Americas Quarterly - Summer 2009

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 benefit system.

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.