I agree with Matt that, as a moral matter, any cap-and-trade permits should be auctioned rather than given to current emitters; I see no prior right to pollute that must be honored in the breach. As a political matter, it's not a large amount of revenue, and the giveaway to the companies will probably go a long way to pacifying their lobby--plus you don't risk a situation like the British bandwith auction where everyone overpaid, netting fat fees for the treasury, but setting back investment for quite a while.
As a practical matter, I agree with the economist I lunched with yesterday that cap and trade is doomed as long as it includes offsets and doesn't price the carbon cost of foreign goods. Otherwise, all we do is displace consumption of fossil fuels to China--an excellent, though thoroughly inefficient, charity program, but no good for the environment. In fact, the net environmental result might well be negative. China and India use fossil fuels in a much less efficient, much more polluting way, because clean technology has a higher capital cost; a ton of coal or a barrel of oil consumed in China produces less output and more pollution than the same ton or barrel consumed here.
Meanwhile the most optimistic hope for the global offset market is that it will pay a fair number of companies to do things they would have done anyway. The darker possibility is that it will encourage developing-market companies to keep polluting facilities open longer in the hopes of selling the offset. Indeed, they might even build new ones so that westerners can pay to shut them down.
The results from Europe's scheme have so far been pretty underwhelming, though everyone keeps assuring me that they're going to take off any day now. Theoretically, cap and trade is indistinguishable from a tax provided that you know either the true externality cost of emissions, or what level of emissions is socially optimal. Since we know neither, and cap-and-trade so far looks pretty weak, I vote for a tax instead.
Of course, I'm the only one so voting, so probably we'll get cap and trade, and probably it won't do very much good. I just wanted to lay the ground for a triumphant "I told you so" later.
Not that this makes me happy; quite the reverse. I think we should do something serious about global warming. I just don't know how to overcome the political and technical problems to do so.
Carbon tax is superior because they are harder to game, easy to interface with, and, most importantly, can be applied as tariffs on the goods of noncompliant countries.
Megan McArdle writes:
you don't risk a situation like the British bandwith auction where everyone overpaid, netting fat fees for the treasury, but setting back investment for quite a while.
On the other hand, according to Wikipedia:
Vodafone Group is a mobile network operator headquartered in Newbury, Berkshire, England, UK. It is the largest mobile telecommunications network company in the world by turnover and has a market value of about £100 billion (December 2007).
Evidently, something went right with the British Government's regulatory approach to mobile phones.
With a carbon tax, there would be a number of second order rebound effects(People buy more fuel efficient cars, and then proceed to drive more) that could actually increase emissions in the long term.
Because of this, the effects of a carbon tax on carbon production are uncertain, and the tax would have to be adjusted frequently if we were to meet any sort of international targets. Megan herself frequently posts about the wisdom of frequently changing taxes.
With a Carbon credit scheme, we not only make international carbon trading and hedging strategies far simpler, but we also have complete predictability about the effects.
As a quick word on international compliance concerns: If we distribute carbon allowances between nations on the basis of population, then China and other developing countries will get a windfall from carbon credit exports that far outweighs the cost of compliance. Administrative issues are the only problem I would see.
Also, http://209.85.215.104/search?q=cache:KtN0CMEwrJEJ:www.cramton.umd.edu/papers2000-2004/02ep-tradeable-carbon-permit-auctions.pdf+revenue+from+carbon+auction+estimate&hl=en&ct=clnk&cd=2&gl=us&client=firefox-a
$125 billion a year is not a trivial amount of money.
I think the European market would be doing better if it were easier for a private investor to participate.
When I had heard some time ago that the market tanked, I looked into buying, but could not find out how.
This speaks to the China question.
And this to the ETS question.
I don't agree that you have made much of a moral case. "Prior in claim is prior in right" is a precept every legal system uses. By hypothesis, the incumbents had every right to emit prior to the cap-and-trade being put in place, and they made investment decisions in reliance.
Also, from a social-democratic perspective, an auction would probably have the features of a regressive tax. There is no clear distributional impact of giving incumbents tradeable rights to emit.
The one downside is that if you allocated rights to emit to incumbents, and everyone knew that's what you were going to do, then you would create an incentive to increase emissions now. So you should use some past year before the cap-and-trade scheme was seriously contemplated.
anomdebus -
That you couldn't find out how to invest in the European market is probably a sign that you shouldn't invest in the stocks of individual companies there.
There are more sensible options available for those who wish to invest in Europe. iShares, for example, offers two European index ETFs and ten individual country ETFs to individual investors in the United States.
I presume 'anomdebus' meant that he could't find out how to buy European carbon emissions permits. It was rather puzzling, when they were trading at a few €/tonne, that governments, environmental groups, etc. weren't jumping at the chance to reduce total legal emissions for peanuts — by buying the offered permits and retiring them.
ndm,
I was referring to the market our host mentioned, which is the European Union Emission Trading Scheme, not the stock market. I wanted to buy the right to expel greenhouse gasses in the European Union (though not with a mind to do so). I was speculating that there was a temporary over supply that would increase the price once that tightened back up.
Sorry if that was unclear.
Pithlord,
The distributional impacts of giving emission rights to incumbents is clear: Companies get large multi-billion dollar windfalls that will not be passed on to the consumer due to Coase's theorem, while the poor are stuck with the same compliance costs that they were before.
anomdebus -
My apologies for my misunderstanding of your comment.
Jeffrey Ball had an interesting front-page article ($) in the Wall Street Journal a month ago recounting problems with the carbon market:
The article didn't inspire a lot of confidence in me that the market is functioning well.
ndm,
No problem, we'll call it mutual misunderstanding.
I believe I was aware of the issues at that time, but was figuring that a failure of that scheme would be too embarrassing for the EU to allow it to fail. Worst case scenario, I figured, was the credits get transferred into a replacement market where the leverage might not have been as good, but at least the management should be better.
How do you "price the carbon cost of foreign goods?" I've seen it mentioned before but have no idea how it would be implemented.
Craig --
Take best practicess (lowest emissions) from US. Then pretend that that is what was emitted in, say, China. Tax that amount.
I presume 'anomdebus' meant that he could't find out how to buy European carbon emissions permits. It was rather puzzling, when they were trading at a few €/tonne, that governments, environmental groups, etc. weren't jumping at the chance to reduce total legal emissions for peanuts — by buying the offered permits and retiring them.
What's happened is that the European system had a set of credits that expired at the end of 2007. Now (2008) is a different set of credits. You can't use the old credits now. When the European carbon market started trading they didn't know what the market would look like from 1 January 2008, so they didn't make credits bankable between phases.
The market price that was reported was extremely thinly traded. I often wonder who was in fact buying what credits were sold.
So it's not surprising that environmental groups didn't bother buying up the offered permits and retiring them, as they would only have removed a small amount of permits for a few months. If they had started buying up large amounts of permits the price would promptly have risen.
I expect that attempting to account for carbon emitted during the production of imported goods would end up looking like a tariff. For that reason, domestic manufacturers and employee groups would love it. Of course, it would fall afoul of WTO regulations.
And of course exporting countries would go nuts.
As a practical matter, do you use the amount that would have been emitted here, or the amount that was actually emitted there? The latter makes more sense if you're truly trying to control emissions.