Now the whole world thinks that I'm an idiot

Or, at least, all of Mark Thoma's Economist's View readers think that I'm an idiot. Mark comments on Glenn Hubbards advocacy of cap-and-trade (and a reduction in the corporate income tax with the auction revenues) vs. Greg Mankiw's advocacy of a carbon tax:

Looks like it's time for two former chairmen of the Council of Economic Advisers for the Bush administration, Glenn Hubbard and Greg Mankiw, to settle this tradable permit versus carbon taxes issue once and for all. I propose an Econoduel. Mankiw versus Hubbard, whiteboards only, any theory goes, and you cannot be saved by the end of period bell. We'll need a referee, so I'll suggest John Whitehead at Environmental Economics as he seems relatively unbiased - he doesn't think there's much difference between the tradable permits and carbon taxes and doesn't really care which one we put into place, as long as we do something.

As I've said before, in the most basic model, there is no difference in the efficiency aspects of a carbon tax and cap-and trade. I've finally formalized the textbook explanation on this blog. See ECON 101: Carbon Tax vs. Cap-and Trade. Again, I'm not ignorant of the vast literature contrasting these approaches with various tweaks to this most simple model. I simply don't think the tweaks make much practical difference, once we have adopted economic incentives over command and control regulation.

Comments

[anne]

No; I think John Whitehead is smart and simple and practical and tough, and I agree with him (you).

[odograph]

I'm just glad nobody prominent linked to that day where I had the right/left problem.

[Chuck Roast]

“I simply don't think the tweaks make much practical difference, once we have adopted economic incentives over command and control regulation.”

Then why bother even teaching…for all the difference you will make, you may as well go caddy.

I know that you will stand up in front of your Welfare Economics students and discuss what ought to be rather than what is and elaborate on prescriptive propositions involving value judgments (oh, perish the thought). You will identify Pigouvian taxes, Pareto Optimality, equity and Coase Theorem possible solutions – how they work and in what cases they could be applied. You will then wander off to your Micro 202 class and discuss marginal utility and market efficiency. You can chat about economic theory until your fillings fall out, but where were you yesterday?

Any bozo that can type “www” knows that the pin-head pols. will reward their PAC-meisters with a relatively painless and lucrative cap-and-trade – we don’t need you to tell us that. At least I don’t. I need you stand up and discuss the relative economic merits of carbon trading vs. cap-and-trade. Be a mensch or stand down.

[John Whitehead]

Chuck,

Both emissions taxes and cap-and-trade can:

1. achieve optimal emissions at the least cost to society
2. provide incentives for firms to innovate and further lower abatement costs

Those are the big things. These are the little things:

3. both carbon taxes and cap-and-trade can raise revenue for the government. Carbon taxes can raise more. Emissions permits must be sold by the government for cap-and-trade to able to raise revenue.
4. emissions trading markets might result in more price variability for consumers. This can be resolved with a price control in the emissions market (i.e., a safety valve).
5. emissions trading markets can become overly concentrated. if some firms accumulate a large number of permits they could set the price above the competitive level. government must be sure to promote competition just like it does in other markets.

I'm happy with either since I think that #1 and #2 are the most important (i.e., that is where the most efficiency gains versus the status quo and versus command and control can be found).

Helping people gain an understanding of the relative importance of these pros and cons is part of the responsibility of teaching. Sometimes academics get so bogged down in the details that we forget the big picture. The details are fun for writing research papers but can be ignored if the big picture items come out even.

In the case of carbon taxes versus cap-and-trade, I worry that carbon tax advocates will derail the economic incentives train and we might end up with command-and-control regulation.

Oh yeah, I forgot, thanks for your brave, anonymous name-calling comment. Sticks and stones, sticks and stones.

If anyone hasn't figured it out yet, I don't particularly like the sharply worded anonymous comment. I'm an immature baby, yes.

[Charles E. Roast III]

John:

While I read all the blogs, I don’t often comment. I actually used to read your blog and comment occasionally until Joshua drove me away – that should be enough to speak for my reasonable civility. Anyway, sometimes ya’ gotta’ stick the old pin in. So, thank you for the response.

