Ryan Avent has been doing some great posting on cap and trade versus carbon taxes. With all information known, the two are theoretically identical. But in the real world they will differ; the question is how much.
One way to think about it is that we are choosing between two kinds of transparency: transparency to regulated companies, and transparency to voters. Politicians like cap and trade because the connection between the plan and higher energy prices will be less obvious to the voters. For that reason, a libertarian should generally prefer a direct tax.
On the other hand, cap and trade provides more certainty for companies, and a more direct relationship between their actions and profits. So the tax is not always a perfect slam dunk.
On balance I prefer taxes to cap and trade. However, politically, no one is going to enact a carbon tax with gasoline at $4.00 a gallon. Cap and trade is what we're going to get. In practice, that will mean that companies get subsidies to get them to go along (liberals who want cap and trade should concede on this issue to make it easier to pass), while prices rise somewhat. It's not clear to me how big a difference it will make in the long run.
I'm a little puzzled here, since Freeman Dyson and William Nordhaus seem to oppose all of these options. I'm not sure whether Ms. McArdle knows more about science than Freeman Dyson, or more about economics than William Nordhaus. Maybe someone can elucidate.
Cap and trade offers much more latitude for rent-seeking behavior, since somebody has to get the permits before they are traded. Hence it will be far more popular with politicians.
pct,
gets the right vector, the whole thing, based on the phony science of GHG induced AGW, is nothing more than, yet, another power grab by our, now Trans-national, Leviathan State.
Something's really, really, off when we focus on stigmatizing Plant-food, CO2, and ignore the real devastations i.e. http://www.alternet.org/environment/86789?page=entire
It's not clear to me how big a difference it will make in the long run.
Difference in what? Difference in global climate? Pretty much zero. Even if anthropogenic CO2 is raising the temperature, the reductions this will make in global CO2 emissions are pretty trivial. Certainly it does dick for the emissions of coal plants in China or India, or forest clearing in the Amazon basin, far larger sources of CO2.
Difference in the regulation of yet more of the economy by doofus unaccountable bureaucrats in Washington? Yeah, it'll do that. Also give the Democrats more patronage jobs to hand out, $80,000 a year positions telling productive folks what to do and what not to do.
Difference in government revenue? A little, I suppose.
Difference in the economic growth? Good question! The consumer price rise is probably the least harmful downer. Like Sarbanes-Oxley, the real drag is probably going to be in the increased amount of corporate time that has to go into regulation compliance, and the discouraging effect on innovation and entrepreneurship.
This is all around just a feel-good measure combined with standard government power-grab. If people really cared about CO2 emissions, they'd just bloody well drive less, buy more efficient appliances, not run the A/C, get rid of regulatory blocks in front of nuclear power plants, and avoid buying stuff that has to be shipped halfway around the globe. Simple as that. You don't even need a law to get it done, you can just do it, and persuade your neighbors to, also.
Eh, this is what people are like. After 25 years of the most wildly successful economy in the world (just ask the poor Europeans, falling steadily behind), the urge is apparently irresistable to throw it all away on some fantasy righteous crusade. Reminds me of England, France and Germany throwing away Europe's global domination (along with much of their national treasure and the lives of a generation of their young men) in the fratricide of the First World War.
"It's not clear to me how big a difference it will make in the long run."
I suspect you were referring to the difference between a carbon tax and cap & trade in the sentence above. However it applies at least as well to whether either will make a difference in global climate.
Regarding global climate, the answer is clearly no. There is no national program which can, on its own, reduce global CO2 emissions on an absolute basis. More broadly, there is no reasonable, achievable sub-global program which could reduce global CO2 emissions on an absolute basis, absent a cessation of CO2 emissions growth by both China and India, which are currently increasing their emissions at a rapid pace.
Certainly, a US program to reduce CO2 emissions would result in global CO2 emissions lower than they would otherwise have been, but not lower in absolute terms. However, if increasing CO2 concentrations in the atmosphere are actually driving global average temperatures, as long as atmospheric CO2 concentrations continue to increase, so will temperatures.
If AGW is an issue, it is a global issue and requires a global solution. Anything less is doomed to failure.
