Just bribe the country to do the right thing

[jducoeur]

One of the problems facing the climate-change debate has been the current political shibboleths, and specifically the anti-tax one. Every sensible economist is clear that the *right* way to deal with it is a flat carbon tax: it would address the problem head-on, would probably be least likely to distort markets in unfortunate ways, and would likely be pretty effective. But of course, anything called a "tax" gets peoples' backs up, so we instead wind up with the Democratic leadership creating a classic muddle, in the form of the wildly overcomplex cap-and-trade model. (Which is *probably* better than nothing, but I honestly can't say that with complete confidence.)

So I'm intrigued to read (in last week's Economist) about Maria Cantwell's "cap-and-dividend" proposal. From the description given there (and I need to learn more about the details), it sounds delightfully sensible. Basically, the notion is that any carbon cap will drive up prices: indeed, that's the point of any sensible proposal. So fine: auction off limited permits for all carbon-based fuels, and then bribe everybody with the proceeds. Seriously: take the money from the auctions, and distribute it to the populace. Their back-of-the-napkin kickback calculation is $1000 for a family of four.

It's not perfect, mind -- a carbon-tax system would still be simpler than a cap-based one -- but it's still far simpler than cap-and-trade. If the auction is mandatory and universal, it's likely to succeed in the goal of raising prices and thereby reducing carbon output. And the bribe (which is effectively a progressive redistributive tax, but a very well-disguised one) could be *very* popular if it was marketed properly.

I confess that I'm seesawing between being appalled at the concept, and admiring its elegance. The citizens'-responsibility puritan in me is vaguely unhappy at the notion of bribing the citizens to get them to agree to a system that will help everyone. But the economist in me just loves the way it aligns incentives, and the armchair political quarterback admires the simplicity of the message...

Comments

[jducoeur]

Just so -- as I mention in a comment above, the problem with a carbon tax is that it is inevitably quite regressive. By compensating the populace with a directly-related progressive-ish redistribution scheme, it might get over that particular bump. Very clever, both economically and politically...

[rickthefightguy.livejournal.com]

But... a cap with purchasable permits IS a tax. The tax is the cost of the permit - the govt charging you to pollute, right? How is that any different than a tax (you know, where the government charges you for polluting?)?

[jducoeur]

Yes, that's correct. But put like this, I suspect people are at least a bit less likely to *perceive* it as a tax, due to its indirect nature. I mean, there are lots of implicit taxes in modern society -- but people tend not to notice the ones that aren't coming directly out of their own pockets quite as much. Also, this one is delightfully squishy: due to the auction approach, there is no clear "The government is charging us $3/gallon, which we're passing on to you" to point at -- the price is effectively set *by* the companies in the auction, and the blame gets spread around in messy ways.

But more importantly, the redistribution of the proceeds goes a fair ways towards helping with the negative impact of that tax, and *that* part is terribly clear and obvious. Even if people get pissed off at having to pay extra at the pump, the fact that most people will get back *more* than that extra goes a long ways towards neutralizing the anti-tax messaging.

(In practice, of course, they may not get back more than the extra: they'll get back more than the actual tax, but prices will have risen more than that due to scarcity. But that's getting into real economic subtlety, and shouldn't be a huge issue if the cap is set correctly and ratcheted down gradually...)