Really, Just Do Cap-and-Trade

Andrew Sullivan responds to a couple of folks who joined me in suggesting that it’s silly to hold out for a carbon tax bill at this point in the game. Answering Kevin Drum, who asked why anyone would continue to oppose cap-and-trade, Andrew writes:

Because we actually believe that a carbon tax will bring green benefits without the kind of crude regulatory scheme that could stigmatize environmentalism for a long time? Because we think it will work better?

To the first point, Kevin makes an excellent observation — practically all of the brute force bureaucracy involved in regulating carbon will be in place whether you use cap-and-trade or a tax. Either way you have to assess emissions and monitor sources. The difference in the plans is whether after all of that you pay a tax or buy a permit (from the government or someone else). That’s it.

Aside from that, the differences all come down to implementation. The only way there are significant benefits from a carbon tax over a cap-and-trade plan is if Congress chooses to approach one plan in a dramatically different fashion than the other. It seems to me that they’re at least as likely to make technical errors with one as another — by failing to adjust or overadjusting cap levels or tax rates, say. And I see no reason to think that the industry lobbyists who have put the screws on legislators over permit allocation would suddenly turn into pussycats if a tax were on the table. At least with cap-and-trade the giveaways are glaringly obvious, where tax breaks can be complex and obscure.

Cap-and-trade can be structured to behave almost exactly like a carbon tax, it has some advantages over a carbon tax, and in basically all the ways that matter it is every bit as good as a carbon tax. It’s the implementation that’s crucial. Those holding out for a carbon tax need to explain why they think Congress would suddenly be less ignorant or craven in debating a tax than they are in debating a cap-and-trade plan, AND they need to explain why the difference in outcome would be large enough to justify the cost of delaying action by a year or several as a new bill was rolled out, sold, defeated a few times, and then eventually passed.


  1. Doug says:

    Well, there’s the fact that we spent 8 years looking at whatever was put on the table first. And, I may be wrong about this, but it seems likely to me that once a carbon tax is in place the lobbyists have much less to influence than when permits are allocated. A carbon tax seems like it would have a simpler time following changes in the real economy, dealing with new or shrinking manufacturers, etc.

    Then there’s the honesty issue. I would prefer to see the costs I pay rather than have the charade that someone else pays the freight. As I see it, the only way cap and trade is superior is the fact that it’s more politically palatable because the effects are less obvious to individuals. It’s the question of whether cap and trade signals the price of pollution to end users as well as carbon tax, and whether the behavioral changes will be as lively. But ok, given that cap and trade seems the less intelligent of two choices both of which are smarter than congress (as is carbon,) I won’t whine when we end up with what seems like the inferior result. But I don’t blame Sullivan for pushing back.

  2. ryan says:

    Doug, you won’t see the direct costs with a tax; it will be levied at the sources just like permits will be bought at the sources, with costs trickling through the supply chain.

    And for the life of me, I can’t see why anyone would conclude that lobbyists would fiddle less with a tax or that Congress would fiddle less with a tax. I just don’t see anything in current corporate behavior to indicate that that’s likely.

  3. Doug says:

    Ryan, your expertise here is much more extensive than mine, and I’m much more sanguine about cap and trade then I used to be. I hope my comments on the topic acknowledge that. But my limited experience is that the skeleton of the tax system, basic rates and what is taxes how, changes slowly. The filigree- exemptions,exceptions, etc. is under constant review by congressfolk and their representatives on K street. I trust the tax more, because I think $500/ton sounds more robust than a system of allocating tradeable allowances and less sensitive to an equal lobbyist effort.

    Are you sure, though, that gas pumps won’t show a $.40/gallon carbon tax?

    Anyway, I surrender this far: I’d rather cap and trade pass than the carbon tax fail.

  4. ryan says:

    For things with very short supply chains, it would probably be possible for the supplier to include the amount of the price that can be attributed to the carbon tax; if you get gas at a Shell station Shell could provide this information, or if your power comes from PG&E they could let you know. There would be an unavoidable fudge factor, though — do those specific electrons come from coal or hydro?

    Other green groups are already working on systems to tell individuals the emission content for things like home appliances. The trick is, it’s really hard to compare across actions. Like, if you’ve been driving to a farmer’s market, which is 50 miles away, for fresh veg, and the gas pump tells you that this is costing you x amount of money in carbon tax, so that you switch to buying veg at the local grocery store, does this actually reduce emissions? Who the hell knows? The nice thing about pricing, in general, is that there’s a set it and forget it aspect to it.

  5. Squalish says:

    The primary advantage of what we have traditionally called ‘cap-and-trade’ is that it doesn’t disrupt existing business models and shut down existing systems of trade.

    The disadvantage is that it’s a bigger giveaway to certain specific corporate powers (the ones doing the current polluting) than even TARP.

    If you try to make it equitable by removing the latter, you also remove the former – if J Random Cement Manufacturer suddenly needs to pay hundreds of dollars a ton, they go bankrupt whether it’s in the form of a CO2 tax or a CO2 permit auction. The only meaningful distinction between ‘cap and trade’ and a system of taxes designed to target a certain amount of reduction per year is that the former implies that existing polluters will be accomodated.

    The main reason that cap-and-trade has been popular, other than conceptual simplicity and special-interest lobbying, is that it allows things like questionable, dirt-cheap mitigation strategies that no responsible administrator would allow. Plant a few trees, call it sequestration, and double your coal-burning habits, and you can end-run around a system that allows it. This can be unacceptably destructive to the environment, or simply less than effective.

    If you’re auctioning permits rather than creating a givaway to existing polluters, it’s easier to simply call it a tax than include stipulations, if we’re being intellectually honest. Not that intellectual honesty should prevent progress within DC – it certainly hasn’t stopped the opposition.