"On the other hand, cap and trade provides more certainty for companies"
I don't follow this claim. Indeed, a tax provides more cost certainty for companies - a prominent "concern" about cap and trade is that the price of allowances will be volatile and harder to predict ahead of time. This is why some cap and trade policies now include a "safety valve" where the cap is relaxed if allowances hit a certain price threshold. Thereby providing more cost certainty for firms (although to me, if you are going to do this you might as well just enact a tax).
There was much speculation about the price of SO2 allowances prior to the passage of the US acid rain emissions trading program in 1990. (They ended up being initially lower than expected or predicted in the run up to the law's enactment). So I think you have this backward? Unless you mean a different kind of certainty than costs, which seems like the issue that would be of most interest to said companies?
Regardless, it is interesting to note that many allowances are proposed to be auctioned under the Warner Lieberman bill - something that would have been unthinkable, in my view, in 1990. So the idea that allowances must be given away for free (for political reasons) strikes me as less than obvious at this point, especially as it runs contrary to a powerful "polluter pays" norm in environmental policy.
Has anyone figured out how to make a cap and trade mechanism for automobiles? --sw
Scott,
During WWII, they were called ration coupons.
Ed,
That would be next.
Your claim that cap-and-trade provides a "subsidy" shows that the term is inevitably normative and depends on your baselines. It is a subsidy in the same sense that basing title on possession is a "subsidy."
Michael,
The "cap" establishes the number of "ration coupons" available for use in the market. The "trade" allows holders of unused "coupons" to sell them to those who need/are willing to pay for them. As the cap is reduced toward zero, the quantity of unused coupons available for trade decreases and the price of the remaining tradeable coupons increases.
I frankly don't see the difference between "cap & trade" and rationing; but then, I'm not a very "nuanced" individual. Tastes like "duck" to me.
On the other hand, cap and trade provides more certainty for companies, and a more direct relationship between their actions and profits.
Huh???
How in the world does cap-and-trade provide more certainty than a direct tax? How does it provide a more direct relationship between actions and profits?
There is something seriously wrong with this post.
A.S.,
The declining cap provides certainty regarding the the total quantity of carbon which may be emitted in each future year, assuming that the ultimate cap level is set sufficiently low to stabilize atmospheric CO2 concentrations.
The tax, on the other hand, is subject to being increased in the future if it does not achieve the necessary CO2 emissions reductions. It is very unlikely that our political class would immediately impose a tax large enough to achieve the necessary CO2 emissions reductions, though they could establish a schedule of increasing tax rates tied to the CO2 emissions reductions achieved. However, while the increasing tax could make continued emissions prohibitively expensive for some emitters, it might well not do so for all emitters.
"You've got to be careful, if you don't know where you're going, 'cause you might end up someplace else.", Yogi Berra, American philosopher
Carl Pham nailed it
Cap and trade is a joke and anyone with any science or business sense knows it. A carbon tax would certainly be preferable, but just as unnecessary. The fact is, we will not see any real reduction in CO2 until the individual standard of living falls dramatically. This will never happen because it's political suicide. Thus, we get nonsense like cap and trade, Kyoto, and hybrid car subsidies.
JBJB,
We will certainly not see any real reduction in global CO2 emissions until China and India stop increasing theirs. The developed nations could not reasonably succeed in reducing emissions as fast as China and India are currently increasing their emissions.
Ed Reid, I fail to see how that results in "more certainty for companies".
With a tax, the company knows exactly how much it has to pay for each unit of CO2 it emits, subject to only a revision by Congress of the tax rate.
With cap-and-trade, the company does not know how much it has to pay, because the auction price for the permits is unknown AND the number of permits to be auctioned is subject to revision by Congress.
As far as I can tell, there is no uncertainty for companies associated with a direct tax that doesn't also affect cap-and-trade (revisions to the law being the main uncertainty that affects both schemes), but cap-and-trade also suffers from the uncertainty of the auction.
Indeed, the main problem with a carbon tax is that all of the uncertainty is shifted away from companies and on to the environment - since we don't know how much carbon emissions we reduce at any particulr tax level. If that were Megan's argument, I'd understand, but it isn't.
