Say No To Global Cap-N-Trade

BBC:

The European Commission has called for a global carbon trading market as part of a plan to tackle climate change.

The EU is already committed to expanding its Emissions Trading Scheme (ETS), but now it is urging other industrialised countries to join in.

The commission says that by 2015 it wants to link the ETS to other carbon trading systems. The goal is to include emerging economies by 2020.

A global cap-n-trade system is the worst idea. A standard, worldwide carbon tax would be much better. Theoretically, the cap-n-trade system would achieve the exact same results as a carbon tax if it worked perfectly, but it won't work perfectly.

There are two problems as I see them with carbon trading. First, one doesn't know the cost until after the policy has been enacted. Second, it creates rent seeking.

A carbon tax is decided in advance. The government states it and then implements it. The results of that action will be government revenue and carbon reduction. We don't know the exact level of carbon reduction, but we can raise and lower the tax every month if need be until we get to the desired carbon output. Each of those choices to raise and lower can be made using some cost-benefit analysis.

On the other hand, a cap-n-trade system specifies the amount of carbon, but the cost to the economy is unknown until after the system has already been implemented. The permits are issued, and then the trade part determines the cost of carbon amid the artificial scarcity created by the permits.

This is beneficial to politicians because it doesn't have the dreaded tax word in the policy, but it's actually worse because the results will be the same as a tax except we don't know how expensive a tax until afterwards. Recently, I've even heard financial industry types jumping on the bandwagon. They want to get in on the action of trading these permits. One of the arguments they use is that it will determine "a market price of carbon" as if this prices were some magic number the market tells us. In fact, the price would not be an actual market price at all. It is the price determined by the artificial scarcity imposed through the issuance of limited permits. This argument about a market price actually misses the point about a market. Markets are primarily beneficial not because they determine a price, but because the prices influence behavior. Therefore, a carbon tax would use the market mechanism as well.

In fairness, a price determined by a market can be a very powerful tool to gather information. For example, election betting markets were probably more accurate than polls during the election. However, in this case the information we are gathering is how expensive the policy will be, but the market will determine that AFTER the policy has been implemented. That's not the type of idea that should be considered a benefit to a policy.

Another problem is the initial allocation of the permits. An efficient auction would be fine, but the temptation to allocate these permits to favorite industries (in the developed world) and to cronies (in the developing world if they sign on) will be huge. But let's say that the allocation is an efficient auction, the only reason a market will be created is because the initial allocation was sub-optimal. An optimal allocation would give everybody who needed permits the exact number of permits they needed. If that's the case, then nobody needs to buy and sell permits and no market needs to exist. Given that the initial allocation will be suboptimal, people, strangely, want to use the exact same bankers they are calling reckless and greedy for screwing up the housing market to reallocate these permits?

A carbon tax allows anybody to emit as much carbon as they want, but they have to pay a political imposed cost that attempts to mimic the environmental cost. It is actually using the market in the best way, using the price to influence behavior, not to determine a price. With a carbon tax there is no allocation problem.

All this is to say that a carbon tax is simpler and therefore easier to implement successfully than a cap-n-trade system. Then again this might all be a hugely expensive but futile endeavor.

BBC:

A team of environmental researchers in the US has warned many effects of climate change are irreversible.

The scientists concluded global temperatures could remain high for 1,000 years, even if carbon emissions can somehow be halted.

"People have imagined that if we stopped emitting carbon dioxide the climate would go back to normal in 100 years, 200 year - that's not true," said researcher Susan Solomon, the lead author of the report, quoted by AP news agency.