Whether you are a believer in global warming or not (and the commission knows that some of you are not convinced), this article does a good job of highlighting the differences in the Cap and Trade program that President Obama campaigned on, and the one proposed by Congress.
Basic economics teaches us that if we want to actively reduce the carbon emitted as part of economic activity a Carbon Tax would be the most effective way to do so. Even those who do not believe in global warming would agree. The higher cost of releasing carbon as a byproduct of production would drive increasing efficiency and the search for new methods of production that did not reduce carbon. At the same time, prices for those products would increase. The revenue from the Carbon tax would be used to offset these higher prices through tax reductions.
Despite the fact that it would be the most efficient, a Carbon Tax is not politically viable. That leaves Cap and Trade. What Mr. Mankiw points out so effectively in his piece is that the Cap and Trade legislation is substantially less efficient than that proposed by President Obama when he was running.
The numbers involved are not trivial. From Congressional Budget Office estimates, one can calculate that if all the allowances were auctioned, the government could raise $989 billion in proceeds over 10 years. But in the bill as written, the auction proceeds are only $276 billion.The issue is by lowering the proceeds to $276 billion -- that reduces the possible taxes to be offset -- which will mean higher prices in the rest of the economy.
As Mr. Mankiw explains:
The hard question is whether, on net, such a policy is good or bad. Here you can find policy wonks on both sides. To those who view climate change as an impending catastrophe and the distorting effects of the tax system as a mere annoyance, an imperfect bill is better than none at all. To those not fully convinced of the enormity of global warming but deeply worried about the adverse effects of high current and prospective tax rates, the bill is a step in the wrong direction.The Commission feels that if we are going to try and do something about global warming, we should do it in the most efficient way possible. Unfortunately, Congress is hardly the place to go for efficiency...
