Peter Dorman, a strong cap-and-trade supporter points out why Stavins’ defense of giveways is wrong. The key paragraphs:

To arrive at his judgment, Stavins lumps together the bulk of the free allocations and says, “about 80 percent of the value of allowances [accrue] to consumers, small business, and public purposes.” Hmmmm. So free handouts to electrical utilities are actually benefits to users? So what gets people to reduce their consumption of electricity in order to meet the carbon caps — brownouts? (Actually, it’s a non-problem because the caps will be illusory — more in a moment.) And giveaways to small businesses aren’t giveaways? And giveaways to businesses in return for getting them to do things more in accord with “public purposes” aren’t giveaways? You could say they are good giveaways to very nice people, but Stavins doesn’t want to defend that position. I don’t blame him.

Still, Stavins admits that handing out carbon permits for free is not the best option. He would prefer using them as government revenue, allowing us to cut other taxes. Since he thinks the efficiency of our economy is hampered by “distortionary” taxes, this would be all to the good. Of course, carbon auction revenues constitute a sales tax, and bear the original sins of such taxes — regressivity and volatility. And nothing more than libertarian ideology supports the view that progressive income taxes are economically harmful. A number of European countries tax at much higher rates than we do and somehow manage to maintain high levels of productivity and income, and even run trade surpluses against lower-taxed America.

Ultimately, if I thought this bill would really protect us against catastrophic climate change, I might overlook a few hundred billion dollars of special interest theft. You have to set priorities. But the loopholes elsewhere in the package, particularly the system for allowing carbon emitters to buy their way out with offsets, will guarantee that targets set for 2020 will not even come close to being realized. From a political standpoint as well, there is no way the bill can squeeze users of carbon fuels enough to get the job done, since almost nothing is allocated to protect household budgets. Imagine a program that deliberately pushes gas, oil, and coal prices much higher than they have ever been before and gives nothing back to most households. Imagine being a politician who has voted for this program and has to face the next election.

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I want to extend Dorman’s point on income taxes slightly. Many environmentalists support emissions taxes not only on environmental grounds, but on grounds that taxing “bads” in general is a good thing. Tax stuff we don’t want or want to decrease rather than stuff we want to increase.  I hope people who take that view will consider that income inequality is a “bad” of this sort.  There are all sorts of side effects of extreme inequality. For example the whole issue of corruption and regulatory capture is made worse when a huge difference in income and wealth lets the rich buy access to politicians and media ordinary people can’t match. There have been studies that extreme income inequality (as opposed to just absolute poverty) harms people’s health.  Adam Smith recognized that extreme inequality was harmful to nascent capitalism. It is a shame that modern market fundamentalists have moved so far to the right of Adam Smith that they  have forgotten much of what he knew.