18 May 2008

Taxes Are Easier...

In response to my support for carbon taxes, Sheryl over at EDF writes
A carbon tax provides price certainty, but not greenhouse gas emissions certainty. What we need is the latter, and that is what a cap-and-trade system provides - emissions certainty. A well-designed cap-and-trade system can provide adequate price flexibility as well.

Nat Keohane, a Ph.D. economist here at EDF, wrote a great post explaining why a tax is the wrong tool for a job and cap-and-trade is the right tool. He wrote this in response to a phone call from the head of the Congressional Budget Office objecting to his review of a study they’d published. This is a good read - take a look
Oh neat, PhD economist debates! I replied with this:
I disagree about the “certainty” aspect of cap and trade. While true in theory, real emissions will be uncertain to the extent that emissions are unmeasured or mismeasured. Take the measurement of population. In the US, the census is considered to be “fairly” accurate, but naysayers complain about various important groups (homeless, migrants, et al.) being unmeasured.

Now consider how most countries do not even know their populations — and multiply that mismeasurement by — say — 120 (census once per decade versus monthly emissions measurements). Carbon taxes are much simpler to enact, measure, and enforce (except for gathering and burning wood — but they are likely to be missed in cap and trade too).

I took a look at Nat’s post. While I agree with him (and my PhD is younger than his), I think he is leaving out another “transactions cost”-related aspect of cap and trade that does not exist with carbon taxes. Say that permits are issued on an annual basis (by auction), that a bank exists, etc. but it’s “suddenly” discovered that too many permits are out there. The next auction must reduce the number of permits AND policing “black market” emissions must increase.

With taxes, the response is only to increase the tax on carbon inputs. That increase can occur on or before the date for the next auction, and there is no need to police emissions, since taxes are part of the prices at the start — not end — of the carbon-generating cycle. It’s much harder to have a black market input (coal from a different mine) than black market output (coal burned in a burner without a permit).

Taxes are better because they are simpler AND easier to adjust. Forget the theory — these systems have to work, worldwide, in reality.
Tell me what you think -- even if you do not have a PhD :)