Carbon trading versus carbon tax

[Collin Li]

The government needs to put a tax on carbon. Polluting fuels are a negative externality on the entire populace. You can't expect people, on the average, to switch to greener energy sources without adding an incentive.

Rational people will continue to exploit the cheaper and dirtier power sources unless the government protects the property rights of the people (that is, the environment).

Response (some guy with another point of view):

Sure, I think a carbon trading scheme (with caps, not just a tax) is a great idea. But it's not going to come in for a few years (and I doubt they'll get it right first time) and in the mean time, if we continue the way we're going, we're going to be sending up a lot of unnecessary GHGs that aren't coming down for 150 years. Also, as far as I know, the carbon trading scheme isn't going to apply to individuals anyway. The products they buy may change in price, but there are still some activities, which won't be affected by an economic incentive. For instance, if you don't have insulation in your roof, a carbon trading scheme isn't going to make you put some in. It won't make you replace old light bulbs.

Caps are incentive distorting. Sure, we need to recognise there is a price on pollution, and put that price on carbon. That is what the carbon tax does, but a cap and trade system takes the extreme: it implies that we should cap greenhouse gases no matter the costs. This disregards that there are private business and individuals who are willing to incur the costs of pollution in order to provide whatever products and services it does to consumers. There are surely cases where a trade-off between increased pollution and cost are beneficial to society, and that is best done by simply allocating the cost of pollution to carbon without any form of quota.

[brendan]

"Cap-and-trade = Carbon tax + Corporate welfare" - Greg Mankiw, Harvard Economist

Carbon Tax vs Cap-and-Trade
http://gregmankiw.blogspot.com/2008/02/carbon-tax-vs-cap-and-trade.html

Case against Cap-and-trade
http://gregmankiw.blogspot.com/2007/04/case-against-cap-and-trade.html
http://gregmankiw.blogspot.com/2006/10/pigou-club-manifesto.html

People for a carbon tax:
http://gregmankiw.blogspot.com/2006/09/rogoff-joins-pigou-club.html

Greg Mankiw (Fortune 5/24/99, WSJ 1/3/06, 5/31/06)
Bill Nordhaus (Foreign Policy in Focus 3/27/06)
Martin Feldstein (WSJ 6/4/92)
Gary Becker (Businessweek 5/27/02)
Robert Frank (NY Times 2/16/06, 6/8/06)
Andrew Samwick (his blog)
Ted Gayer (Regulation)
Mike Moffatt (about.com)
Ken Rogoff (Project Syndicate)
Paul Krugman (Slate 4/18/97)
Greg Easterbrook (NY Times 5/25/04)
John Tierney (NY Times 10/4/05, 5/23/06)
Jonathan Rauch (National Journal 2/9/02)
Thomas Friedman (NY Times 9/21/05, 2/8/06, 6/16/06)
Joe Klein (Time 5/7/06)
Andrew Sullivan (Time 4/11/04)
Jane Galt (her blog)
Christopher Farrell (Businessweek 8/19/05)
William Baldwin (Forbes 6/19/06)
Clive Crook (National Journal 6/2/06)
Al Gore (Charlie Rose Show 6/19/06 at 42:45)
We are always looking for more members. An elected official or two would be nice.

Alan Greenspan, George Schultz, Tony Lake, Nicholas Stern, Hal Varian, Larry Summers, Richard Posner, David Frum, Nouriel Roubini, Joe Stiglitz, Brink Lindsey, Tim Harford, Rob Stavins, Ray Magliozzi, Robert Samuelson, Dan McFadden, Charles Krauthammer, Paul Mulshine, Kevin Hassett, Jason Furman, Anne Applebaum, Paul Volcker, Bill Frenzel, Isabel V. Sawhill, Charles Stenholm, William Hoagland, Robert Shapiro, David Leonhardt, Morton Kondracke, Gilbert Metcalf, Fred Foldvary, Arthur Laffer, and a majority of economists.

[Eriny]

I generally think that they have the same effect, but with cap and trade you are more likely to hit targets. Collecting money with the tax is all very well and good, but there's a real limit to what the government can do with that money to help the environment. I think also that companies that genuinely need more credits will be able to buy them from companies that are polluting way below averages and that businesses who do make a commitment to helping the environment and reducing the amount of emissions have a right to have (under the assumption that businesses have a right to have carbon emissions for the purposes of production, which is an assumption I don't like but concede that there must be some emissions inherently involved in production just as there is consumption) ought to be rewarded with the ability to sell what has always been hitherto intangible, businesses that are on par with targets ought to be left alone, and businesses that are emitting beyond their worth ought to be punished by having to buy more credits.

I also think that short term economic costs associated with either scheme will be more than offset by the newfound flexibility in terms of energy reliance in the corporate world and the added bonus of avoiding the hypothesised disasters associated with climate change coming to fruition.

In short, I'm not too fussed, but based on a lot of my reading, especially reading associated with the impact of these measures upon the third world, I tend to prefer cap-and-trade.

