Tax vs. Cap

Recent days have seen some low intensity warfare among those who are trying to enact some measures to control global warming. In each case, the idea is to control carbon emissions. One way to do this would be by enacting carbon taxes, with the idea of making emissions so expensive that people could not afford them. The so-called cap and trade system instead is based on the idea of providing a limited supply of emission permits that would be sold (traded) to the highest bidders. The tax idea has been pushed strongly by James Hansen and tends to be favored by lefty types like the authors of this show linked by commenter Cynthia: Cap and trade is a favorite of economists. I am trying here to assemble some of the pros and cons of each side, though I think it will become clear which idea I find more likely to succeed.

Pro Tax: The carbon tax avoids the complications of setting up markets and the risks that speculators would game those markets, create bubbles, and (oh horror!) make a profit. It provides one kind of predictability, in that you know how much the energy/carbon tax is going to cost, which facilitates planning. Also it provides a big stream of revenue that social engineers are itching to get their fingers on.

Anti Tax: Predictability in price is achieved at the cost of predictability of effect. You can't predict how much a given tax rate will affect the emission of CO2. Consumers may just suck it up and pay through the nose to go on emitting. The tax is a blunt instrument, limiting the options of consumers and industry to find innovative ways to save emissions. It provides no incentive for sequestering carbon. It provides a stream of revenue profligate politicians are certain to funnel to special interests. Finally, it is a very regressive tax. The poor will starve and freeze while the rich will still lead the same lifestyle. Finally, there is no way a big energy tax is going to be enacted in the US or many other countries.

Pro Cap and Trade: It provides predictability where you need it, in the total emissions. It provides more scope for ingenuity and enterprise since those who find ways to save emission can do more than just save a little money, they can make it, even big money. It can naturally accomodate sequestering carbon and other offsets as well as emissions. As an indirect tax, it is a smaller target for the anti-tax fanatics. If permits are auctioned, it too can provide a revenue stream (for good or ill). Prominent advocates are Paul Krugman and Brad DeLong:

Anti Cap and Trade. Regulation of emissions requires detailed monitoring. There will be opportunities to game the system. Profitteers are already gathering up emission permits with the aim of selling them at a big profit. We don't need another trillion dollar market for speculators to create bubbles in. Its revenue stream, if any, is unpredictable and less likely to be used to help victims of higher energy prices.

My comments: I find the arguments of the economists persuasive, and I'm especially skeptical of the idea that there is any political will to pass an energy tax. I like the idea that cap and trade seems to provide more scope for innovation. Too many on the left, I think, are motivated by a besetting fear that somebody, somewhere, might be making a profit.

That said, I am deeply skeptical of the likelyhood that any effective action will occur. Long term planners should be watching the predictions of where climate damge is likely to be concentrated and making plans to emigrate before everybody else tries to. (This advice doesn't apply to my generation, but to their children and grandchildren).


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