23 October 2008

The Political Economy of Cap and Trade

I just did a presentation [PDF] on carbon cap and trade. In it, I spoke in favor of carbon taxes and against cap and trade (for fear of the political manipulations that are all-too-likely).*

In particular, I highlighted the importance of taxing carbon as close to the source as possible, the necessity of rebating ALL tax revenue (or auction revenue, should C&T be enacted) to citizens, and the importance of allowing price signals (HIGHER PRICES) to work.

I did the presentation at the annual meeting of the National Association of [Investor-Owned] Water Companies [site]. NAWC is worried that carbon taxes/C&T will increase the cost of delivering water -- as it should -- and that revenue from taxes/C&T will be rebated to "favored" industries (e.g., municipally-owned water companies) -- as it should NOT.

When preparing the talk, I was surprised to learn that the EPA's SO2 auctions (the famously-successful ones that have been running since 1995) account for less than 3% of total SO2 permit activity. 97% of permits are given to industry -- and then traded.

Bottom Line: We should tax carbon like we tax gasoline: Taxes are simple, transparent and hard to manipulate. We should then rebate the the $billions (trillions?) in tax revenue to citizens, not "favored" industries.

* For more debate, see this

1 comment:

Pradeep said...

David,
Are you aware of this?
I am non-committal about choosing between C&T and a carbon tax, and think that each has its own merits and demerits. Economists argue that a tax will be more efficient than a trading system, but IMO, this does not spur innovation. Giving tax rebates to people might make them consume more of the same..On the other hand, a carbon tax might be more simpler than a complex piece of C&T legislation.