Carbon taxes vs cap-and-trade

Ps vs Qs in Green Inc:

If the nation’s goal is to reduce greenhouse gas emissions and promote the development of clean energy, is it easier to do this by managing the price of emissions and renewables, or by fixing the amount by which they are to be reduced (emissions) and produced (renewables)?

This may sound like an obscure policy distinction, but it is an old debate among environmental economists — and one that has gained new import in the debate over the climate bill passed by the House of Representatives last week.

“The issue of prices vs. quantities resurfaced with a vengeance in the climate change debate about which control mechanism should be favored,” said Martin Weitzman, a Harvard economics professor, in an e-mail message.

Mr. Weitzman is considered by many economists to have written the seminal paper on this subject in 1974 — a time when, according to Mr. Weitzman, most economists supported a tax on pollution.

“There was almost no discussion about the quantity side, such as cap-and-trade,” he said. ...

“A surprisingly large (to me) number of prominent economists in this area supported a carbon tax, but to no avail,” noted Mr. Weitzman of Harvard, who is also in the carbon tax camp.

But setting a price target carries the risk that the price will be wrong — too high or too low to achieve the objective — although it can in theory be adjusted over time.