(And how a cap-and-trade provides a more direct link to a company's profits also escapes me. The company is going to have to pay money (the "link to profits) either way.)
Cap and trade is simply bad policy, for the reasons that Robert Samuelson set out yesterday: it obscures that the policy is really a tax, and it is too inflexible with respect to the economy. That is, as the CBO puts it: A tax could achieve a long-term emission reduction target at a much smaller economic cost than an inflexible cap.
Ed
Yea, and Europe, and to a certain extent the US and parts of Asia, have built comfortable societies and great wealth via the complete prostitution of the earth and its resources for two centuries. Now we (via the UN) are going to demand that the billions of struggling people in developing nations wait a few more decades to get refrigerated food and air conditioning because we need to make dents in global CO2 levels to feel good about ourselves. The whole idea is preposterous and makes me sick.
How does a Cap and Trade provide reduction of CO2? Do these permits expire and need to be repurchased periodically or does the government buy back some to reduce the availability over time?
A.S.,
I thought the policy was to reduce CO2 emissions, not to raise taxes. A declining cap accomplishes emissions reductions on a known schedule, with a known end point. It is predictable and verifiable.
At least CBO acknowledges that either approach has economic costs. I guess they are not "broken window" types.
Now if we can just get someone to delineate the benefits to the US of US CO2 emissions reductions while global emissions continue to rise, driven by economic expansion in China and India.
Now we (via the UN) are going to demand that the billions of struggling people in developing nations wait a few more decades to get refrigerated food and air conditioning
Utter gibberish. Developing countries are in a far better position to adopt low-carbon-emissions infrastructure because they haven't yet built most of their power generation systems and they haven't yet constructed their transportation systems. In Vietnam electric power generating capacity is scheduled to more than triple through 2020 due to economic growth. The country is now choosing its mix of nuclear, hydropower, wind, gas, and coal. If it chooses wisely, it will reap the benefits as international carbon credits come into place in coming decades. There's no reason why it can't make a Japanese or French choice rather than an American choice and end up with a fraction of our CO2 emissions. In contrast, the US's electric generating capacity is for the most part already built, and shifting massively towards low-carbon-emissions technologies will require a big sacrifice of existing plant. The same goes for transit: developing countries can make choices now about whether to adopt the obsolete car-suburb-freeway concepts of the past, which chew up precious farmland for suburbs and create the classic 3-hour traffic jams of third-world cities like Lagos and Jakarta, or whether to build fast, clean new subways linked to high-rise developments, as in the cities of the future -- Singapore, Shanghai, Hong Kong. The choice is clear. Ho Chi Minh City broke ground on its subway system this year. The world's fast-growing developing countries look more like Vietnam and less like the US.
Brooksfoe
I got news for ya, there is no such thing as a low carbon emission energy and transportation infrastructure that will support countries the size of India and China. China is building a coal fired electricity plant a day and still can't even come close to meeting the total energy demand. You think cars and freeways are obsolete in China and India? You are out of your mind. I have been to China (and India), many times. There are lot of cars, more each time I go, and the new freeways going in and around Shanghai make LA look like Peoria. Looks at the sales revenue of any automobile maker, they are bing supported by growing demand from China, and 90 percent of their population still ride bikes. Guess what, a lot of Chinese are going to want air conditioning too, not mention steel, chemicals, and all of the other products that make life easy and great. They haven't even scratched the surface yet. The comparison to France and Japan is ludicrous. Do you rally think so many people yearn to live in sweltering 350 sq ft high rise developments?
whether to build fast, clean new subways linked to high-rise developments
Why do you need subways? Just force people to live in their office buildings, either in the literal office or in a residential bloc located on a different set of floors. Commute by elevator.
God, that sounds like true hell.
China is building a coal fired electricity plant a day and still can't even come close to meeting the total energy demand.
That's because China is stupid. They should be building nuclear. They're also building a lot of stupid suburbs around Beijing that aren't accessible by public transit and as a result they have hellish traffic jams, pollution and transit problems. As for Shanghai, I've been there as well. As in any densely concentrated metropolis, only idiots travel by car between 3 pm and 7 pm. Shanghai is building the world's largest subway system -- it's already the world's third-largest. New "model town" development outside Shanghai concentrates on housing that is 3 stories, minimum, and is planned for public transit and walkability. Obviously they're also building new freeways, but their mix of public-private transit looks far more like New York than like LA.
