)But, realistically, what would happen in such an event? Would
sit idly by as fuel-oil costs exceeded monthlymortgage payments? Would they tell their constituents that, sorry, nothing they can do about $15-a-gallon gasoline prices, we set our cap and now we have to stick with it? Of course not. They
would tweak the cap-and-trade systemin one of any number of ways:
allow companies to borrow emissions credits
from future years, or theymight
implement a "safety valve"
allowing the government to auction off new emission credits at a certain price, or they might simply raise the cap. Alternatively, of course,
they could take the unexpected excess revenue from thecap-and-trade auctions and start mailing large checks to everybody in the country, thereby helping to cancel outthe ill effects of higher energy prices.
The one thing you can be pretty sure would not happen is that
Congress wouldhappily take the cap-and-trade windfall revenue and use it to, say, pay down the national debt.
Although even thatwould have social value which would offset the negative social effects of higher energy prices. But what of the scenariowhere emissions permits are auctioned off at a relatively low price, and then suddenly skyrocket in the secondarymarket, giving no windfall to the government? Well, for one thing, the value of next year's permits has just gone up, sothe windfall will come.
And for another thing, given that most people bought their emissions permits at arelatively low price, and that it's only the marginal permits which are expensive, the effects on actual energyprices would likely not be huge.
In other words, as I've said many times in the past,
cap-and-trade is flexible. Onceyou've installed the mechanism, it can and will be tweaked over time. Changing tax rates, by contrast, is muchharder. Which is why cap-and-trade is superior to a carbon tax.