissions taxes
may disproportionately hurt lower-income families who tend to spend
a greater share of their budget on
electricity and other energy goods.
Cap-and-trade programs would also
raise energy prices. However, specific
provisions in the Waxman-Markey
bill are designed to dampen this
effect through granting free allowance allocations to local electricity
distribution companies that limit
price increases. This has the perverse
effect of reducing incentives for energy conservation.
Emissions tax systems can also
provide compensation to lower income families through reductions in
their income tax burdens. Moreover,
it is not immediately obvious why
we should be so concerned about
the potentially regressive effects of
higher energy taxes. The central objective of climate policy should be to
impose a progressively rising price on
greenhouse gas emissions over time.
Distributional concerns are best addressed through the broader tax and
To sum up, if the prospects for
full allowance auctioning remain
remote, it is time for Congress to
give up on the cap-and-trade approach altogether in favor of a CO2
tax, so long as legislation requires
automatic recycling of the revenue
to households and firms through
lower income taxes.
Ian W.H. Parry is the
Allen Kneese Chair and
senior fellow at Resources
for the Future.
Studies suggest that cap-and-trade
systems may impose costs on the
economy that are two or three times as
large as those under emissions taxes.