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DAVID FRUM AND CAP AND TRADE.
If this post is anything to judge by, I don't think David Frum totally understands Obama's cap and trade proposal.
He 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 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.
He says that "taxes on carbon emissions do not fall on 'corporations.' They fall on users of electricity." Sort of. They fall on users of electricity 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. Electricity use isn't fixed. The intent of cap and trade is that it will push users of carbon-intensive energy sources towards cleaner energy sources that aren't taxed (which is why, in part, corporations won't pass on the whole tax; they want to blunt the impact of the policy, not accelerate it). Which brings us to our next point.
Frum says that "the only merit of cap and trade is that it enables the government to collect revenue without admitting that a new tax has been imposed." No, the merit of cap and trade is that it discourages the use of carbon-intensive energy sources by making them more expensive relative to less carbon-intensive energy sources. Right now, solar power is much pricier than oil. But the carbon burnt by oil usage imposes all sorts of long-term environmental costs that aren't built into its present price. Cap and trade prices the carbon in the oil, which makes oil relatively more expensive as compared to solar energy, which burns no oil. That's the point of cap and trade.
Update: Some in comments thing that Frum's final point was arguing that the only merit of cap and trade relative to a carbon tax is that it's sneakier. I disagree, but even so, it's still untrue. The two are very different policies.
COMMENTS (13)
If Frum meant to say that "the only merit of cap-and-trade" as opposed to a plain carbon tax is "that it enables the government to collect revenue without admitting that a new tax has been imposed", then I think he's right.
Posted by: Vance Maverick | February 26, 2009 1:01 PM
and in fact, Vance Maverick is right. Here is fuller context of Frum's remarks:
"Cap and trade is a worse idea than a carbon tax. Less lucrative too. The only merit of cap and trade is that it enables the government to collect revenue without admitting that a new tax has been imposed."
He is clearly comparing cap and trade to a carbon tax. Who lacks understanding now, Ezra?
Posted by: jamie | February 26, 2009 1:03 PM
jamie, it appears that you are joining Frum in lacking understanding. In the entirely full context of what Frum is saying, he turns out to say nothing, zilch, regarding either policy's merits with regard to internalizing the currently externalized costs of burning fossil carbon. He says nothing to suggest that he endorses a carbon tax. He's just using a rhetorical trick to make it seem as though he's attacking cap-and-trade on its merits when he's not actually doing anything of the sort.
Posted by: Jonathan | February 26, 2009 1:15 PM
...the $800 Making Work Pay tax cut, which is a refundable income-tax credit.
Lessee....a refundable credit for every taxpayer making up to $75,000. This would be the vast majority. However, the tax system is already so progressive that about half of the workers don't have an income tax liability at all. That means that most of the "credits" will be returned to the workers as CASH, not a reduction of anyone's taxes. It's a disguised federal welfare program.
How does one keep a straight face when calling a refundable tax credit a tax cut? A pig with lipstick is still a pig.
Posted by: El Viajero | February 26, 2009 1:18 PM
Sorry, just don't agree. Frum never says, in the whole post, that cap and trade makes dirty energy pricier.
Meanwhile, cap and trade actually has a host of merits that a carbon tax doesn't. It's not just about the visibility of the tax (and one isn't necessarily more or less visible than another.). Cap and trade fixes the quantity of carbon. A carbon tax fixes the price. Good discussion of the relative merits here.
Posted by: Ezra Klein | February 26, 2009 1:25 PM
Incidence of a tax.
Econ 101.
http://en.wikipedia.org/wiki/Tax_incidence
Posted by: bdbd | February 26, 2009 1:38 PM
Lessee....a refundable credit for every taxpayer making up to $75,000. This would be the vast majority.
You'd better tell your party's Congressmen, then. Wasn't it Jim DeMint who said yesterday that there are tons of people making over $250,000?
Posted by: Cyrus | February 26, 2009 1:51 PM
Conservatives like Frum need to focus on the relative disadvantage Cap and Trade place on American businesses.
For instance how many jobs will be lost as consumers and business buy from cheaper (unregulated) foreign importers?
Even if it is a trivial amount voters will probably hate the idea of climate change legislation acting as a de facto transfer of wealth to emerging markets.
Posted by: gordon gekko | February 26, 2009 1:54 PM
I still don't get why conservatives have been advocating a straight tax instead of cap and trade (I think Krauthammer said he wants this too). Is it because cap and trade will create new industries/voters that will be a Democratic constituency? Will a straight tax be easier to roll back? I know the AEI gets a lot of dough from Exxon Mobil. (Just thinking aloud, FWIW...)
Posted by: JJ | February 26, 2009 4:02 PM
Is this actually an accurate description of "cap & trade"? I thought the cap would set a fixed amount of carbon that could be used in the country, and then corporations would essentially participate in an auction to purchase these credits
If we cap and have a fixed tax per unit of carbon, who decides how to ration out the now limited supply?
Posted by: crayz | February 26, 2009 7:51 PM
On either carbon tax or cap-and-trade, how is enforcement going to work? Do we have the monitoring capacity to keep companies from cheating?
Posted by: SqueakyRat | February 27, 2009 2:58 PM
Crayz: you're right that cap-and-trade wouldn't involve a tax. But Frum is still wrong. He seems to assume everyone will get a permit for free to emit whatever they're emitting now. If that happened, then of course the program would simply fail. The Europeans gave away too many permits and consequently their price has crashed. Good reason not to do it that way!
Posted by: SqueakyRat | February 27, 2009 3:03 PM
Mr. Associate Editor: you misspelled the word THINK in your article Update. How telling.
This Draconian proposal punishes every American.
Posted by: Trapper Dave | March 4, 2009 8:34 AM