Rob, you may not like the idea of living in apartment buildings, but that is how people in Singapore, Shanghai and Hong Kong by and large live. (Singapore is somewhat less high-rise and more freeway-oriented than the others, but has a very solid subway and light-rail net.) These cities represent the models of advanced modernity for much of Asia and the third world. The question at hand is: do we need to encourage people to drop the Singapore/Shanghai/Hong Kong model in favor of the more carbon-intensive, traffic-jam-producing LA model? Why on earth would we want to do this?
As for me, I freaking love Hong Kong. Amazing city.
Why on earth would we want to do this?
I'm not saying we should do it either way. I'm just saying that a vertical commute--which is is less carbon-intensive than any subway, so why not favor it?--sounds like hell. And you're right, i don't want to live in a highrise, or indeed in anything that can reasonably be called a "city" at all; my idea of a nice place to live is a modest house on a lavish lot, preferably backing up to a state forest or something. Telecommunting, naturally.
cap and trade versus carbon taxes. With all information known, the two are theoretically identical
I beg to differ. They may be identical in their effects on carbon emissions; they are significantly different in other ways. With a carbon tax, everyone who emits crbon pays (if enforcement is perfect), and the money will be available for government spending or cutting other taxes. With cap-and-trade, the people who were polluting before the cap, or who otherwise got allocated allowances to pollute, will possess property, created at our expense, and that of future generations. Their grandchildren will be able to sell or lease this property to our grandchildren, while government revenue will have to come from other taxes.
We will pay taxes on our incomes, purchases, etc., and pay rent to the new class of airlords for the right to use the atmosphere. Where is the outrage at this proposal.
Read Henry George, my little chickadees, read Henry George.
"These cities represent the models of advanced modernity for much of Asia and the third world."
According to you. I would guess that a large number of these folks would opt for a 3br, 2ba, center hall colonial with an inground pool given the choice and access to resources.
"The question at hand is: do we need to encourage people to drop the Singapore/Shanghai/Hong Kong model in favor of the more carbon-intensive, traffic-jam-producing LA model?"
It must be a great feeling for these people to have their futures being influenced by a bunch of half wit European and American bureaucrats and their phony feel good cap and trade boondoggle.
Face it, CO2 emission are directly related to quality of living. By imposing unnecessary global CO2 restrictions, you are decreasing standard of living, especially in the developing world and for lower income people here in the US. Since dramatic decreases in standard of living are political suicide, we get cooked up dumb ideas like cap and trade. The only sensible and humane policy is conservation and investment and application of energy efficiency increasing technologies.
That's because China is stupid. They should be building nuclear.
Right, because nothing says "environmentally responsible" like 1.5 billion people's worth of deadly radioactive waste that no one knows what to do with, that will remain extremely dangerous for thousands of years, and that terrorists would love to get their hands on to build a nuke or dirty bomb. Of course, it's a matter of picking your poison, and I'm not opposed to all nuclear power, but it's far from clear that nuclear is a more responsible choice than coal, or some other fossil fuel.
New "model town" development outside Shanghai concentrates on housing that is 3 stories, minimum, and is planned for public transit and walkability. Obviously they're also building new freeways, but their mix of public-private transit looks far more like New York than like LA.
Well, they're still relatively poor and undeveloped, and Shanghai has a huge population to house and move around. It already has over 20 million people. If China were as wealthy and developed as the U.S.--as it may one day become--its new development would probably more closely resemble new development in America--big homes, low density, and transportation policies more oriented to private motor vehicles rather than public transit.
Rob, you may not like the idea of living in apartment buildings, but that is how people in Singapore, Shanghai and Hong Kong by and large live.
More irrelevant comparisons. Singapore and Hong Kong have extremely high population densities. They don't really have any choice but to build high-density housing. That doesn't mean they wouldn't prefer bigger, more American-like housing if they had the resources.