1. achieve optimal emissions at the least cost to society:
My point is that C&T is a sub-optimal solution because:
a. it attacks only a small portion of the market (major stationary sources) while a carbon tax is optimal inasmuch as it attacks all hydrocarbon sources from chain-saws to coal fired power plants, and
b. by not attacking mobile on and off road sources, C&T permits continuing externalities and social costs

2. provide incentives for firms to innovate and further lower abatement costs
I agree that C&T can provide abatement incentives for large stationary trading sources if the marginal cost of pollution exceeds the marginal cost abatement. However:
a. greenhouse gas (GG) reduction occurs at the margin and may not meet societal goals while a carbon tax can be readily adjusted for pain and gain for all,
b. provides no incentives for the GG reduction for area and on and off road mobile sources while a carbon tax can if it is relatively elastic
c. will provide a substantial market opportunity for profits for a small elite and can little surplus to ameliorate the costs to those least able to afford price increases while a carbon tax makes everybody pay and can be used to provide distributional equity

3. both carbon taxes and cap-and-trade can raise revenue for the government. Carbon taxes can raise more. Emissions permits must be sold by the government for cap-and-trade to able to raise revenue.
Carbon taxes can raise substantial amounts for the “public sector” – we are all members of the public and as Young said:
a. this is a Pigouvian tax and is a reasonable and proper method for remedying an environmental externality – an admitted market failure
b. a carbon tax is easy to administer by putting a levy on the source, e.g. continuous emissions monitoring (CEM) on a stack (CEM already exists)
c. once emissions permits are sold, they trade on an open market and there is no longer any opportunity for public revenue – or at least, that revenue will be substantially diminished

4. emissions trading markets might result in more price variability for consumers. This can be resolved with a price control in the emissions market (i.e., a safety valve).
Isn’t this a sub-optimal reaction to a sub-optimal solution? You would remedy a market failure by establishing a market that may be fatally flawed relative to Pareto considerations with command-and-control intervention? I won’t stick the pin in here.

5. emissions trading markets can become overly concentrated. if some firms accumulate a large number of permits they could set the price above the competitive level. government must be sure to promote competition just like it does in other markets.
Again, why eschew the command-and-control of a carbon tax that acts as a user fee or even a flat tax (the more you use the more you pay), and then establish a market trading scheme that could require government intervention?

Sorry, Occam’s razor has got me again. Anyway, nothing personal – and thanks for being a mensch!

[John Whitehead]

Chuck,

I don't have any disagreement. Yet, I don't see how this helps society move towards economic incentives policy over command-and-control.

If Mankiw can't get a broad-based carbon tax considered while he is the President's economist then I don't think it will happen.

My solution for the transportation sector is a higher fuel tax (i.e., a carbon tax). I don't think a two part policy is too complicated.

I don't think the odds of getting a higher fuel tax are great either.

So, I'm left with cap-and-trade for power plants and any other sector that might join in. I think this would be a good start.

[Jay Benesch]

I am not an economist. I'm a physicist.

I do not think this administration is going to do anything except obfuscate the issue.

I wonder if in 2009 a grand coalition might pass something like the following.

1. carbon tax starting at $30/ton of CO2 (6.5 billon tons/year) and increasing $10/year to $100/ton (2009$).

2. elimination of corporate income tax

3. elimination of special treatment of capital gains and dividends in individual's taxes since original justification was double taxation

These three likely net zero integrated impact on deficit after three years. After that, carbon tax produces new revenues. Use those for some politically salable combination of:

A. debt reduction to generate "virtuous cycle" of low interest rates and economic growth. Might be sold as preparation for impact of retiring baby boomers.

B. national health care, selling it in part as evening the playing field for US vs foreign manufacturers

C. lower individual tax rates

My estimate of the probability of such a grand deal? under 0.1%

[tjr]

It is not all black and white between carbon taxes and emissions trading. Have a look at this recent report from an Australian government commissioned task force on the future path for emissions trading in Australia.

http://www.pmc.gov.au/publications/emissions/index.cfm#viewing

The Australian economist Warwick McKibbin has had an intellectual influence on the report even though he was not part of it directly. I think it deals with the policy and political issues together in the most responsible and politically feasible method possible. I am aware of the international debate and I believe this serves as a template for all nations including the China's and India's in the emissions debate.