Point-Counterpoint

I really don't get the debate by economists between a carbon tax and marketable carbon permits. At the first level, as economists, we've won! We've convinced nearly everyone that regulation using economic incentive-based policies is a preferred approach. The squabbling amongst us over the best economic incentive-based policy can't help get one of these policies implemented.

I understand the squabbling by others ... since there is a lot of money at stake. The distribution of wealth from various carbon policies is examined in a recent CBO Brief (I hope to summarize this very, very soon).

Here is a recent sampling of the preferences of cap-and-trade and carbon taxes.

Some (e.g., U.S. business firms, pragmatic environmental groups) like the cap-and-trade (Business Coalition for Climate Action Doubles):

The unprecedented coalition calling for a cap and trade system to combat climate change, the U.S. Climate Action Partnership (USCAP), has more than doubled its membership.

In a move that transforms the political landscape, General Motors is the first automobile manufacturer to join the coalition of high-level corporate and environmental leaders.

Some (e.g., Financial Times) like the carbon tax (CO2 needs a price ...):

The Kyoto protocol to fight climate change expires in 2012. The shape of a successor treaty is still in doubt, but one aspect seems certain: carbon trading will play a major role. A Financial Times investigation today reveals that carbon markets leave much room for unverifiable manipulation. Taxes are better, partly because they are less vulnerable to such improprieties.

The Financial Times editorial goes over the becoming-well-known arguments for taxes over marketable permits. I agree with some (price uncertainty is a bummer), disagree with others (tradeable permits are easier to cheat than taxes) and then reverse myself. But this one I'm solid on:

Yet most of the political appeal of markets is that they hide the true costs to consumers.

Huh? I thought that most of the political appeal of markets is that firms are hoping that permits are given away leading to profit opportunities (e.g., ED's Business Coalition). Consumer prices will rise, (i.e., internalizing the negative externality) whether carbon is removed with taxes or tradeable permits (i.e., allowances). On this point, see the excellent CBO Brief. In short:

Regardless of how the allowances were distributed, most of the cost of meeting a cap on CO2 emissions would be borne by consumers, who would face persistently higher prices for products such as electricity and gasoline.

Comments

[Tim Haab]

Good stuff.

[odograph]

I really don't know. Does the argument slow response or is it part of the drum-beat building for action?

[joshua corning]

At the first level, as economists, we've won! We've convinced nearly everyone that regulation using economic incentive-based policies is a preferred approach.

Wha?!?

Last I checked our representative government elected by popular consensus took option C and decided to spend billions on ethanol subsidies. Whom is this "nearly everyone" you speak of?

[David]

I don't think you've really answered the point that although trading and taxes have much the same impact on consumers, consumers (aka voters) don't necessarily realise that.

[John Whitehead]

Trading might hide price increases but the welfare impacts are the same. Just like how a voluntary export restraint works the same as an import quote.

[mike]

"The squabbling amongst us over the best economic incentive-based policy can't help get one of these policies implemented."

Sure it can. So long as argument is over which incentive based policy to implement, no one is talking about command-and-control.

There even may be an external benefit. When the next big environmental debate arises, editorialists and other educated people will have already been primed to wonder whether to implement an appropriate tax or to employ tradable permits. (And no one will talk about command and control.)

[John Whitehead]

Mike,

Won't the CandC types seize on the negative arguments against either IB policy and use this to further their own arguments?

"See, Senator X, economists think that both of these have negatives. We should just impose a technological standard."