What’s Bad About Waxman-Markey Bill

June 26, 2009

As one would expect, conservative bloggers, politicians and talk radio are on the attack against the Waxman-Markey cap-and-trade bill that is expected to be voted on by the House sometime today. Their criticism can basically be summed up like this: Cap-and-trade is just another tax on the American people and is therefore bad.

It’s true that in principle, a well-designed cap-and-trade system is virtually the same as a carbon tax, but from the interest of societal well-being (not just GDP-measured economic growth), it should only be opposed for one of two reasons: (1) greenhouse gas emissions have small enough externalities that don’t warrant this policy, and/or (2) government cannot be trusted to implement an optimal cap-and-trade tax policy.

From a first-best situation, the only relevant question would be the first, which is a question of what the actual externalities are from greenhouse gas emissions. I leave that first for the scientists (and then the economists).

But assuming that under a first-best situation, cap-and-trade is optimal, we live in a real world where some government has to determine what the optimal policy is. And that brings me to this Waxman-Markey bill. AEI’s Alan Viard has an excellent article (linked from Greg Mankiw) that gives us one reason this bill isn’t a very good cap-and-trade bill: the windfall that goes to most current emitters. At a time when members of Congress are looking everywhere for money, this bill is a giveaway to most existing polluters because only a small fraction of the emissions permits are to be auctioned off. While environmentalists often talk about the virtue of cap-and-trade having a known level of emissions as opposed to a carbon tax, as Viard points out, we have to account for the benefit that a carbon tax actually raises revenue and would allow us to possibly cut marginal tax rates (which cause distortions) as opposed to just giving a windfall to existing owners of capital.

This problem with the bill is on top of the vote-buying that is going on behind closed doors for the agriculture industry as if the emissions from farmers are less harmful than the emissions from oil companies. As one of my co-workers pointed out, Congress would vote to install Satan as dictator as long as the measure included more handouts to farmers.

Some environmentalists will argue that such is the game in Washington and that anything is better than nothing. But I’m not so sure.

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