testimony on cap-and-trade is out. Greg
Mankiw likes it, because the CBO supports including given-away emissions
permits in the national accounts. I don’t like the testimony, becaues the CBO
supports the concept of a "safety valve", which defeats the entire
purpose of a cap-and-trade system, which is the cap. Deborah Solomon’s preview
of the testimony in today’s WSJ is OK, I guess, although the headline is
dreadful: the study does not "cast doubt" on a cap-and-trade system,
it just talks about the budgetary treatment of emissions rights once such a
system is in place.
The testimony does have one argument in favor of a carbon tax over a cap-and-trade
system which I haven’t seen before:
In terms of the impact on the climate, it does not matter greatly whether
a given cut in emissions occurs in one year or the next. From that perspective,
a tax has an important advantage: It allows emission reductions to take place
in years when they are relatively cheap. Various factors can affect the cost
of emission reductions from year to year, including the weather, the level
of economic activity, and the availability of new low-carbon technologies
(such as improvements in wind-power technology). By shifting emission-reduction
efforts into years when they are relatively less expensive, a tax can allow
the same cumulative reduction to occur over many years at lower cost than
can a cap-and-trade program with specified annual emission levels.
I’m hoping that a pro-carbon-tax blogger (Komanoff?
Mankiw?) will explain this argument for me in a bit more detail, since I’m not
sure I entirely follow it. Isn’t it an advantage of a cap-and-trade system that
emissions steadily decline, as opposed to a carbon-tax system where emissions,
could, in theory, continue to rise indefinitely?
In fact, it might be worth backpedalling a little and asking a question I’ve
had in the back of my head for some time, and have never seen explicitly answered.
Consider a cap-and-trade system where you impose a hard cap, C, on carbon emissions,
and the government auctions 100% of the emission rights. The auction is conducted
in an efficient and transparent manner, and the clearing price is, say, $10
per ton of carbon. In fact, the market is so efficient that in the secondary
market for emissions rights, the price stays at exactly $10 per ton for the
Now consider that instead of implementing the cap-and-trade system, the government
simply imposed a $10-a-ton carbon tax at the beginning of the year. Can we say
with any certainty that under this scenario, total carbon emissions would fall
It seems to me that the arguments made by the pro-carbon-tax crowd always assume
that the answer to this question is yes, while my real-world intuition is that
the answer to this question is no. My feeling is that under the carbon tax,
government revenue would be greater than under the auctioned cap-and-trade system,
as businesses continued to emit carbon and pay the tax on their emissions. Yes,
the higher price would encourage a reduction in those emissions, but a price
incentive is surely no match for a hard cap when it comes to something as sticky
as energy consumption.