15 Jul 2010

CFR vs. IER on Cap-and-Trade

Climate Change, Economics 2 Comments

Incidentally, I didn’t make a big announcement at the time, but I am no longer working for the Institute for Energy Research (IER). I am shifting my consulting business to focus on online teaching and projects with Carlos Lara.

IER put out a study written by Chamberlain Economics (CE) arguing that Kerry-Lieberman would act as a regressive tax on US households. The basic logic is that energy prices would go up (which hurts poor households proportionally more), while the free emission allowances given to utilities and other favored groups would end up in the pockets of rich shareholders, rather than getting passed along to consumers as the politicians claim.

The Council on Foreign Relations thinks this is nonsense:

The authors, to their credit, go beyond this sloppy analogy, and make a more careful argument about Kerry-Lieberman. They go through some basic microeconomics to argue (I’m simplifying a bit here) that since utilities’ costs will rise under cap-and-trade, and since regulators won’t be able to tell exactly how much of any cost increase is due to cap-and-trade, utilities will be able to play the regulators in a way that lets them capture some of the allowance value.

This would be fair if this exercise was about estimating costs. But it isn’t. It is about measuring value. The regulator knows the value of the free allowances: it is equal to the number of allowances given out for free multiplied by the value of the allowances at auction. If the LDCs cannot account for having spent that money on public purposes, the regulator will know. The CE authors try to make this complicated, but it’s actually pretty simple.

Nope, my gut tells me that when if the government imposes a massive new scheme to ration energy, and then hands out hundreds of billions of dollars worth of emission allowances, that poor people in the Bronx aren’t going to get the benefits.

2 Responses to “CFR vs. IER on Cap-and-Trade”

  1. Leo says:

    Hey Bob,

    In California we are just going to let the poor feel the rate hike (so the price of carbon is reflected in energy use) and send California’s a check from the money we extract from the covered entities. This means that poor people that have smaller homes and use less electricity might feel a net gain. I’m not sure if the CARB economists took the price of goods into account, but who cares when California will lead the world in ‘Green jobs’. Not to mention saved the world!

  2. Roger Ritthaler says:

    So they think that there will really be a program that turns out exactly as the politicians intend? Must be a first. Harry Browne will have to revise his book “GDW”.