The Financial Times' lead editorial today argues for prices over command-and-control (duh!) and then goes on to say a tax would be better than a cap (d'oh!). Where to begin?
Well, first, let me once again point anyone interested to an ongoing debate over at The Bulletin of the Atomic Scientists on this issue. There are arguments pro and con. I strongly believe the pro-cap arguments have the upper hand, but then again, I'm helping write them.
Second, I'm guilty as charged. I wrote for the FT editorial board in 2007. Let's just say that there may have been an editorial printed during that time that threw its weight behind a tax. That's only to say that there are indeed some good arguments on both sides.
In the vacuum of economic theory-land the two are, under certain conditions, even equivalent. In practice, they are clearly not. Here's the main part of a letter I just sent to the FT:
Most significantly, the US and EU cannot solve this problem alone. At the very least, the largest emerging economy emitters need to limit their pollution as well. A carbon market can make these commitments in the economic self-interest of all parties involved; a tax cannot.
Second, smart market design -- including provisions for banking and borrowing of allowances -- would dampen feared price volatility, and well-known market instruments can iron out the rest.
Third, the most important missing link in turning climate change from a problem into an unprecedented market opportunity is innovation. A cap taxes entrepreneurs to look for breakthrough technologies at any price. A tax caps innovation.
Lastly, almost all new scientific evidence over the past two years has shown that the climate problem is worse than previously feared. We do not have time to experiment with tax rates to achieve the desired results. If you want to limit emissions, do exactly that: cap them.
This, of course, is the staccato version. There's much more over at The Bulletin.
