Yes, that's why most economists I've read seem to agree that carbon tax is better than co2 credit cap-and-trade systems - simpler and harder to game, flawed only because it includes the word "tax" which is unpalatable to the public.
A tax is actually vastly more complicated and easier to game.
Remember, the goal is to cap emissions, not to raise money. When you start with a cap and work backwards towards the clearing price, you are guaranteed to be meet that cap. But when you start by setting a price, there is zero guarantee that you're going to meet your emissions target.
Also, the point of cap and trade is that it lets societies meet their emissions target in the least expensive way possible. Whereas a tax imposes the same fees on everyone, regardless of how much it would cost them to lower their emissions. This makes zero sense.
Cap and Trade and a Carbon Tax are equivalent in outcome. Cap and trade would impose fees on everyone regardless of how much it costs them to lower emissions also. The problem with Cap and Trade is that it targets the large scale emitters rather than the item desired to be limited.
Imagine that you had five major producers putting out 30% of airborne carbon, and 50,000 minor producers putting out 70%. The cost of administering a cap and trade system to the minor producers would be incredibly expensive - the legislation would instead focus on gouging the five major producers. Also imagine that the 50,000 minor producers could very easily cut their production of carbon in half.
Cap and trade punishes large players - taxes are fair because they impose the same fees on everyone.
Cap and Trade being the least expensive way possible is also a terrible loss for good tax reform. If we implement a responsible carbon tax, the offset income can be used to reduce associated corporation taxes, sales taxes, or even income taxes.
An optimal tax system taxes things and behaviors we don't want, and subsidises things and behaviors we do want.
Let's get rid of an income tax, and replace it with a environmental tax. More money in your pocket, and cleaner air.
As California's attempts to tax mileage of hybrid and electric vehicles proves, if you create an additional source of revenue for the government, tax levels will bear no relation to the harm they're designed to compensate for. It becomes just another way for the government to raise taxes without admitting to doing so.
And VAT in Europe was only created to rebuild after the war.
Tax repeals are very rare, once they're worked into the budget they are there to stay and usually will expand to pay for other things besides the reason they were originally created.
I was always shocked by the 'good' mpg US hybrids get, compared to Uk/Euro diesels - (though some of the difference is down to different sizes in gallons between us, but still. My 12 year old volvo v70 (not a small car) got 53mpg easily
Prius highway rating of 4.4 L/100 km (53 mpg-US / 64 mpg-imp)
Volvo V50 highway rating: 3.8 L/100km - this is the 'extra economical' diesel, with start/stop, aero body and aero wheels, so a good match for the Prius - seems odd that all that extra tech wouldn't give them much improvement? I guess city driving it may be better but I don't have time to dig out the figures now.
If I can save 10 tons of co2 at a cost of 2 dollars and you can save it only at 4 dollars, then if we have to lower the amount by 10 tons with a tax that is evenly distributed the total cost is going to be 3 dollars - 50% more than under a cap and trade system, where I sell you 10 tons worth of co2 credits and implement all the changes.
Since ultimately a carbon limitation is going to mean more expensive products, it is important to limit it as much as possible.
Also I don't see how a cap-and-trade system is going to be more difficult to enforce than a tax, you are still going to have to check if all the companies have paid their taxes.
The 50% in your analysis stems entirely from the fact that you're using ridiculously small integers. At any tax rate greater than $2, the first person would save money by making the change. You say $3, but it could be $2.01. At exactly $2 they would have no preference between enacting the change or not.
Of course, you omitted that the same must be true for cap and trade. The person who can save CO2 at a cost of $2 would have no preference between enacting the change or not if they were only to be paid $2. You'd need to pay them more. Like, $2.01 or $3 if we're only using integers. Exactly like the tax.
> An optimal tax system taxes things and behaviors we don't want
Except for that the goal isn't to punish polluters, it's to get carbon to a level that won't result in the end of human civilization. By moralizing the issue you're just making it more likely that we won't get there.
Of course the goal isn't to punish polluters. It's to convince them to pollute less. This is why tax things and behaviors we don't want - to make it more expensive, so that there's less of it.
Raising the price of a thing tends to reduce the quantity demanded.
There are perverse cases. Veblen and Giffen goods (higher prices increase consumption). But generally, the relationship holds.
