Subtitle: Misperceptions on the costs of cap-and-trade (or a carbon tax) are cleared up today, right here at this blog
Pictured to the right is the market for energy and/or energy-intensive goods and services, where climate change policy increases the cost of production shifting the supply curve up and to the left. The household "costs" estimates that are flying around* are the increased expenditures on energy and goods and services that use energy, area (a + b). In a benefit-cost analysis sort of way, these "costs" aren't social costs at all, but simply transfers. If the government auctions permits then the (a + b) is money transferred to the government budget. If permits are given away the money is transferred to permit holders. This doesn't mean that consumers don't suffer from higher prices, they do. But, we're supposed to cut back on energy use in the face of higher prices. That's how we mitigate climate change.
The true cost of climate policy is the deadweight loss, area (c + d), the lost economic surplus. Area c is the lost consumer surplus and area d is the lost producer surplus. The numbers represented in the deadweight loss triangle are the ones we should be talking about.
*Background reading:
