Would you dump your current girlfriend, because she is not your "ideal hypothetical" girlfriend?*

From Greg Mankiw's Blog:

Club Member Ted Gayer makes five points:

1. Either a carbon tax or a cap-and-trade program will result in substantially lower economic costs than command-and-control regulations that mandate technologies, fuels, or energy efficiency standards.

2. Given the uncertainty of the future costs of climate policy, a carbon tax is more economically efficient than cap-and-trade.

3. Carbon allowances in a cap-and-trade program would be susceptible to price volatility. Price volatility causes economic disruptions and complicates investment decisions. It also could lead to political pressure on Congress to repeal or substantially loosen the cap.

4. A carbon tax, in which the revenues are used to offset economically harmful taxes or to pay down our deficit, would substantially lower the cost of climate policy compared to a cap-and-trade program that gives away allowances for free.

5. The currently proposed climate bills rely heavily on offsets to reduce the overall costs of cap-and-trade. Given the substantial potential value of offsets, there is a very real concern that offset integrity will not be maintained. This would result in a weakening of the cap, undermining its environmental benefits.

Continue reading here.

I agree with all points except for a couple of not-so-minor things (or don't disagree since I don't work with the minutiae of these models). I don't agree with:

• The last sentence of #3. At least, I don't agree the implicit assumption that a carbon tax is immune to political pressure (e.g., this post from Tim).
• The comparison in #4. The relevant comparison is with a carbon tax and cap-and-trade with an auction of permits that raise revenue.
  

In fairness to Dr. Gayer, I haven't read his four page testimony (I'm in a SSC meeting and better not [I'm taking a blogging break as the fisheries scientists debate stock assessment]) so these are really comments on Dr. Mankiw's highlighting of Dr. Gayer's testimony.

However, here is Dr. Gayer's conclusion:

I acknowledge that my arguments in favor of a carbon tax over cap-and-trade are made easier in that I am comparing my ideal hypothetical carbon tax to the actual cap-and-trade programs either passed by the House or proposed in the Senate. Indeed, a cap-and-trade program that included a safety valve and that auctioned allowances would achieve many of the economic advantages of a carbon tax.

I wouldn't dump my girlfriend because she is not quite my ideal hypothetical girlfriend. That is a sign of romantic immaturity (e.g., Beautiful Girls). In the cap-and-trade vs carbon tax debate it is a sign that you really, really like a carbon tax. I continue to fail to see why the proposed cap-and-trade should be compared to the ideal carbon tax.

*The post title works just as well with "boy" substituted for "girl." It was a bit clunky to write girl/boy or girl (boy) so I simplified.

Comments

[Jim Roumasset]

Dr. Gayer's statement(2) regarding the superiority of carbon taxes is correct for the case of one-sided uncertainty. It does not necessarily follow for the case of uncertainty about both abatement costs and damages. Since the environmental costs are present values of highly uncertain future damages, we simply don't know what the tax should be.