Climate Change Legislation: Allowance and Revenue Distribution

Chairman Baucus, Ranking Member Grassley, and Members of the Committee: It is an honor to appear before you to discuss "Climate Change Legislation: Allowance and Revenue Distribution."

In my testimony, I make the following major points.

Free allocation of cap-and-trade allowances to firms in unregulated markets is equivalent to imposing a carbon tax while using the revenue to make transfer payments to stockholders.

This policy harms economic efficiency, because cap-and-trade increases work and investment disincentives, an effect which cannot be offset under free allocation. This policy also leads to a more unequal income distribution because low and middle-income consumers pay higher prices for carbon-intensive products while wealthy stockholders benefit from the free allocation.

Auctioning the allowances can address both the efficiency and distributional concerns, if the auction proceeds are properly used. Marginal tax rates can be reduced and compensation can be provided to vulnerable consumers.

The free allocation of allowances to price-regulated electric utilities is also unwise. If the benefits are flowed through as reductions in the fixed component of electricity rates, the allocation provides consumer relief, but less effectively than could be done through the proper use of auction proceeds. If the benefits are flowed through as reductions in variable electricity rates, as is likely, free allocation increases the nationwide cost of reducing carbon dioxide emissions and consumer relief in the regulated sector is accompanied by increased consumer burdens elsewhere in the economy.

Adopting a carbon tax in place of cap and trade would avoid the pressure for free allowance allocation and offer a number of other advantages.

I elaborate upon these points below. I begin by considering the case in which prices are unregulated.

Click here to download this testimony as an Adobe Acrobat PDF.

Alan D. Viard is a resident scholar at AEI.

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About the Author

 

Alan D.
Viard
  • Alan D. Viard is a resident scholar at the American Enterprise Institute (AEI), where he studies federal tax and budget policy.

    Prior to joining AEI, Viard was a senior economist at the Federal Reserve Bank of Dallas and an assistant professor of economics at Ohio State University. He has also been a visiting scholar at the US Department of the Treasury's Office of Tax Analysis, a senior economist at the White House's Council of Economic Advisers, and a staff economist at the Joint Committee on Taxation of the US Congress. While at AEI, Viard has also taught public finance at Georgetown University’s Public Policy Institute. Earlier in his career, Viard spent time in Japan as a visiting scholar at Osaka University’s Institute of Social and Economic Research.

    A prolific writer, Viard is a frequent contributor to AEI’s “On the Margin” column in Tax Notes and was nominated for Tax Notes’s 2009 Tax Person of the Year. He has also testified before Congress, and his work has been featured in a wide range of publications, including Room for Debate in The New York Times, TheAtlantic.com, Bloomberg, NPR’s Planet Money, and The Hill. Viard is the coauthor of “Progressive Consumption Taxation: The X Tax Revisited” (2012) and “The Real Tax Burden: Beyond Dollars and Cents” (2011), and the editor of “Tax Policy Lessons from the 2000s” (2009).

    Viard received his Ph.D. in economics from Harvard University and a B.A. in economics from Yale University. He also completed the first year of the J.D. program at the University of Chicago Law School, where he qualified for law review and was awarded the Joseph Henry Beale prize for legal research and writing.
  • Phone: 202-419-5202
    Email: aviard@aei.org
  • Assistant Info

    Name: Regan Kuchan
    Phone: 202-862-5903
    Email: regan.kuchan@aei.org

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