Of Carbon Taxes and Caps

Some important points:

1) Reasonable people can disagree over whether cap-and-trade or a carbon tax are the “better” policy.
2) It is not true that either has significant advantages over the other.
3) There is only one plan with a serious chance to get through the Congress in the near term.
4) So if you are out there arguing that we should really be adopting a carbon tax rather than cap-and-trade you’re undermining that best chance at a carbon price law for at most a slight improvement in policy.
5) Given the stakes, you, arguer, should be shouted down.


  1. jim says:

    Not sure your (3) is true. If some version of Cap and Trade actually makes it through Congress, it’s likely to have lots of free cap given to the major polluters.

    But I doubt that any version of Cap and Trade will actually get enacted.

  2. Very elegant summary, Ryan.

    jim – one can argue over what a ‘serious’ chance is, and just how much free cap will need to be given out in the cap-and-trade deal.

    But there’s essentially zero chance that a carbon tax will be passed by this Congress, or the next, for that matter.

    Maybe the odds of cap-and-trade passage are poor, but poor’s a hell of a lot better than no chance at all.

  3. BruceMcF says:

    The chance of passing a policy strong enough to do what we need to get done is, approximately 0 … somewhere between Nil and Buckley’s Chance.

    Which suggests that the only path to getting what we need to get done is to get some structure in place, and then work on firming it.

    So the argument over whether a tax or a cap and auction is better is not the theoretical argument over under which assumptions which approach is superior, but a political argument …

    … which one can we get started on sooner …

    … and what is the incremental path toward firming a massively underambitious program and target into the program that we need.

  4. bottomofthe9th says:

    Maybe I’m naive, but I think that when it comes time to sell this thing, the transparency of a carbon tax could appeal to Americans. If you pitch it as a) saving the world and b) no net tax increase (via payroll tax rebate, or similar), then I think you could get support for a carbon tax, rather than the opaque, and not at all easy to explain, cap-and-trade.

    I guess my opinion is shaped by the fact that hardly any political capital has been expended in selling either option to-date, and as such folks’ opinions are not yet well-formed.

  5. Karl Smith says:

    I am not so sure about (2)

    Even leaving aside the huge temptation to not actually auction the permits but to give them away there is the issue of cost uncertainty.

    Because the cost of controlling pollution is uncertain the relative merits of cap vs tax depend on the nature of the benefits.

    My understanding is that the benefits of carbon reduction, in the range we are talking about, are continuous and quite likely nearly linear.

    That is, a reduction in carbon is worth a given amount per ton and we are not likely to reduce carbon so much that global warming is no longer an issue, nor reduce it so much that its worth a whole lot less to reduce it some more.

    This gives us a constant marginal benefit, which is perfect for a tax but down right horrible for a permit scheme.


    Because you don’t know what level of permits is going to hit the marginal benefit of carbon reduction. Suppose you issue too many. Then there is global warming proceeds too fast with its obvious consequences.

    Or, perhaps more likely, you issue to few or fail to raise the number as the population grows. Then the costs of cap and trade easily outstrip the benefits.

    Perhaps, also there is revolutionary technology that lower carbon control cost. With a cap the value of permits collapses and there is no further incentive to reduce.

    Under a tax the marginal benefit of reduction remains constant and so there is still an incentive to reduce further.