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1. 

   Charles
   

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   "The Smoke of Chimneys is the Breath of Soviet Russia"

   There is an interesting post on Slate’s “The Big Money” website that points out what it believes to be a hidden secret about the recently passed (in the House) climate bill. It is a well-thought-out piece, and it makes many good point — though I think it requires some discussion. To recap, the House bill establishes a cap and trade program for carbon emissions as a method to eventually limit CO2 emissions` to a level scientists tell us are environmentally sustainable.

   In general, a cap and trade system is the system preferred by economists. In an influential article (JStor access required) in the Journal of Economic Literature, Maureen Cropper and Wallace Oates cover cap and trade systems in their original form, which were SO2 permits. Quickly, let us review how the cap and trade system works (I have detailed the system in this post). We start from the premise that there is some lesser amount of emissions that we want reach. There are lots of ways to arrive at this amount, we could tax the pollution, we could give ownership of the air to somebody that would charge polluters, or we could simply state –by law — that polluters can only emit so much junk into the air.

   
   Cap and Trade Carbon Markets

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   Sometimes I forget that I have a photographic memory.

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   Posted 7 months ago #
2. 

   drucev
   

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   Joined: Jul '09
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   Not particularly persuaded.

   If you assume all the relevant can openers, there’s not much difference between cap and trade and a carbon tax. Cap and trade sets the quantity of emissions and lets the market determine the price; a tax sets the price of emissions and lets the market determine the quantity. They both impose a cost disincentive on pollution.

   But compare 2 methods of putting controls on pollution. 1) have a bureaucrat determine how much pollution you have the right to emit, and issue permits, and enforce them, vs. 2) a tax on fuel, according to how much carbon is in it and ultimately emitted.

   Cap-and-trade = the tax, plus corporate welfare (by giving away the right to pollute up to the initial cap – see http://gregmankiw.blogspot.com/2007/08/fundamental-theorem-of-carbon-taxation.html), plus administrative costs, plus opportunities for rent-seeking.

   Politically, cap-and-trade is great for the bureaucracy that administers and enforces; the bankers that trade; the congressmen who get contributions; and the manufacturers that fall under the initial cap and impose the burden of buying permits on any new entrants; and of course voters don’t hear the T (tax) word.

   Determining a proper quantity of permissible carbon emissions is as no more or less unknowable and arbitrary than determining the social cost of an additional kg of emissions. In each case you have to adjust over time as technology, population, and cost/accepted quantity of pollution changes.

   To me, the complexity of enforcement and potential for gaming the system make cap-and-trade clearly less desirable than a carbon tax; but from a political standpoint of course those are features, not bugs.

   Posted 7 months ago #
3. 

   Charles
   

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   Joined: Jul '06
   Posts: 27

   Druce, Thanks for the great feedback. You and Greg Makiw make all the correct points. I never meant to indicate that cap and trade is a perfect -- or even a good -- solution. I simply meant to say it is less bad. I still feel convinced of that. Assuming all the can openers, a tax and a permit system should be equivalent. I am not so sure why you think the "corporate welfare" is a bad thing. I would rather have the funds be a private windfall than a windfall to government, which is what tax revenue would be.

   Both systems will generate revenue, the way they work is through the price system. The difference is who receives the revenue. The Mankiw link talks about "revenues rebated to households through lower payroll or income taxes," and that would be great, but realistically, there is not likely to be any sort of correspondence between revenues and rebates (I think I have some crap about the Flypaper Effect somewhere on this site).

   I am also not sure I agree that knowing the total amount of pollution that is right is as difficult as getting the tax correct. In other words, I think you are talking about a far more complicated can opener when it comes to a tax system. I am not an expert on atmospheric sciences, but from the limited exposure I have to those who are, they seem a lot more convinced they are correct than economist are about understanding the marginal cost structures of carbon emitters, which you would need to know the get the tax correct.

   Finally, I did not touch on this in the post, but the political feasibility argument is not a small one, though it might be overblown. We use Pigouvian taxes far, far, far more commonly than we use permit systems.

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   Posted 7 months ago #
4. 

   drucev
   

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   there's the old joke about how economic forecasters exist to make weather forecasters look good... combine them both to come up with a carbon emissions policy and then mix in some politicians for good measure ... makes one skeptical.

   policy only works if it creates incentives to develop cheap clean energy...otherwise you're just extending the date at which all the extractable hydrocarbons will be returned to the atmosphere by a couple of centuries. meaningless on a planetary scale, if not for the next couple of generations of humans.

   one thing I've often wondered what CO concentrations were like when the hydrocarbon deposits were deposited...since initially whatever CO we're emitting did come out of the air via photosynthesis...not that that's an excuse to do nothing but I guess that's one way to find out.

   Posted 7 months ago #
5. 

   Charles
   

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   Joined: Jul '06
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   I think the incentives to develop clean energy would have to come from somewhere else. The polluters are just that, polluters. It's possible to tax the oil companies, but that would be a bit like taxing the cigarette manufacturers. You have little idea where the final economic incidence is going to lie. Tax or permit schemes are going to create in incentive to make pollution abatement less expensive, which is a good thing, but if we want to create clean energy, we should do that through the National Science Foundation, or some such R&D type outfit.

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   Posted 7 months ago #

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