Cap and Trade vs. Carbon Tax

We know we’re in the hole, environmentally speaking.  And we know we’ve got to start digging ourselves out.  But which way do we best attack the major problem of CO2 emissions?  Do we use a Cap and Trade system or a Carbon Tax?   What experiences can we pull from to inform our opinions?

Lucky for us, Europe already as a Cap and Trade system.  And apparently, it’s not working as planned.

The approach has been a bureaucratic morass with a host of unexpected and costly side effects and a much smaller effect on carbon emissions than planned.

The Guardian said the cap and trade is:

“Manifestly not working as planned.”

But, the Cap and Trade is politically easier for our Politicians to stomach.  And that is too bad.  If a Carbon Tax is more likely to affect change than a Cap and Trade is, then we should go with the Carbon Tax.  Of course, we all know that Washington doesn’t work that way.

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2 responses to “Cap and Trade vs. Carbon Tax

  1. David Moffatt

    I think the ideal would be a carbon tax which is implements gradually (say over 10 years) with a matching reduction in other tax so that the net effect is revenue neutral. Because a carbon tax is a consumption tax it will be harder on the lower income groups. Thus it would make sense to lower the income tax the bottom brackets. I think it would also make sense reduce the corporate income tax brackets with the new tax revenue.

    Also I think the carbon tax would need to be adjusted every year with a maximum delta and have that via the estimated carbon output from the prior year. That will create a feedback loop that will force the country into the desired carbon output regardless of things like population growth.

    On final point about a federal carbon tax; it is not as simple as it sounds. Do you tax the gasoline or the car? The gas is good because the more you drive the more carbon you emit. The car is good because it may be possible to burn cleaner and not emit so much C02 per gallon of gas. How about the grill or the charcoal?

    If a carbon tax system sound too complicated, then think about how hard it will be to get the carbon quota version right. Does the government give tradable credits to the gas producers or the electric companies? What about competition trying to enter the market? If there is a cap and trade system the pre-existing companies will have a hell of a competitive advantage over new entries. An electric produce that gets 500 credits a year and uses 450 of them will have 50 credits of extra income. A new firm who can build a more efficient power plant that only emits 200 credits worth of C02 to produce the same power will need to buy those 200 credits. Supply and demand mean those 200 credits could be very expensive. That is totally the opposite of what you want to happen. This would never happen in a tax based system

    –David Moffatt

  2. Howdy! This is my 1st comment here so I just wanted to give a quick shout out and say I really enjoy reading your articles. Can you recommend any other blogs/websites/forums that deal with the same subjects? Thanks for your time!

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