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There’s an internet fight going on about how to limit emissions of greenhouse gases. In Corner #1, we have the Cap-and-Trade Kids, advocating limits on the amount of gases emitted. In Corner #2, we have the Pigou Clubbers, arguing for a carbon tax. Backing cap-and-trade are President Obama, Senator McCain (during the campaign), the European Union, and much of the rest of the world. Backing the carbon tax are … Andrew Sullivan and a bunch of economists, nominally led by Harvard’s Greg Mankiw. This seems a little lopsided.
What’s interesting is that there are those arguing that the fight should be called off before a punch is even thrown. The winner will have to take on The Status Quo, and cap-and-traders want to go into that fight unblemished. Since they’re the only ones with a chance, the argument goes, the Pigou Clubbers should toss in the towel now.
This raises some interesting questions. Is there any difference between cap-and-trade and a carbon tax? Is cap-and-trade the only politically viable approach? And would either have a chance against The Status Quo, who is drawing new fans in the midst of the economic downturn?
First, there is a difference. Cap-and-trade can do a very good impersonation of a carbon tax when we know the demand for emissions with certainty, when we do a great job of regulating, and when we auction off all the emissions permits. If we’re uncertain about the demand for producing emissions, if it is hard to keep tabs on what various emitters are doing, or if politics intrudes into the process of handing out emissions permits, then the two approaches veer apart.
For ease of use and immunity from political meddling, the carbon tax is the clear winner. Taxes can be applied early in the fuel distribution process, which makes the logistical task much easier. That sort of upstream application would make attempts at political interference much more transparent, as well. So what about uncertainty? The big critique of a carbon tax is that it cannot guarantee a country will come in under a pre-set emissions cap. If the desire to pollute is really, really high one year, we could find that a given tax won’t serve as a sufficient deterrent, and we’ll blow past our limits.
Europe, though, has had the opposite problem with their cap-and-trade system. In the first phase of the program, they printed more permits to pollute than anyone wanted. That drove the price of permits near zero, deeply annoying anyone who had paid up for the right to pollute. It also meant that the system was ineffective in restraining pollution. That would be hard to do with a carbon tax.
The Cap-and-Trade Kids argue that, whatever the economic merits, their approach is the only one with a political chance. But why? Carbon taxes have certainly been seen as a political third rail, at least since President Bill Clinton dropped a proposed BTU tax in 1993. People don’t want to have to pay more for energy. But how does cap-and-trade overcome this critique? If it’s going to rein in eagerness to pollute, it will have to raise the cost of pollution. It may be possible to win support by pretending this won’t happen, but it’s worth thinking hard about whether such deception is a sound basis for creating a major long-term policy.
And what of the big ruckus with The Status Quo? Australian cap-and-traders just postponed their fight. Prime Minister Kevin Rudd gave a number of reasons, including the need for business certainty (a plus for a carbon tax, by the way) and the impact of the global financial crisis. Does it make any sense to raise taxes, implicitly or explicitly, in the midst of a recession?
Actually, it might. It would depend what we did with the revenue. Imagine we used it to finance a cut in payroll taxes. That would make it more expensive to pollute, but cheaper to hire people. That could be a nice combo. I wouldn’t bet much on the political chances of the carbon tax, but it’s got enough promise to at least go down swinging.
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This is a fight that should be broken up by the responsible adults. The question is not tax vs cap and trade. The question is whether tax is a tool in the tool box that will be used in a timely manner to help address climate change.
Here are a few relevant benefits of a tax.
I will begin with the bottom line: If we are going to have to wait another 10 years for the carbon price of a national cap and trade program to catch up to the carbon price that would otherwise be establish by a carbon tax, then we collectively missing a huge opportunity.
I have read that the BC tax was put into place 6 months after it was conceived. Compare that to how long it will take BC to put a cap and trade in place. BC committed to a cap and trade years ago and it will not be implemented for years to come. It may take several years more before the carbon price stemming from their cap and trade rises to a level that matches the carbon price that would have resulted from their carbon tax (had it continued without a cap and trade).
Dismantling a tax would also be more expeditious than dismantling a cap and trade.
All funds collected via a provincial (or a state) tax are reallocated within the local economy.
A tax seems just as likely as a cap and trade to achieve the targeted reductions. I disagree with those well meaning groups who compare a tax with a cap and conclude that a tax is less likely to achieve long term targeted reductions.
I also disagree with those who critisize cap and trade for what are usually overallocations in the first trading periods. Price spikes in the first period (e.g., by underallocating) would create roadkill at a time when an existing cap and trade is most susceptible to being dismantled. Absence of cost containment mechanisms force a reliance on overallocation.
Cap and trade legislation is going to come and go. Reopening enacted legislation (that perhaps was inadequate to begin with) will be no cakewalk.
Our goal must be to increase the price of carbon throughout the world economy as quickly as possible. Waiting years to establish a lackluster price in a national cap and trade is not the right approach.
As noted right from the start by the BC government experts, a tax is not mutually exclusive of development of a cap and trade. So stop dissing cap and trade
I believe a carbon tax, if configured appropriately, could be used to facilitate the implementation of cap and trade in a way that creates more stability in carbon prices and a faster price rise in the market price of carbon.
Since a tax is much more dynamic than a cap and trade, the tax could be reduced as the cap and trade allowance prices rise. I suggest here that taxes could be used in addition to offsets as a potent means of cost containment for the cap and trade. Tax proceeds could also be used to persuade certain “vulnerable” industries to get on board with cap and trade.
Of course, this government seeks to allocate all proceeds to the other crisis (the one that resulted from 17 years of unbridled prosperity). How the funds are allocated is a big food fight, I agree, but the importance of early progress towards a meaningful price signal is entirely underemphasized in the debates I have witnessed.
And what harm would the BC tax cause if implemented in other states and provinces? A $10 per ton price would increase residential gas and electricity rates by 3-5 %. That is a few dollars a month more on the utility bill. But they’d also see a few dollars at the pump, etc. If this were deemed to burdensome, the tax could start out at $5 per ton. Let the economists decide.
In BC, the tax rises $5 per year per ton, so in 2012, when the mythical cap and trade is supposed to go into effect, the price would be $30 (Canadian) per metric ton.
I salute BC for their environmental leadership. They are demonstrating meaningful early action to the rest of North America.
For those industries most likely to become subject to cap and trade, a tax provides better certainty of projected costs.
Finally, many of us have seen or heard of the recent ICF report projecting a 7 fold increase in European allowance prices. Many of us have seen the Tanaka’s IEA report projecting the need for a price of $90 in 2030 to stay below 550.
So, please ask yourself: In 2020, if the US price of carbon is only $20 per ton and global emissions have not even stablized, will we and/or our children in 2020 in order to keep atmospheric concentrations below 550 be able to make decisions to go from $20 to $90?
Establishing a price signal is the most important early action we can take. Obviously a cap and trade cannot do that for us. Only a tax can. Please consider it.
The two mechanisms are complementary and can be set up to address different parts of the overall market, without overlap. Cap-and-trade has a known outcome (the cap) and (potentially) unknown cost. Tax has unknown outcome and known cost (the tax rate). A carbon tax can be adjusted. Cap-and-trade is unfortunately a cop-out for weak-kneed “enviros” (see Jack Layton et all). (Sorry for getting political there.)
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