That doesn't mean they wouldn't prefer bigger, more American-like housing if they had the resources.
The elites always get that anyway, of course, if only in their vacation housing. And they certainly don't want you and me "sprawling" into their nice view ...
There is a consensus building within DC that speculators have caused the crude spike. Cantwell now holding up regulator appointments etc. It makes a wonderful stump speech. How will they reconcile that with turning over a bigger chunk on the economy and energy policy/pricing mechanism to the "free" markets? Hard sell, even for that wondrous band of liars.
Do we still need cap and trade and/or a carbon tax? When gas was at $2, I was advocating a carbon tax that would increase by 25 cents per year until we caught up with European prices. The idea was to give people and companies time to adjust. But rising prices have the same effect on carbon consumption as rising taxes. Effectively, we're about 10 years into my tax increase scheme, in a lot less than 10 years. And what's happening? Carbon output is declining steadily. I expect that the decline will accelerate as people adjust their lifestyles and companies get serious (e.g., a big shift from truck to rail shipping). The end of the SUV era will become official when GM kills/sells off its Hummer division.
The worst thing about cap and trade is the political corruption that will accompany it. Cap and trade is bad because of the allowances. The current bill gives allowances for about half of emissions. If you like the latest farm and energy bills, you're really going to love cap and trade. Lobbyists are going to be in hog heaven. The proper way to do it is to have no allowances whatsoever. Fat chance!
@Mark E Hoffer - Even if AGW is a myth (I have been unable to convince myself either way) reducing oil consumption is good simply because it has gotten very expensive, and it's insane for us to ship so much money to countries that are not our friends. I agree that unless Asia joins the carbon reduction parade, nothing we do will matter.
@Carl Pham - Shifting to lower carbon energy will not destroy our economy. If we do it stupidly (a good bet) it'll hurt more than otherwise. Carbon-intensive activities will move to Asia, but they're already doing that anyway.
@Ed Reid - The difference between "cap & trade" and rationing is that the allowances are tradeable. That means you don't get the most common bad outcome of rationing, which is that the rationing scheme is always wrong because the world is more complex than the rules allow for.
@A.S. - I don't see why taxes are less costly than cap/trade with fully auctioned permits. Cap/trade has other defects, though.
@JBJB - Poor countries aren't going to delay their development one iota to address AGW. I'm actually thinking (along with people like Ray Kurzweil) that technology is rapidly coming to our rescue ($100 oil is certainly helping.) Let's hope Ray's right. He's been right about other things. And CO2 != living standards. We produce about half as much CO2 per $ of GDP as we did 30 years ago. We can repeat that doubling and still improve our lifestyles.
@Bernie - The permits are to emit a given amount of carbon. Once you use up the permit, you have to buy or be given another one.
@brooksfoe - Asia is developing a lower-carbon infrastructure than we are. They're building lots of nuclear plants. It's just that nukes take a long time and a lot of money to build. Coal is cheap and quick, and Asia is in a big hurry (I wish we could do things, anything really, in a hurry.) France and Japan emit way too much GHG, if the models are right. To truly address AGW, we need emissions at 1890 levels, not 1990 levels. I enjoy HK, too, but I'm not sure I want to live there. The average apartment is about the size of an American bedroom.
@Mixner - We've been living with nukes my entire life without a single meaningful problem. We can deal with the waste. Most intelligently, we'd burn it and get the rest of the energy out. But storing it is no big deal. Technology is advancing so rapidly now that we'll have lots of ways to deal with spent fuel this century. The "thousands of years" issue, much less the ludicrous million-year standard the bureaucrats are trying to set, are bogus issues. I agree that the American lifestyle remains the world's dream. We just need to figure out how to do it without carbon.
Yes, brooksfoe, the Chinese are stupid for building the cheapest power plants that use the cheapest fuels. Who can possibly deny your assertion.
Once again, I must point out that people want to lynch those they think are to blame for $4/gallon gasoline. Any CO2 reduction plan is going to result in further, significant price rises in gasoline, electricity, and any product that is produced using energy (everything, in other words). It simply is not going to happen by government fiat- politicians that support that will be former politicians in short order.
