Obama vs McCain on climate

From Environmental Capital:

One key part of Sen. McCain’s bill, like many other climate-change proposals now pending, is that he would allocate a big chunk of emissions permits to industry for free. They would have to buy in an auction some smaller portion of the permits. Europe did something similar when it started its emissions-trading scheme; permits were given away generously in 2005 and will be auctioned in 2013.

That’s what has Sen. Obama riled up. “I’ve been very specific about proposing 100 percent auctioning, which makes an enormous difference in terms of how effective it’s going to be,” Sen. Obama told Reuters. He added that he is in regular talks with former vice-president Gore and hopes to start work on climate-change policy as soon as he secures the nomination.

Meanwhile, it’s instructive to note who’s among the co-sponsors of the Lieberman-McCain climate bill of 2007: Sen. Barack Obama. Would President Obama veto legislation co-sponsored by Sen. Obama?

Comments

[josh]

"Would President Obama veto legislation co-sponsored by Sen. Obama?"

Bills expire at the end of each congress. The scenario you describe is impossible........ economists, sheesh.

[Nate]

Auctioning off or giving away the permits only has distributional effects and doesn't make any difference to how effective they would be right?

[Nate]

Auctioning off or giving away the permits only has distributional effects and doesn't make any difference to how effective they would be right?

[John Whitehead]

Nate,

That's about right.

[Steve Hamilton]

Giving away permits and auctioning them off are only equivalent when firms make zero profit; if firms make positive profits, then auctioning is more efficient to the extent that the revenue from permit sales dislaces other taxes or is "rebated" back to consumers.

[Nate]

Thanks for the explanation. Do you mind my following up on the reasoning behind your answer Steve? I'm not sure my two semesters of env. econ have given me the tools to understand. Why should profits be rebated back to consumers? Isn't efficiency about finding the right level rather than who has the money? Thanks!

[Jack Schieffer]

My (limited) understanding is that the auction vs. give-away decision doesn't really affect the efficiency of emissions. The firms should pollute the same quantity in either case (determined by the total number of permits).

The efficiency improvement of an auction occurs when/if the revenues from selling the permits (an efficient source of govt. funds) are used to reduce the use of income taxes or other incentive-distorting government revenues (an inefficient source of funds). Of course, this "double dividend" argument assumes that the government will reduce those other taxes rather than simply spend the additional revenue.

I'm not exactly sure why the firms need to be making positive profits. Maybe so they won't go bankrupt if they have to pay for permits. (Although, if the cap is constraining, they'll have to absorb some abatement costs anyways, driving zero-profit firms under even with free permits, if they can't pass the full cost to customers.) I'm getting in over my head here, so I'll stop now.