One of the many questions governments must answer when setting a price on carbon is how to allocate the potentially very large revenues that a cap-and-trade or carbon tax program would generate. RFF Darius Gaskins Senior Fellow Dallas Burtraw argues that two perspectives are emerging based on property rights: one views the atmosphere as property of the government, the other as a common-pool resource shared by its citizens. Resources sat down with Burtraw to discuss how this choice affects the efficiency and fairness of a given carbon-pricing program, and what these consequences mean for the political economy and likelihood of climate policy.
Resources: One of the first and most notable cases of using incentives to manage pollution in the United States was the regulation of sulfur dioxide emissions through a cap-and-trade program under the Clean Air Act Amendments of 1990. In that case, the emissions allowances were given to firms based on their historical levels of pollution. You’ve pointed out that using the same strategy for greenhouse gas regulation could have some very important distributional implications.
Dallas Burtraw: The situation for carbon dioxide is very different than it was for sulfur dioxide in 1990, because carbon dioxide is ubiquitous through our economy. If we have a system that gives emissions allowances for free to firms in a competitive economy, we can expect them to forward those costs to consumers through a change in product prices, just in the same way they would a change in their cost for fuel or labor. So it puts industry in a situation of being able to charge consumers for something they themselves have received for free. The consequence can be the prospect for “windfall” profits—that is, changes in revenues that are greater than the changes in costs that the firms actually have to incur in order to reduce their emissions. This has occurred already in Europe.
Resources: So when we create property rights in the environment and acknowledge this common property resource, are we actually creating a source of wealth?
Burtraw: I would make the observation that the introduction of a price on carbon in the US economy would constitute the greatest creation of a federally enforced property right since the opening of the Great American West in the nineteenth century. The land obviously existed previously and was inhabited by Native Americans, just as our atmosphere exists already, and we all breathe it.
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