Monday, December 7, 2009

Paul Krugman Says Exactlly What I Was Saying About Cap-N-Trade


Which, of course, he should because this is Econ 101 analysis.

The Cliffs Notes:
What the basic economic analysis says is that an emissions tax...and a system of tradable emission permits, aka cap and trade, are essentially equivalent in their effects.

The only difference is the nature of uncertainty over the aggregate outcome. If you use a tax, you know what the price of emissions will be, but you don’t know the quantity of emissions; if you use a cap, you know the quantity but not the price.

And to dave.s.' concern, Krugman writes:
Oh, and the argument that if you create a market, you’re opening the door for Wall Street evildoers, is bizarre. Emissions permits aren’t subprime mortgages, let alone complex derivatives based on subprime; they’re straightforward rights to do a specific thing.

My view is that Cap-N-Trade is a more complicated way of getting to the exact same place as a carbon tax, and following the KISS principle I prefer the simpler method.


Anonymous said...

Small Paul misses part of my complaint: that our Congressional Overlords have huge capacity to fuck it up by giving permits to all their pals, and thus remove the incentive for the ag sector to grow/harvest corn more cheaply.
I'm not convinced you want to accept the loss from a claimed 'small' cost program of running the permits, anyhow - it has no utility, why do it?
And furthermore, a lot of our taxes actually harm us - discourage industry, distort incentives. So why not tax the hell out of carbon, and use it to lower the costs of Social Security, paying back the costs of TARP, etc? dave.s.

FLG said...


There are huge issues with Congress and hanky panky with permits. I'm also with you on skepticism about small cost on the permits. I'm not sure why you think that one huge carbon tax distortion is superior to other distortions?

If we are going to go for one tax, then I'm all for a massive real property tax and get rid of the rest.

Anonymous said...

Reihan Salam, what he said:

It's always nice to see someone call Krugman out. He richly deserves... dave.s.

FLG said...

I'm glad we are all in agreement. I even said so back in January:
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.

Also, this is Krugman being disingenius again.

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