Carbon tax vs cap-and-trade: required reading

• N. Gregory Mankiw, One Answer to Global Warming: A New Tax, NY Times, 9/16, 2007
• Solomon, Deborah, Climate Change's Great Divide: Lawmakers Favor Carbon Caps, Trading; Economists Prefer a Tax, Wall Street Journal, September 12, 2007

Comments

[odograph]

I hate required reading but that first one isn't so bad, it only repeats the economists instinctive response that regulation would make cars "more expensive" (never mind that efficient and inexpensive cars exist). More likely it would serve to shift conspicuous consumption to other forms. (50 mpg cars with 500 watt stereos?)

I haven't read the second ... maybe the night before the quiz.

[phil]

If we discount the political factors (I know this is not a realistic approach for policy), is the cap and trade alternative not a better solution?

Taxes work well for negative exteranlities if the revenues are spent on alleviating the social cost. That rarely happens.

If instituted properly, a cap-and-trade policy would work better to give a market solution--an efficient solution--as users would have incentives for reducing their carbon use.

No matter the initial distribution of permits, holders will be motivated to decrease emmisions so they can sell their rights at the going price.

The economics is simple enough.

Has this not become a political question?

[phil]

If we discount the political factors (I know this is not a realistic approach for policy), is the cap and trade alternative not a better solution?

Taxes work well for negative exteranlities if the revenues are spent on alleviating the social cost. That rarely happens.

If instituted properly, a cap-and-trade policy would work better to give a market solution--an efficient solution--as users would have incentives for reducing their carbon use.

No matter the initial distribution of permits, holders will be motivated to decrease emmisions so they can sell their rights at the going price.

The economics is simple enough.

Has this not become a political question?

[jsalvati]

phil:

I think I prefer a cap-and-trade scheme over taxation too, but "Taxes work well for negative exteranlities if [and only if] the revenues are spent on alleviating the social cost." is simply wrong. There are many cases where spending revenue mitigate social costs would not be cost effective (consider acid rain, where it would be very expensive to rebuild buildings out of different materials). The effect on efficiency due to the tax/cap is not related to how the revenues are used. A tax will incentivize polluters to reduce their pollution in exactly the same way as a cap (in both cases polluters have to buy the right to pollute).

[phil]

jsalvati,

Well, if all you want is to reduce the pollution to efficient levels, OK. But for the market to truly work efficiently, should it not compensate the resource owner for the loss? True, that is not necessarily alleviation.