Common Tragedies

Thoughts on Environmental Economics

The CBO gets opportunity cost

Posted by Daniel Hall on April 10, 2008

The CBO has just released a budgetary analysis of the Lieberman-Warner cap-and-trade bill.  In doing so they get one thing (at least) very, very right.  From the CBO Director’s Blog:

A second scoring question involved the emissions allowances that are given away at no charge. In CBO’s view, these should also be recorded in the budget as revenues and outlays. The government is essential to the existence of the allowances and is responsible for their readily realizable monetary value through its enforcement of the cap on emissions. The allowances would trade in a liquid secondary market since firms or households could buy and sell them, and thus they would be similar to cash. CBO estimates that the value of the market created by the major cap-and-trade program would be large, exceeding $100 billion in 2012. Therefore, CBO considers the distribution of such allowances at no charge to be functionally equivalent to distributing cash. (emphasis added)

By setting up a cap-and-trade system the government is creating a scarce resource — emissions allowances.  That resource has value regardless of how it is distributed.  Regulators need to be reminded that giving allowances away means the government is not collecting revenues it otherwise could have.  The CBO has done exactly that by scoring the distribution of allowances in this way.

I’m not necessarily arguing that all allowances should be auctioned.  Most should be, but there are (limited) cases where a few industries — typically exposed to strong international competition and facing very elastic demand — should perhaps receive free allowances for a time, a point we’ve made several times.

But regardless of what you think of that argument, legislators must remember that giving away allowances for free means giving up potential revenue.  Just because you created something for free doesn’t mean it’s worthless.

3 Responses to “The CBO gets opportunity cost”

  1. […] credits. But the problem with getting them through the House remains the samefunding, notes Grist. Common Tragedies looks at the CBO analysis of Lieberman-Warner, which stresses that emissions permits are basically cashand shouldnt be given […]

  2. Shannon said

    “firms or households”. Does this mean that the Congressional Budget Office is contemplating personal carbon caps and trading? This is the first I have heard of such a thing!

  3. Daniel Hall said

    I think if you look at the CBO language closely:

    allowances would trade in a liquid secondary market since firms or households could buy and sell them

    you’ll see that all that they are saying is that the allowance market will be like any other commodity market in which anyone — firms, individuals, etc. — could buy and sell that commodity.

    Besides, the CBO can’t “contemplate” a new policy at all. They don’t make policy! All they do is analyze existing or proposed legislation that Congress or regulators create.

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