TCS Daily

Regressive Measures

By Colby Cosh - August 15, 2003 12:00 AM

The English-born University of Chicago economist Ronald Coase enjoys the rare privilege of knowing that he has changed the world forever.


A founder of the conjoined discipline of "law and economics," Coase has expanded the conceptual universe of both those fields, demonstrating that specific legal privileges should be made tradable at the lowest possible transaction cost so that they can find their way towards their most socially efficient users. In an astonishingly short time, experts on environmental law, under Coase's influence, have reached a consensus that the most effective way to limit pollution is to choose some acceptable overall amount of it and give away, or auction, the legal right to emit quantities of it. In a Coasian marketplace, these rights are bought and sold, eventually reaching those who can extract the most value from them.


The U.S. Congress has been studying such a regime as a way of putting a ceiling on domestic industrial emissions of carbon dioxide, the chief culprit among the greenhouse gases thought by some to be warming the earth's climate. A new review of the relevant literature, "Sharing the Cost Burden of a Carbon Cap-and-Trade Program," has just been prepared by the Congressional Budget Office at the behest of Sens. Joe Lieberman and John McCain. There is a lot of talk about potential winners and losers in the review, but one message stands out: much of the cost of capping carbon emissions would inevitably have to be handed down to end-users of energy. In other words, thee and me.


The likely distribution of the carbon-cap burden across the income spectrum, according to the CBO, is pretty predictable. "[L]ower-income households generally consume a larger share of their income than higher-income households do and... spend a greater percentage of their income on energy products (such as gasoline, electricity, and fuel for heating and cooking), which are the most carbon-intensive goods." As individuals, we all consume a certain large amount of energy just staying alive, and are responsible for having released a consequent amount of carbon dioxide. The rich expend more carbon, but as one gets richer, one spends less of each extra dollar, as a rule, on energy.


The general consumer price increase that accompanied the introduction of a social carbon cost would hit the poorer harder. (File under "duh," perhaps.) A carbon tax -- for that is really what we are talking about here -- could not help but be regressive. In a way, the government's traditional failure to put a price on carbon emissions is a kind of hidden progressive tax refund, benefiting the poor most.


There is a possible solution to the regressivity problem. When you create tradable pollution or emissions rights, you can choose to allocate them, when you begin, however you like: the point is that they be allocated to someone, anyone, and left to find the right end-consumer. If you wanted to assign them by lottery, or give them to left-handed dog owners, you could do that. Coasian exchanges are about efficiency, not justice. If it's justice you want, you have to build it into your initial scheme for allocating the legal rights you want traded.


That could be done easily enough. The CBO, in fact, found in 2000 that the burdens of a carbon cap-and-trade program could be made progressive by auctioning off the emissions rights, rather than simply giving them away, and giving individual households equal lump-sum shares of the resulting revenue. Roughly speaking, the best guess is that the poorest 40 percent of income-earners would come out ahead in this game, the other 60 percent behind. There is a certain morally satisfying element, an attractive Euclidean clarity, to this idea. But it has its problems.


One is that the government may feel it can distribute the revenue from a sale of emissions rights in a more beneficial way, overall, than simply dividing it equally amongst Americans. The CBO advances this argument openly: "Paying compensation would entail an opportunity cost... because it would preclude the government from using those funds in ways that would reduce the cost imposed on the economy." Whatever administration was in power would surely be tempted to reward core constituencies: the CBO has already considered what Democrats would label "tax cuts for the rich."


If talk of a cap-and-trade regime ever becomes serious in the United States, it will be interesting to see how individual politicians react. The ones most acutely concerned with making the carbon tax progressive may be the very same ones most anxious to control the revenue from an auction, and to distribute it according to some blindingly complicated political program that lets some Americans slip through the cracks.


Perhaps the more serious problem is that there is a competing moral claim on the revenue from a hypothetical auction of carbon-emission rights. If a carbon tax works as intended, it will decrease output in the sectors that output the most carbon. Coal mining and burning, for example, emit a disproportionate amount of CO2. "A significant reduction in coal production," the CBO report notes, "would impose a hardship on some of the nation's 71,000 coal workers, their families, and their communities."


Considered against a background of 290 million Americans, 71,000 people is not a lot. But we are talking about lost livelihoods here -- thousands of working families who may need heavy transitional funding while they retool their lives. It would be the kind of economic devastation that plays like a dream on the television news, and would target an American industry already brutalized by policy and global economic changes for decades. Less drastic effects -- equally devastating to individual households -- could be expected in other carbon-emitting sectors, like electricity generation and the oil patch.


Could U.S. politicians resist channeling revenue from a sale of emissions rights into the parts of the labor market worst hit by a cap-and-trade system? If money is to be set aside for people thrown entirely out of work, there will be less available to offset the marginal harm from the income-regressive effects of pricing carbon emissions. Either way, someone's got to lose out.


TCS Daily Archives