Monday, December 7, 2009

I'm Repeating Myself

...but don't let the "market solution" or "power of the market" language fool you on Cap-N-Trade. A Cap-N-Trade system, if run properly with an auction, will simply achieve the same as a tax, except we won't know the cost of that tax in advance.

The market power comes in by attributing a cost to carbon. This cost then signals through prices that people and corporations need to use less of it. For example, I'll change "cap and trade" to "carbon tax" and "buy permits" to "pay a cost" in this paragraph by Paul Krugman and the economics are still entirely true:
Action on climate, if it happens, will take the form of “carbon tax”: businesses won’t be told what to produce or how, but they will have to pay a cost to cover their emissions of carbon dioxide and other greenhouse gases. So they’ll be able to increase their profits if they can burn less carbon — and there’s every reason to believe that they’ll be clever and creative about finding ways to do just that.

Cap-N-Trade has one big benefit and that is it hides the cost and doesn't have the word tax in it, but it is the equivalent of a tax if everything works efficiently. I'd rather just put the tax out there and know the cost and have less worries about efficiency and complexity. Permits and trading create a market for carbon, but that market is solely the result of a misallocation when the permits were initially distributed.

1 comment:

Anonymous said...

The only intellectually strong reason to do cap and trade instead of a carbon tax, as far as I can tell, is that you can set the amount of carbon more precisely, and then give out/sell the permits to match this level you have decided is optimal. Against that, you have the vampire squids of Wall Street making money on the market in permits, and the irresistible temptation for our Parliament of Whores to give permits away to their buddies. AND the claimed problems of carbon use are long term, so if you set a tax at $90 a tonne one year and people burned more than you though optimal, you could raise it the next year. I like the tax better, and it's partly out of hostility to our vampire squid overlords. dave.s.

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