I Like My Rebates Lumpy

Ezra discusses the potential for a near-term cap-and-trade plan and writes:

If you wanted to use the tax to change behavior rather than fund investment, however, you’d have to make it much larger, and then you’d probably want to look at ways to offset the impacts on low and middle income households. Luckily, the CBO examined exactly this and found that “if the government chose to sell the allowances and used the revenues to pay an equal lump-sum rebate to each household in the United States…the size of the rebate would be larger than the average increase in low-income households’ spending on energy-intensive goods.” That said, I imagine it will still be a bit hard to explain that the government is going to make the price of energy much higher, but will give people checks for yet more money than that, in the hopes that the high price tag triggers an irrational response to use less energy even though the lump sum check could actually cover the average family’s fossil fuel habit.

Not irrational at all. Everyone gets the same lump-sum payment, and on average it’s enough to cover the increase in fuel prices (you’re not just handing back to people the exact amount they spent on gas). But that means that if you’re a heavy consumer of fossil fuels, it doesn’t cover the increase, and so you really want to reduce your consumption of gas (or whatever) in response to increased prices. Of course, if you’re a light consumer of gas, you still want to reduce your fossil fuel consumption, so that you can get more use out of your rebate.

The process of capping and refunding increases personal income and increases the relative price of carbon. The latter acts to increase overall consumption, and the former acts to shift consumption away from carbon-intense activities. The net effect is reduced emissions. No irrationality required.


  1. Doug says:

    I forget the term for the benefit government gets from printing money and then redeeming it at a later date when it will be worth less (seniorage?), but that will be another incentive to decrease energy consumption and a slight reduction in benefit,