Sunday, January 06, 2008

The Pigou Club watches the debates

The following exchange in yesterday's Democratic Candidates Debate made me sit up and take notice:

MR. GIBSON: All right. Let me turn to something else. Reversing -- you invoked the name of Al Gore a few moments ago. Reversing or slowing global warming is going to take sacrifice. I'm sort of sorry Chris Dodd isn't here because he's talked a lot about a carbon tax in this election. Al Gore favors a carbon tax. None of you have favored a carbon tax. Is it a bad idea? Or is it just so politically unpalatable that you guys don't want to propose it?

GOV. RICHARDSON: It's -- can I answer? You know, I was Energy secretary. It's a bad idea because when you have a carbon tax, first of all, it's not a mandate. What you want is a mandate on polluters, on coal companies, on -- on -- on those that pollute to reduce greenhouse gas emissions by a certain target -- under my plan, 30 percent by the year 2020, 80 percent by the year 2040. It takes international leadership.

The better way to do it is through a cap-and-trade system, which is a mandate. Furthermore, a carbon tax, that's passed on to consumers. That's passed on to the average person. That's money you take out of the economy. So it's a bad idea. Cap-and-trade is mandate, but it's also going to take presidential leadership. It's going to take all of us here, every American, you know, to think more efficiently about how we transport ourself, what vehicles we purchase, appliances in our homes.

It's going to take a transportation policy that doesn't just build more highways. We have to have commuter rail, light rail, open spaces. We got to have -- we got to have land use policies where we improve people's quality of life.

MR. SPRADLING: Senator Obama?

SEN. OBAMA: Well, I agree with Bill, that I think cap-and-trade system makes more sense. That's why I proposed it because you can be very specific in terms of how we're going to reduce the greenhouse gases by a particular level. Now what you have to do is you have to combine it with a hundred percent auction. In other words, every little bit of pollution that is sent up into the atmosphere that polluter is getting charged for it. Not only does that ensure that they don't game the system, but you're also generating billions of dollars that can be invested in solar and wind and biodiesel.

I do disagree with one thing, though, that Bill said, and that is that on a carbon tax the cost will be passed onto consumers and that won't happen with a cap-and-trade. Under a cap-and-trade there will be a cost. Plants are going to have to retrofit their equipment, and that's going to cost money, and they will pass it onto consumers. We have an obligation to use some of the money that we generate to shield low-income and fixed-income individuals from high electricity prices, but we're also going to have to ask the American people to change how they use energy. Everybody's going to have to change their light bulbs. Everybody's going to have to insulate their homes. And that will be a sacrifice, but it's a sacrifice that we can meet. Over the long term it will generate jobs and businesses and can drive our economy for many decades.

For the passages I put in bold, Bill Richardson and Barack Obama deserve special note, for opposite reasons. As a former energy secretary during the Clinton administration, Richardson has presumably studied these issues. But here he demonstrates extraordinary ignorance (or perhaps extraordinary disingenuousness) about the economic impact of cap-and-trade systems. By contrast, Obama shows extraordinary clarity and honesty about the effects of the policy he is proposing.

The economics is straightforward and uncontroversial. Both carbon taxes and cap-and-trade systems put a price on carbon, raising the cost of producing carbon-intensive products such as gasoline. In both cases, this cost will be passed on to consumers. The government can, however, raise revenue through a carbon tax or auction and use that revenue to reduce other taxes and help offset the adverse income effect.

In case you are curious, Hillary Clinton is the next speaker on this question, but she does not weigh in on the particular issue of carbon taxes vs cap-and-trade. Instead, she offers some typical vacuous blather about requiring utility companies to help us all become more energy efficient. I think of this as "magic-wand economics." Like your fairy godmother, the President can wave a magic wand and make your problems disappear.