Setting the Tax Foundation straight on cap-and-trade

As momentum for climate and energy legislation [1] gathers on Capitol Hill, disinformation from opponents of bold climate action is coming out of the woodworks. Case in point: a recent working paper from the Tax Foundation [2] -- which no less an authority than Nobel Prize-winning economist Paul Krugman says is not a reliable source [3] -- claiming that a cap-and trade system for curbing global warming emissions would impose on the average American household an annual burden $1,218. Scary, huh?

Thankfully we have economists like Kristen Sheeran, Ph.D. [4], Executive Director at the Economics for Equity and the Environment Network (E3 Network) [5], willing to set the record straight. She has circulated a full rebuttal (not yet available online) explaining how the Tax Foundation arrived at this deeply flawed analysis:

So, how did this report reach its conclusion that a cap-and-trade system would be worse for American households than a carbon tax?

It makes one key assumption that drives this conclusion. Their report assumes that in a cap-and-trade system, there are no carbon revenues recycled back to households to offset the impacts of higher energy prices. There is absolutely no doubt that any system that imposes a price on carbon - be it a carbon tax or cap-and-trade system - will be regressive in impact. However, if we use a system that requires polluters to pay for carbon, it will generate a stream of revenue that can be used to compensate households for higher energy costs and invest in energy efficiency and alternatives to fossil fuel energy sources. A carbon tax and a cap-and-trade system where all permits are auctioned will generate a revenue stream that can be recycled back to households in these ways. This is well established in the literature, and the Tax Foundation report makes no reference to this literature at all.

Whichever method you prefer to curb carbon emissions (cap-and-trade, cap-and-dividend, a carbon tax) the fact is that a well-designed and implemented cap-and-trade system can reduce global warming emissions without imposing the financial burden that the Tax Foundation alleges it would.