[brendan]

you shouldn't be preferring a cap-and-trade if you are true left adherent because cap-and-trade benefits the corporate interests, but not society's interest.

you have to look back at economics and generally, a cap-and-trade and a carbon tax have the same effect: they place a price on the emission of carbon dioxide.

but under the cap-and-trade the government doesn't earn as much revenue (or none at all, depending on how you allocate the initial permits) as it would under a carbon tax.

if you collect revenue with a carbon tax, you can use that revenue to reduce inefficient taxes like payroll taxes and income taxes, or give Earned Income Tax Credits to low-income earners.

This is essentially what they are implementing in British Columbia in Canada, and I would recommend that British Columbia is doing:
http://www.theglobeandmail.com/servlet/Page/document/v5/content/subscribe?user_URL=http://www.theglobeandmail.com%2Fservlet%2Fstory%2FRTGAM.20080219.wbcbud0219%2FBNStory%2FNational%2Fhome&ord=72388420&brand=theglobeandmail&force_login=true
"Finance Minister Carole Taylor introduced an escalating carbon tax on most fossil fuels Tuesday, one she says is designed to ignite an environmental social movement in British Columbia and across Canada to fight climate change....
Ms. Taylor said the carbon tax will be revenue neutral, meaning the government will not use money generated from the tax to fill its coffers. The carbon tax revenue, estimated to hit $1.8-billion over three years, will be returned to taxpayers through personal income tax and business tax cuts, she said."

the carbon tax arrangement is by far superior, less costly in terms of administration, more transparent, more understandable, and more efficient.

See also: http://ca.news.yahoo.com/s/cbc/080219/canada/vancouver_bc_provincial_budget

[Eriny]

Yes, I think that's true. But the problem I see is that targets may not be met which is bad because the government alone cannot reduce emissions and I don't know anything of the extent to which they are able to offset emissions, even with the revenue.

And I think cap and trade is just as mean to businesses with high emissions as carbon tax is, potentially. It just seems to be less of a shock to some businesses (and in turn consumers).

I say that, but if either policy were to be implemented well then they could both bring about maximum benefits. I suppose it's important then, moreso than which scheme would be used is how the schemes would be used, because there are a few variants of both.

[brendan]

Yes, I think that's true. But the problem I see is that targets may not be met which is bad because the government alone cannot reduce emissions and I don't know anything of the extent to which they are able to offset emissions, even with the revenue.

That is not necessary true, because you can adjust the rate if you feel that the emissions are too high. There's no stopping government from reviewing the tax rate, and upping it if need be.

[brendan]

This issue, like free trade, is probably one of the few issues both left and right economists agree on. If you look at the list of experts that have come out in favour of a carbon tax, it's just overwhelming, and they just span both sides of the political spectrum.

[excal]

Carbon emissions need to be taxed, definitely. Even in my agreement, two questions beg to be asked: what is the cost of ensuring compliance for both government and business? And why stop at carbon? Surely, there are worse gaseous emissions out there.

Regardless, I see this as a positive step towards resolving the tragedy of the commons...by placing a cost on what was considered to be a 'common' in the past, it gives incentive to reduce damage to the environment. My concern remains with the actual implementation of any carbon tax system.

[Collin Li]

Definitely.

If you have a communal apple tree, don't expect the apple tree to be sustainable. The environment is also a communal thing. The best way to solve this is to simulate some sort of property rights over the environment. The most efficient way to do that is to assume that society values the environment homogenously, and apply taxes on pollution.

[brendan]

Paul Krugman, professor of economics at MIT
http://web.mit.edu/krugman/www/green.html
"existing taxes already discourage people from engaging in taxable activities like working or investing. What this means is that the revenue from any new taxes on pollution could be used to reduce other taxes, such as Social Security contributions or the income tax (but not, of course, the capital-gains tax). While the pollution taxes would discourage some activities that are counted in the GDP, the reduction in other taxes would encourage other such activities. So measured GDP might well fall very little, or even rise."

Robert H. Frank, an economist at the Johnson School of Management at Cornell University, co-author, with Ben S. Bernanke, of "Principles of Economics."
http://www.nytimes.com/2006/06/08/business/08scene.html?_r=1&oref=slogin
http://query.nytimes.com/gst/fullpage.html?res=9D05E7DA133EF935A25751C0A9609C8B63&sec=&spon=&pagewanted=all
"I suggested an additional gasoline tax of $2 a gallon. All revenue would go into a common pool, which would then be returned on an approximately equal per capita basis by reducing payroll taxes."

Joseph Stiglitz is a Nobel laureate in economics.
http://www.project-syndicate.org/commentary/stiglitz77
"A global externality can best be dealt with by a globally agreed tax rate. This does not mean an increase in overall taxation, but simply a substitution in each country of a pollution (carbon) tax for some current taxes. It makes much more sense to tax things that are bad, like pollution, than things that are good, like savings and work.
Although President George W. Bush says he believes in markets, in this case he has called for voluntary action. But it makes far more sense to use the force of markets – the power of incentives – than to rely on goodwill."

