Guest post from Jim Roumasset:
The editors of The Economists' Voice claim that Fullerton and Karney give the Waxman-Markey bill "minimally passing marks," though you won't find that in the actual article. F-K's figure 1 shows that 30% of permits under Waxman-Markey would be initially auctioned off, with the percentage falling to an average of 17.5 percent from 2015-2025. Published too late to impact the Kerry-Boxer bill, their conclusion that more permits should be auctioned and the revenue recycled to lower payroll taxes may still be considered in the Senate-House reconciliation process.
Their conclusion is too kind, however. Sometime ago, Goulder and company estimated that cap and trade without revenue recycling would be welfare reducing. And that's before accounting for leakage and the distortionary mandates and subsidies that have been attached to the bill.
F-K also note that W-M calls for permits to electricity LDCs (local distribution companies) for the purpose of reducing the fixed cost of electricity bills. Really? I don't know about other areas, but my fixed costs are too small to be reduced much (unless they go negative, thus incurring perverse incentives). They could always use increasing block pricing, but that's not what the legislation says. Even in areas with large enough fixed costs to make the scheme work, consumers typically don't decompose electric bills in their heads. If the variable part goes up and the fixed part goes down, consumers won't entirely internalize the increased marginal rates, which is the whole point of carbon pricing.
The bills need some serious work. Otherwise we will be left with nothing but guilt assuagement. (It's a word; no kidding!)
