5.19.2009

Carbon Tax vs. Cap and Trade, Round Three

Carbon tax vs. cap and trade continues to heat up in the economics blogosphere, with Greg Mankiw linking to a New York Times article that calls cap and trade pure politics, and Marginal Revolution responding that a little politics is necessary to get something done. A commenter at Marginal Revolution makes the following assertion:

"During an economic downturn, such as now, energy demand and usage falls, so were we to have set a 2007 Cap, the current imputed energy tax would have already fallen dramatically as the market value of the allowances would have plunged. During boom times when everyone is demanding energy, the allowance prices would rise, encouraging conservation and innovation. That pattern of price changes is economically efficient."

I'm not so sure I agree. This self-correcting mechanism may be useful if the atmosphere can painlessly absorb a certain amount of carbon dioxide each year: when we're in a bust, we can "get away with" polluting more, while when we're in a boom, we need to be careful so as not to over-pollute.

But if in fact all carbon dioxide is bad, and the effects additive, then it shouldn't matter if we haven't had to pollute as much in a given year. Furthermore, it may very well be that the best, most human-serving solution to global warming isn't just to reduce carbon emissions but to help economies grow so they have the resources to deal with global warming's environmental consequences. If that's the case, then it makes sense to allow people during a boom to pay a carbon tax if they think it's better to produce and pollute than to not produce and not pollute.

Hey, there's pros and cons to both sides. But it's interesting, and the New York Times article notes this, that cap and trade was first conceived within a Republican administration and dismissed as a sop to industry by Democrats who argued instead for a straight federal carbon tax. With some Republicans now counter-proposing a carbon tax to the current, Democrat-conceived cap and trade proposal, it appears the tables have turned.
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