Arthur B. Laffer
http://arduinlaffermoore.com/PDF/2007%2007%2013%20Global%20Warming%20Minimizing%20the%20Economic%20Impact%20From%20Carbon%20Taxes.pdf
"Of the two primary policies being proposed to address global warming—the capping and trading of emissions and the taxation of emissions—we favor the taxation of emissions. We suggest that a pro-active environmental policy should include an appropriate carbon tax fully offset by a static dollar-for-dollar across-the-board reduction in marginal income tax rates. If implemented with taxpayer protections, this policy would mitigate many if not all of the adverse economic costs from reducing carbon emissions."

Tufts University economist Gilbert Metcalf shows how "a national tax on carbon emissions is paired with a reduction in the payroll tax so the reform is both revenue and distributionally neutral."
http://pdf.wri.org/Brookings-WRI_GreenTaxSwap.pdf

Robert N. Stavins is the Albert Pratt Professor of Business and Government at the John F. Kennedy School of Government and Director of the Environmental Economics Program at Harvard University
http://www.env-econ.net/stavins/Column_4.pdf
"A gas tax increase — coupled with an offsetting reduction in other taxes, such as the Social Security tax on wages — could make most American households better off, while reducing oil imports (read dependence on Middle Eastern regimes), local pollution, urban congestion, road accidents, and global climate change. This revenue-neutral tax reform would exemplify the market- based approaches to environmental protection and resource management I examined in previous columns. Such a change need not constitute a new tax, but a reform of existing ones. It is well known — both from economic theory and numerous empirical studies — that taxes tend to reduce the extent to which people undertake the taxed activity."

[brendan]

Tim Harford talks about what the UK Govt is doing: http://www.ft.com/cms/s/0/e3f62008-f975-11dc-9b7c-000077b07658.html

[bubble sunglasses]

 
  So, is a Cap-and-Trade: everyone in the country is allocated "50million thimblefuls of CO2"; if you want to use 63 million, you  have to buy 13mill from someone else? If so, how does this benefit corporate interests?



 "Provided that the tax was set equal to the expected benefit of reducing a ton of CO2, a tax could thus result in substantially greater net benefits (benefits minus costs) than a comparable cap-and-trade program."
 
What does this [from the Greg Mankiv link] mean?  "equal to the expected benefit of reducing a ton of CO2" does is the "benefit" the upper limit on what I'd be prepared to pay for using a ton of CO2?

[Collin Li]

  So, is a Cap-and-Trade: everyone in the country is allocated "50million thimblefuls of CO2"; if you want to use 63 million, you  have to buy 13mill from someone else? If so, how does this benefit corporate interests?



 "Provided that the tax was set equal to the expected benefit of reducing a ton of CO2, a tax could thus result in substantially greater net benefits (benefits minus costs) than a comparable cap-and-trade program."
 
What does this [from the Greg Mankiv link] mean?  "equal to the expected benefit of reducing a ton of CO2" does is the "benefit" the upper limit on what I'd be prepared to pay for using a ton of CO2?

No. Cap and trade is "the country is allocated x units of CO2," and in order to be eligible to use them, you need to have carbon credits. There would only be enough carbon credits to permit x units of CO2 emissions, and in most of the policy designs, the carbon credits would be allocated to firms that emit CO2, and then they could be freely traded as they wished.

In the interim, this encourages corporations to emit CO2, to be eligible for free credit allocation, and it benefits corporations, because they are still polluting without reimbursing taxpayers. These credits are just being swapped around major corporations, rather than being direct taxes that go back into public treasury (presumably for the use of the general welfare).

[bubble sunglasses]

  So, is a Cap-and-Trade: everyone in the country is allocated "50million thimblefuls of CO2"; if you want to use 63 million, you  have to buy 13mill from someone else? If so, how does this benefit corporate interests?



 "Provided that the tax was set equal to the expected benefit of reducing a ton of CO2, a tax could thus result in substantially greater net benefits (benefits minus costs) than a comparable cap-and-trade program."
 
What does this [from the Greg Mankiv link] mean?  "equal to the expected benefit of reducing a ton of CO2" does is the "benefit" the upper limit on what I'd be prepared to pay for using a ton of CO2?

No. Cap and trade is "the country is allocated x units of CO2," and in order to be eligible to use them, you need to have carbon credits. There would only be enough carbon credits to permit x units of CO2 emissions, and in most of the policy designs, the carbon credits would be allocated to firms that emit CO2, and then they could be freely traded as they wished.

In the interim, this encourages corporations to emit CO2, to be eligible for free credit allocation, and it benefits corporations, because they are still polluting without reimbursing taxpayers. These credits are just being swapped around major corporations, rather than being direct taxes that go back into public treasury (presumably for the use of the general welfare).

Mmmm, sounds rather suboptimal. Can you explain the tax supported by Greg Mankiw and the other economists? Does it affect everybody or just corporate polluters?
 Also what do you think of the rationing system I mentioned above? [where every citizen is given an allocation which they can trade freely.]

[Velox]

In an ideal world, then yes, carbon would be 'taxed', but unfortunately, we don't live in an ideal world. Australia emits jsut 1.2% of global emissions. If every single person in Australia suddenly stopped using all electricity, all generators shut down, it would make zero difference to the supposed problem we face. Unless you can get the whole world to sign onto a CTS, then one in Australia will be useless, and would just damage our economy unnecessarily.