Torn between two lovers

Mankiw: Carbon tax vs cap-and-trade.

Where have I seen that headline before? But seriously, the mainstream economics blogs are hitting the climate change policy issue very hard. And it seems like we hit it really hard in 2007. Every time I read a mainstream blog dealing with climate policy I feel like diving in and repeating myself but then I end up typing something totally silly instead ...

Here is my bottom line: a carbon tax or a cap-and-trade policy is a big improvement over the status quo. Cap-and-trade is politically feasible [look at this too]. A carbon tax is not (as far as my political instincts can tell). I pragmatically, and unapologetically, support cap-and-trade. Other economists are strongly in favor of a carbon tax and seem not to support cap-and-trade over the status quo. I find this a curious position. These supporters are either (a) economic purists and anything other than maximum efficiency is unacceptable or (b) actually in favor of the status quo and therefore willing to push something politically infeasible (or likely infeasible) or (c) torn between two lovers, feelin' like a fool, lovin' both of you is breakin' all the rules [complete lyrics].

If you are a carbon taxer or bust, please supply the reason [a, b, c or some combo] in the comments section.

Comments

[Charles Young]

Who are the economists who rank the status quo over a carbon tax? Although I've argued with John about this on these pages, I've always made it clear that cap-and-trade would be superior to the status quo, and I've never seen any economist, including Mankiw, make the case that the status quo is better than cap-and-trade. Pending identification of these economists, I tend to believe that they may be figments of John's imagination.

The case against cap-and-trade with gifted permits is simply the case against gifting money to utilities (neatly described by Mankiw as "corporate welfare"). If it is true that only cap-and-trade is politically feasible, then let's do it. But I am not clear why John's political antennae tell him that this is so. It is true that giving money to utility companies has great political appeal to utility companies, and that they have efficient lobbying groups. But in Europe the public has gradually realised what a scam this is, and would prefer that the money be used to fund public services or cut other taxes.

[Tim Worstall]

I'm not an economist but when has that stopped me?
Not a, b or c.
We're still at the stage where we're arguing about what to do. Thus it's logical to argue for what is the best solution, a carbon tax.
Only once the intellectual argument is finished and we have to start trying to sell the solution politically is it worth doing a Rodrik and settling for the second best but better than the status quo solution.

[Tim Haab]

Tim,

I'll take a shot here. The other day my kids had a snow day. My two daughters got in an argument over what movie they wanted to watch. My solution? Either agree or you get neither.

I think that's the fear of failing to agree. If there is major dissension when whichever policy is put before Congress, there is a likelihood neither will be chosen.

[John Whitehead]

Charles: I'm U.S. centric -- there are cap-and-trade bills in the U.S. congress and one will get through, I'm almost positive (unless prominent economists pushing carbon taxes only derail it). There are no carbon tax bills that have a chance, as far as I can tell.

There are skads of economists, maybe the majority, who rank the status quo over any sort of climate policy. These are the climate skeptics.

Tim W: The intellectual argument (i.e., academic debate) is truly never-ending. Tweak a model and one policy instrument comes out ahead of the other (with a simulation to back up the theory). Another tweak and vice versa. The same game is played in every field of economics.

[odograph]

I thought it was pretty big when the Director of the CBO said yesterday “A [carbon] tax could achieve a long-term emission reduction target at a much smaller economic cost than an inflexible cap.”

It seems politic to take that and run with it a bit.

What is "politically possible" sometimes changes.

[Charles Young]

John, I agree that there are economists who favor the status quo, but I am still curious to identify the ones you referred to who "are strongly in favor of a carbon tax but seem not to support cap-and-trade over the status quo".

[John Whitehead]

Odo: "sometimes" is correct. A cap-and-trade climate policy didn't seem politically feasible a few years ago. I doubt that sort of lightening will strike twice.

Charles: Mankiw seems to be the guy I'm referring to.

And remember everyone: you won't catch me ragging on a carbon tax.

[John Whitehead]

addendum to last comment:

Insert "the efficiency of" in between "on a" in the last sentence.

[bartman]

Any economist who has ever studied the basics of environmental economics knows that if they are properly designed, cap-and-trade and emissions taxes have exactly the same outcome.

Of course, they will never be perfectly designed. Thus, when examining which of two flawed paths to follow, it seems clear to me that the cap-and-trade path is better. Why? With a carbon tax we are setting a price on emissions with the hope that this will shift the supply curve to such a point as to give us the optimal amount of carbon emissions. With cap-and-trade, we are instead setting the amount of emissions at the optimal level, and letting the price float to an equilibrium point.

An erronously-set carbon tax has the potential to do a lot more damage to the economy, and is prome to much more political manipulation.

[John Whitehead]

Odo,

The inflexible cap is a strawman. The flexible cap fares better. I posted a link to the CBO study here and updated with a link to the blog entry.

[odograph]

Yeah, well I blogged it all yesterday :=

Seriously, why the "tax as enemy of the cap" or "cap as enemy of the tax" thing? As bartman notes this isn't really an economics argument. It is an argument of political expectations.

As a cynical optimist, or an optical cynic (no, that can't be right), I'm pleased that the CBO Director has come down on the side of Angels. That lessons my cynicism.

But your cynicism stands tall?

[dWj]

I support a carbon tax over fully-auctioned cap and trade because it seems more plausible to me that "experts" would get the price right than the quantity, insofar as it's uncertain what the demand curve looks like (and will look like in the future). I would support fully-auctioned flexible cap and trade over the status quo. If permits are to be gifted in proportion to anticipated emissions or previous emissions, this creates a great incentive for creating anticipated or, worse, previous emissions. This is my biggest efficiency fear with gifting emissions credits.

[dWj]

Hey, look what I found. I wrote approximately this five years ago. I'm not sure it entirely occurred to me I had a record that long.

[dan]

the econ blogosphere has been going a bit mad on tax v cap & trade over the last few weeks - and everyone seems to say that "the mainstream supports tax because it is efficient". but then everyone gives good economic and environmental reasons for supporting cap and trade not only over the status quo, but also over tax!

[Carl]

A cap and trade requires more bureaucracy and rewards those who currently pollute.

A carbon tax can be sold on its own merits, even to those who are global warming skeptics. Carbon taxes are simple and anonymous. Replace either FICA or the personal income tax with carbon taxes and you have a huge net increase in liberty.

Oh, and a carbon tax to replace FICA would be over ten times higher than the CBO proposal so it should make climate alarmists plenty happy. (Derivations of this figure on my site.)

[stuart kasdin]

Please clarify something for me. I have been wondering about the Kyoto-type cap-and-trade for affecting global warming. In that case, the cap is applied to a nation, such that the US would have some overall target to hit, like 1990 emissions levels. What I don't see is where the incentives come from. If we assume that the LDC countries will have emission deficity to sell to the West, then the only effect will be enhanced foreign aid. The domestic cap and trade, such as for the clean air act directly applies to companies and factories. The cap-and-trade generates incentives for industries to efficiently reduce emissions. However, applied on a country basis -- even aside from the enforcement problem if countries exceed their caps -- there are no incentives created except to reduce government spending. I don't see the cap-and-trade encouraging indivdiual consumers or businesses to pursue conservation. I don't see the cap and trade as accomplishing any change in US global warming. If don't have the political capacity to implement a carbon tax, why does anyone think we will do more than transfer funds to Latin America and Sub Saharan Africa without really affecting any warming?