Monday, October 19, 2009

UnKISSed Cap-N-Trade

Once upon a time, FLG was an engineering student. One of the most important things he learned was the KISS principle, which as most of you know is "Keep it simple, stupid."

This is largely FLG's issue with a cap-n-trade solution to carbon emissions. Theoretically, with an initial auction of the permits and efficient trading, the results from cap-n-trade would be the same as a carbon tax, but cap-n-trade is more complicated. Therefore, it is more prone to political maneuvering, as we are seeing. Ryan Avent says not so fast:
One of the things about politics is that solutions always seem easier to implement and more promising before they stand a real chance of being implemented. People who have for one reason or another fallen in love with the idea of a carbon tax watch the difficulty Congress is having negotiating a passable climate bill and ask why we don’t just pass a carbon tax. It would be so easy! It’s just a tax! Pass it, price carbon, and bada bing, you’re done.

But of course, a carbon tax looks like a clean, simple option at the moment because no one is invested in securing protections or advantages for themselves because a carbon tax isn’t on the table. The moment it looked as though Congress might actually consider and pass a carbon tax, every single interest that has pushed for free carbon credits or other assistance would take on the carbon tax, demanding exemptions or offsetting subsidies of some kind, and generally producing the exact same kind of mess for a carbon tax bill that we have now with a cap-and-trade bill.


Ryan obviously has a point. Any bill would come under pressure from lobbying groups, so the political difference between cap-n-trade and carbon tax is one of degree and not kind. But where he goes wrong is dismissing the matter of degree.

The public doesn't fully understand that giving away carbon permits is a subsidy to industry. Nor that cap-n-trade will result in the same level of price increases as a carbon tax. Despite all the talk of carbon permit trading market creation, as if the creation of this market is some sort of net benefit, there is no economic or environmental benefit of choosing cap-n-trade over carbon tax. There is only a political benefit. A political benefit derived from obscuring the economic consequences and impact from the public.

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