In any case, on a theoretical basis, the tax is the better way to go. It provides more certainty for everyone, and forces rent-seeking out into the open. I am not naive enough to think rent-seeking is impossible under a carbon tax, but it would certainly be easier to hide in a cap and trade scheme.
@brooksfoe They should be building nuclear.
They are. They are waiting until they finish pebble bed reactor trials to move in that direction. PBR designs are much safer than the high-pressure water reactors currently in use. Too bad we abandoned development of them under Carter and are now playing catch up.
@Mixner Right, because nothing says "environmentally responsible" like 1.5 billion people's worth of deadly radioactive waste that no one knows what to do with,
I do. Reprocess it for reuse, contain it and put it in a salt dome, or vitrify it and dump it into a subducting trench in the ocean.
that will remain extremely dangerous for thousands of years,
Not really. The highly dangerous stuff has short half lives and is not really dangerous after a few decades.
and that terrorists would love to get their hands on to build a nuke or dirty bomb.
Well, sure, but building a nuke is not easy for a terrorist group. A medium sized nation can, but not a terrorist group - going from nuclear fuel pebbles/rods to bomb-quality nuclear material is very, very energy intensive and difficult. You can't do it in a kitchen or a warehouse, like you can with chemical or bio weapons.
We have a couple of alternatives that make technical sense:
- nuclear
- space solar
- land-based solar concentrators (in some locales - bad NIMBY problems)
- wind (in some locales - bad NIMBY problems)
- ocean thermal
- conservation (forget compact fluorescents, think LED - over 2x as efficient and about 5-7 years out for home lighting)
Oh, and forget the Hydrogen phantom. There are lots of reasons why the "hydrogen economy" is bunk.
What is clear is that the Warner-Lieberman bill is a bad, bad bill.
So if you have cap & trade + subsidies, doesnt that mean that in the end you just have an indirect, less transparent (but perhaps more politically acceptable) carbon tax? After all, those subsidies have to be paid for somehow...
That's because China is stupid. They should be building nuclear.
Uh-huh. Stupid. You know, nuclear power is a fairly complex beast and time-consuming to build, provided you want to build a stable reactor and not some simplified design that can readily go into a full-meltdown mode and destroy the lives of thousands of people, plus those of a couple successive generations (ask the Russians about it). The trade-off is a very long service life and reduced fuel costs over that service life, provided the facility is maintained correctly.
However, China presently has no time or patience for projects that consume vast amounts of resources immediately in exchange for long-term benefits. The resources are scarce; the infrastructure is strained. Factor in a regulatory environment that bulldozes what it needs and tells the former occupants to start manning the bulldozer or go pack sand, a large pool of migrating farm workers with nothing to lose and time on their hands, a general lack of OSHA-type safety standards in both construction and manufacturing industries, and cookie-cutter design techniques...and I would expect the Chinese can probably erect a low-cost, medium power, coal-fired plant and adjacent step-up substation within 18 months from ground-breaking to generation, assuming the steel mills can keep up. You can dig the fuel right out of the hills; no additional processing required.
Also, you're talking about a country that has smelters belching raw stack emissions into the air over adjacent residential areas. Carbon emissions from power generation are way down the list of Things The Chinese Government Cares About Right This Second.
I have no doubt Vietnam is capable of a moderated and future-oriented perspective as compared to China, but that speaks more to the greatly reduced scale. Pretty easy to organize a calm party amongst ten people. At a hundred people, you lose some furniture and the cops get called. At a thousand, the news media describes it as a riot.
Mouse,
I found the following article somewhat interesting in the context of this thread.
Link
Ssshhh. Brooksfoe believes.
Ms. McArdle,
The public might go for a "carbon tax-cut". This is a variation of the tax-and-dividend idea advanced by James Hansen.
The public uses, more or less directly, about 1/3 of US energy, and companies use about 2/3. The public would get back all their carbon tax payments, plus a little extra, in equal dividends. Companies would get the corporate income tax cut by a third (assuming a carbon price of around $25/ton CO2).
Almost everyone would come out fine, especially the poor. For more information, Google: new climate deal, and note my comment, #61,
Sorry, my link information above was inadequate. Google: tierney new climate deal.