Lynne takes a firm stand, I should take lessons, and chooses cap-and-trade:
Thus while I am sympathetic to the political economy arguments for the lower implementation costs of a carbon tax, the knowledge problem and the right set of institutions for inducing dynamic efficiency through innovation make me favor pursuing a carbon market, designing it well, and testing it carefully.
It is a long post, please read it, but here is her big point (buried in there is a hint about the Hayekian source of the mysterious blog name):
Finally, but most importantly, how do we know the right level at which to set the tax? This is where we get to the Coasian/Hayekian crux of the problems with Pigouvian taxes that the other commenters did not account for in their analyses. The most problematic aspect of Pigouvian taxes is that they rely on the assumption that the policymaker has sufficient knowledge to be able to set the optimal tax. The knowledge of the optimal level of emissions and the optimal tax rate is not, in Hayek's phrase, given to any one mind. That is the knowledge problem. That means that the policymaker has to have information about production processes, production costs, the epidemiological and other health and consumption effects of the product, and the economic value of those epidemiological and other consumption effects. That is a heroic assumption. No one person or group of people, however well-informed and well-intentioned, can ever determine the optimal emissions or tax through a centralized process. A political process will stumble upon the optimal tax rate by luck; through analysis we can only approximate that rate. If we are wrong and have to revise it, then we violate the above-stated benefit of certainty and transparency. The best mechanism we have for discovering the optimal emissions is through a decentralized process that can aggregate this widespread, diffuse, personal knowledge; this decentralized process is a market.
And don't miss my favorite quotes:
- The imminently sensible John Whitehead sees little difference between the two policies.
- Starting with theory, as John Whitehead concisely and capably summarizes, if you make all of the standard neoclassical assumptions there's no difference between the two policies. Or, as John puts it, "Both emissions taxes and cap-and-trade can achieve optimal emissions at the least cost to society." They are most similar if the initial permit allocation process is an auction.
