I have to give Greg Mankiw credit. Since the last time he discussed the climate legislation making its way through the Congress (an effort with which I was none too pleased) he seems to have taken some of my criticisms to heart. In his column in today’s Times, he acknowledges that blame for many or most of the bill’s imperfections can be placed at Congress’ feet. He admits that the share of permits auctioned doesn’t affect the efficiency of the final distribution or the emission-limiting function of the cap. He spends much less time making inane gotcha points, which makes the piece much better.
But it’s still wrong. Mankiw writes:
The problem arises in how the climate policy interacts with the overall tax system. As the president pointed out, a cap-and-trade system is like a carbon tax. The price of carbon allowances will eventually be passed on to consumers in the form of higher prices for carbon-intensive products. But if most of those allowances are handed out rather than auctioned, the government wonâ€™t have the resources to cut other taxes and offset that price increase. The result is an increase in the effective tax rates facing most Americans, leading to lower real take-home wages, reduced work incentives and depressed economic activity.
This is the point at which some real world figures would help. In fact, most of the allowances will be used in ways that reduce the cost of the bill to consumers. Some of this is via direct refunds to households. Some is via household tax credits. Some is via investments in efficiency and research — programs that will make it easier for households to substitute away from carbon-intensive activities over time. Most of the value of the allowances will go toward reducing the incidence of the increased carbon costs on households. And this is why the CBO judged the bill to have such a low cost for households, particularly those with lower incomes. The lowest income quintile will actually enjoy a net benefit from Waxman-Markey (not including the benefit of reduced warming). This is important context when talking about the threat of “lower real take-home wages, reduced work incentives and depressed economic activity.”
I criticized Mankiw previously for supporting a veto of the climate bill without providing details on the mental model he was using that would make a bill with fully-auctioned permits acceptable and one without veto-worthy. He offers a hint today:
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.
Mankiw then proceeds to urge the president to veto. I think this is ludicrous, but I appreciate what he’s done here. He has made it clear that his support of a carbon tax is primarily about improving the overall efficiency of the tax code. That’s good to know. It suggests that those interested above all else in improving tax policy in an environmentally-friendly manner can continue paying attention to Mankiw, while those of us focused on the problem of climate change while mindful of economic costs can ignore him.
Perhaps in the future, when he is fully convinced of the enormity of global warming (we’ll send him some generals to talk to), he’ll be worth paying attention to again.