Cap-and-trade versus a carbon tax, Part II

(Here’s Part I of my ruminations on this.)

The Los Angeles Times, in a long and well-researched editorial, comes out in favour of a carbon tax (free registration required). The argument comes down to three points:

  1. Carbon markets are very hard to run well;
  2. A cap-and-trade system tends to sharpen already difficult economic conditions, such as when a desperate shortage of power in a hot summer forces power companies to resort to coal. People’s electricity bills will shoot up to cover both the spot price of electricity and the shortage of carbon credits needed to use coal to generate it.
  3. Volatility discourages green innovation, because investors like steady returns.

I’m a little skeptical of that third point — lots of investors are willing to take flyers on long shots that could pay off big, because that’s how big fortunes are made — but the difficulty consumers might face unexpectedly in a system that’s working exactly the way it’s supposed to is undeniable.

The Times is skeptical that something called a “carbon tax” could get past the demands of politics, but makes the case anyway:

[F]or voters, taxes are radioactive, while carbon trading sounds like something that just affects utilities and big corporations. The many green politicians stumping for cap-and-trade seldom point out that such a system would result in higher and less predictable power bills. Ironically, even though a carbon tax could cost voters less, cap-and-trade is being sold as the more consumer-friendly approach.

A well-designed, well-monitored carbon-trading scheme could deeply reduce greenhouse gases with less economic damage than pure regulation. But it’s not the best way, and it is so complex that it would probably take many years to iron out all the wrinkles. Voters might well embrace carbon taxes if political leaders were more honest about the comparative costs.

I doubt that. They might embrace carbon taxes if they were matched with cuts in other consumption taxes, though.

Update, May 30: John Whitehead of Environmental Economics isn’t impressed. It’s mostly a point-by-point fisking, so it doesn’t lend itself to quoting; I think he labels some things “incorrect” that are just differences of opinion, but it’s very much worth a read. He concludes:

Let me be clear, I’m a fan of economic incentives. I would be delighted with implementation of a carbon tax or cap-and-trade to deal with climate change. Yet, I don’t see either as wildly superior to the other. Whenever someone advocates one as wildly superior to the other I grow suspicious (i.e., where’s my wallet). You should too.

The L.A. Times piece very explicitly doesn’t advocate a carbon tax as being wildly superior to a cap-and-trade system. It weighs the two, looks at the very serious practical problems the Europeans have encountered, and finds that a carbon tax comes out as a better choice. The second-last paragraph begins: “A well-designed, well-monitored carbon-trading scheme could deeply reduce greenhouse gases with less economic damage than pure regulation. But it’s not the best way, and it is so complex that it would probably take many years to iron out all the wrinkles.” That’s about as measured as you can get while still taking a side.

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One response to “Cap-and-trade versus a carbon tax, Part II

  1. Pingback: How not to merge a carbon tax with a cap-and-trade system « The EcoLibertarian

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