Pigou, Glenn Beck, and the false case against cap-and-trade

false — claims about the cost of Waxman-Markey have been circulated by many supposed experts.

Basic economics says that if we want to discourage a negative externality, like pollution, we need to put a price on that externality. One way is through an emissions tax; an alternative, with very similar economic results, is a system of tradable permits. All this goes back to Pigou; Greg Mankiw has urged economists to join his Pigou Club of those who support externality taxes.

Now, a key point in all this is that the emissions tax or, equivalently, the rent on emissions permits, does not represent a net loss to society. It’s just a transfer from one set of people to another — from the emitters, and ultimately those who buy their products, to whoever collects the taxes or gets the permits, and ultimately whoever benefits from the revenue or rents thus generated. The only net loss is the Harberger triangle created by the reduction in emissions — which has to be set against the benefits of reduced pollution.

And the burden on households from cap and trade depends on what’s done with the rents. In the original Obama plan, the rents would be used to pay for middle-class tax cuts; in Waxman-Markey, many of the permits are initially granted to utilities — but since these utilities’ profits are regulated, many of the rents would end up being passed on to consumers through lower prices.

Posted via email from Jim Nichols