I won't sign the "cap & trade economist statement"

From the inbox (links added):

Dear Economist:

Are you concerned about the impact efforts to cap U.S. carbon emissions may have on the economy? 

For the past year, we have worked with the Southern Alliance for Clean Energy and other interested groups to ensure that legislation making its way through Congress is structured correctly.

A critical aspect of a carbon cap and trade program will be how the carbon credits are allocated -- will they be given free to emitting industries or will they be sold at auction? 

The attached statement makes the case for auctions.  Please review it and let us know if you are willing to add your name. 

Current signatories include Greg Mankiw from Harvard and James Barrett from Redefining Progress. This is an issue that transcends politics and party -- getting the allocation question right is critical to the success of the program and our economic future. 

Please respond and let us know if we can add your name to this important statement. 

Here is the statement (in italics, just like in the email):

CAP & TRADE ECONOMIST STATEMENT

As Congress addresses the challenges of global warming, the undersigned economists support market-based solutions for reducing carbon and other greenhouse gas emissions.

If Congress pursues a carbon cap-and-trade program, we believe 100 percent of the credits should be sold at auction to help ensure the most efficient and equitable outcome. 

Conversely, the free allocation of carbon credits to emitting industries under a cap-and-trade program would undermine the program’s long-term success:

• Free allocations will do little or nothing to protect families and businesses from higher energy costs.

• Free allocations will represent a significant and undeserved windfall to utilities and other greenhouse gas producers. 

• Free allocations will deny the government the necessary resources to reduce the economic cost of combating climate change, and will thus generate needlessly high costs of achieving any reduction target.

For these reasons, we oppose the free allocation of credits to emitting industries under a carbon cap and trade program and support auctioning 100 percent of the credits immediately.

Why won't I sign? I agree with everything in the statement except for the 100% part.

100% auctions seems like a guarantee that some sort of incentive-based climate policy will not be implemented. A policy with 100% auctions will be opposed by industry almost as much as a comparable carbon tax. I'm of the opinion that some sort of incentive-based climate policy is better than command and control climate policy.

I don't think that Lawrence Goulder at Stanford will sign either (from the Stanford news bureau):

In order to create a politically viable carbon emissions plan ... we must find a way to avoid placing big costs on the industries that source and process these fuels.

"Some interest groups—particularly fossil-fuel suppliers and industries that intensively use these fuels—can veto a climate policy," Goulder says. The challenge is "to design a policy that not only achieves environmental goals, but also is relatively cost-effective and has some chance of getting through politically." That's why his goal is to develop a carbon plan that protects profits for energy firms, but that does not substantially raise overall costs to taxpayers and the economy as a whole.

...

Goulder's proposal is straightforward. The government would auction off a majority of carbon dioxide emissions permits, gaining revenue in the process. But roughly 10 percent of the permits would be given away. According to Goulder's analysis, that small portion of free permits would be sufficient to maintain the profits of energy firms, thus enhancing the prospects for political success. At the same time, the plan would add just 10 percent to the cost of the program for the government and taxpayers.

So, replace "100%" with "up to 90%" in the cap & trade economist statement and I'll sign.

I'm guessing the folks at RFF won't sign. Here are two RFF discussion papers that support the less than 100% rule, the original Goulder paper and an application:

• Goulder, Lawrence H., Mitigating the Adverse Impacts of CO2 Abatement Policies on Energy-Intensive Industries
• Palmer, Karen, Dallas Burtraw, Danny Kahn, Simple Rules for Targeting CO2 Allowance Allocations to Compensate Firm

Comments

[David Zetland]

Although I agree that 100% will be opposed, it's sad to see that you and Goulder both claim an "industry veto." Is it so obvious and predictable that "our" Congress is so easy to buy/control?\

Although the FCC gave away early spectrum, we do not see industry lobbyists vetoing current spectrum auctions "unless you give us 10% free".

If you give 10%, how do you give it? 10% results in all the costs and lobbying as 100% political allocation. Maybe it's fine because 90% is allocated at auction, but it still sounds like a massive deception. What if industry gets the free allocation up to 50% Where do we cross the line between stupid and clever pork distribution?

[John Whitehead]

David,

From Environmental Capital:

Mr. Mankiw applauds the Illinois senator’s plan for 100% auction of emissions permits, because that’s the closest thing to the carbon tax beloved of so many economists but reviled on the Hill.

I don't think "reviled" is too strong a word.

[justakim]

Yeah, good luck with 100% auction. Something is better than nothing unless it's California's attempt at electricity deregulation.

[Wy]

I personally prefer the carbon tax option (ramped up to the requisite level over time). Not that it's politically possible, but then again, you can count me under 'technocrat' :P

[David]

I'm kind of with you, but if you want to give compensation / handouts to industry, I'd rather you just gave them cash than free permits: transparent and it avoids mucking around with efficient permit allocation.

[David Zetland]

John,

So it's not the industry veto that's the problem but the congressional desire to sell to the higher donor? That's another reason to make it 100%.

CA's deregulation failed because politicians tried to eat their cake (retail price caps) and have it (wholesale dereg). If technocrats had been in charge (100%!), it would have gone better.

btw -- I agree with "David", but I am a different one :)

[odograph]

I'd sign, because I'll up your cynicism ... we are on track to maybe 20% sold and 80% given away.

[Marc Bilodeau]

Essentially, a 100% auction places us in a "polluters pay" regime, while 0% places us in a "pollutees pay" regime. So 90% auction means that polluters pay 90% of the cost and pollutees bear the other 10%. I agree that the higher the portion that would be paid by industry, the stronger their opposition, and the more likely it is that their lobbying could block efficiency improving policies. But I'd start with 100% as an opening bargaining position anyway, and see how far I can get. By the way, Sen. Obama has been advocating a 100% auction regime, and if elected with a strong enough majority, may have enough clout with congress to get this through.