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.
