Cap & Squander Strikes Back! (or, the economic mantra: incentives matter)

© 2010 Joshua Stark

The Economic and Allocation Advisory Committee (EAAC), organized to provide an economic study of California's cap & trade carbon regulation, has come back with a recommendation: Rebates!
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Let me step back a year and explain both my title and the concepts and controversy. Last year, I attended a session, organized by a coalition of environmental groups, on cap & trade at the federal level. One member of a national enviro. group, who will remain nameless (hint: we have a subscription to their kids magazine) described the various ideas surrounding the revenues from a cap-&-trade regulation. He first started with the one he thought the least of: a cap & rebate, where the funds from the carbon price are returned directly to individuals in the form of checks. He derisively labeled it, "cap & squander", and pointed out the obvious (to him) problem of people blowing their money on big-screen televisions. Then he moved on to describe all the great things that would happen with the money if it were used by the federal government to protect wild lands and clean our air and water.

I was dumbfounded. I understand people wanting control over the gigantic sums of money that will be generated through a carbon regulation, but again, I had to sit in stunned silence while an "expert" was allowed to railroad basic economics. The words "paternalistic", "regressive taxation", and "really?!?", repeatedly flashed through my mind.

So to quickly debunk the gentleman's concern, let me ask you, dear reader, this (rhetorical) question: Where will all this money come from?

This money will come from our economy, and in our economy, most markets are oligopolies (markets with very few producers). Now, it is not true that all new costs to businesses are automatically shuffled off to consumers; where the final cost winds up depends on a number of factors. But, it is true that one of the biggest factors in determining where that cost will settle is the number of competitors in a market. The fewer the competitors, the more the costs can be given to consumers. In monopolies and oligopolies, then, the vast majority of that additional cost is paid by consumers.

So when a carbon price hits, the prices of televisions and electricity will depend on the ability of the producers to limit their carbon emissions. "Dirtier" TV's and electricity will be more expensive, cleaner ones will be cheaper. The consumer will get a check from the carbon price, but this consumer will be playing in vastly different marketplaces, and will have many new incentives in her purchase decisions.

Now, a nationally recognized group of economists who are far more intelligent than I am (or that feller I saw last year) have suggested the same thing. They don't recommend a rebate of everything, (nor do I), but they do recommend a big rebate (me, too).

With the remaining amount, I recommend funding the parts that can't play in our market system: Wild lands, wildlife, etc. But, that's for another post. Also, I must iterate that a carbon price must be expensive (or a cap tight - same difference), or else it will not be effective. The only way to alleviate the disproportionate burden on poor folks, then, is to issue a rebate of equal amount to everybody.

Go cap & squander, everybody!