Too Tricky?

Ezra Klein over at the American Prospect font color="#000000">disputes< this lfont color="#000000">ast blogpost of mine<. He offers three points in reply. Answers to each in turn:

[David Frum] says that the Obama administration plans to "use the revenues generated by cap and trade to pay for health care tax credits for lower-income people." That's not true. The revenues from cap and trade will be used to fund the $800 Making Work Pay tax cut, which is a refundable income-tax credit. It has nothing to do with the health care plan.

He's right, I'm wrong. I scrambled my notes and inserted an erroneous "health care" before the correct "tax credits."

He says that cap and trade "only generates revenue if American utilities emit more carbon in future years than they have done in past years." Again, not accurate. Imagine I pass a law taxing potatoes at the rate of one dollar a potato. This year, Americans eat a billion potatoes and I make a billion dollars. Next year, they eat a half billion potatoes and I make a half billion dollars. A half billion dollars is still more than I made when I wasn't taxing potatoes.

 The big decision in cap and trade is whether existing emitters have to pay to retain the right to emit - or whether they will be capped at present levels and only pay if they exceed those levels. During the campaign, candidate Obama endorsed the first and more radical idea, and Ezra is assuming that this campaign trail idea is the one that will become law. Not so fast.  The font color="#000000">bill actually introduced in Congress by Henry Waxman< in 2007 allowed existing emitters to continue their emissions at only gradually reducing levels over multiple years in future. The 2007 bill is the basis for the bill taking form in Congress right now. My description of the revenue effects of the actual law is almost certainly closer to what Congress will produce than Ezra's. 

Finally, Ezra argues that taxes on carbon 

 fall on users of electricity [only] if the corporation passes them on to the users of electricity. They will do this to some degree. Probably not 100 percent, as that would be a fairly sharp price increase. But it's important to remember that the tax only falls on users of electricity insofar as people use electricity. 

Since the corporations in question are (above all) regulated electrical utilities, they will of course pass on the price in full. Indeed, that's the idea. If the utilities swallowed the tax, rather than passing it on, there would be no effect on consumer behavior - which is the main point of the cap-and-trade regime after all. Yes people can escape the tax by using less electricity. But the tax is still falling on them - they are just feeling its effects in a different form, by reducing their consumption. They are still worse off, just worse off in a different way. And again: that's the point.

(Sorry - I know Ezra will say that the point is to persuade the utilities to rely on windmills instead. But that's energy fantasy, not energy policy!)