A cap-and-trade or carbon tax system, to work, has to establish how much carbon can be emitted (I'm ignoring for the moment the argument that the answer may well be "none").
A tax or trade mechanism both invoke market mechanisms to allow individual carbon emitters or absorbers to determine how much activity they'll undertake, including seeking alternatives.
If a tax or C&T at a given level isn't sufficient, then the solution is to change the basis level. The result is still (in theory) achieved in the market.
You and ThrustVectoring are arguing two components of the same mechanism.
See also the Jevons Paradox: increasing efficiency (without also increasing prices) increases the amount of a good or resource consumed.
If you want less of something, raise its price. E.g., tax it.
I'm not sure what the distinction you're trying to make is. The total amount of pollution is the sum total of every individual's pollution. In order to reduce the total amount of pollution, individuals have to pollute less (on average). Conversely, if individuals pollute less (on average), then total pollution goes down.
But 'producers' are not the polluters, it's consumers driving cars that are polluting. The goal is not to punish everyone, it's to get them to make other choices.
Cars are not the problem, there is no one thing that is the problem. Simply being alive and doing things uses energy, there is no way around that.
And BTW if you do the math a bicyclist (in the US, eating a typical US diet) emits more CO2 per mile than a small car. Assumptions: The bicyclist is riding in addition to any exercise, the riding is not exercise, and the bicyclist eats normal food. A bicyclist who prefers organic, or local, would definitely emit more (both of those emit more CO2 in the growing than regular food).
It's a surprising result, I know. But it's because humans are not very efficient in turning food energy into miles, and cars are reasonably efficient. It doesn't help that growing food takes a lot of energy, especially if you force yourself to only eat local, if you do that energy really goes up.
I would be rather wary of bike endorsing studies posted on sites called "bikesomething" just as I would be wary of "rightwingnut.com" publishing studies on immigration or any other contentious issue.
What about CO2 emitted by the driver? They are respiring too.
The real issue with emitted CO2 is not the quantity at the exhaust-pipe versus the quantity exhaled by a cyclist. The CO2 emitted by the cyclist was absorbed by plants in the preceding months. The CO2 emitted by the car was absorbed by plants in a previous era of the earth. The cyclist allows you to leave the oil in the ground keeping the contained carbon out of the atmosphere.
You misunderstand. It's not the CO2 of the plants that are eaten, but the heavy equipment necessary to grow the food, the tractors, and everything else involved in growing food.
That's why produce is so expensive - it takes a LOT of energy to grow it.
Produce is expensive because it's minimally subsidized and it takes a lot of people, land, and care instead of a lot of energy. Dry corn is extremely hardy, fresh lettuce wilts.
At the extreme end, roses are not actually much plant matter, they are expensive in large part because you can't treat them like bricks. On that continuum Produce is closer to flower than grains.
> And BTW if you do the math a bicyclist (in the US, eating a typical US diet) emits more CO2 per mile than a small car. Assumptions: The bicyclist is riding in addition to any exercise, the riding is not exercise, and the bicyclist eats normal food. A bicyclist who prefers organic, or local, would definitely emit more (both of those emit more CO2 in the growing than regular food).
This result is useless since it makes impression that those miles are interchangeable while they are not. No bicyclist will make same amount of miles per unit of time as car driver. Bicyclist will make other choices: living closer to the job, working remotely, etc.
"The cost of administering a cap and trade system to the minor producers would be incredibly expensive - the legislation would instead focus on gouging the five major producers"
Why is that different from the tax approach? Wouldn't taxing the 50,000 minor producers appropriate to their levels of pollution be equally as expensive?
The key part of that is administering part. Cap and trade requires the producer participate in a market for cap allowances. It's that overhead that makes it more expensive.
Ok, yes, I see that there will be some extra expenses in tracking and trading the allowances. I would expect that to be neglible next to the cost of tracking the pollution by all those producers.
I assumed in this scenario that the the producers being taxed are already the ones who extract the oil or coal. If there are 50,000 minor oil producers then taxing all of them will be a bit of a headache.
cap and trade is a means by which politicians can pick favorites and get around rules that might prevent subsidizing particular businesses.
tax everyone to change behavior is the best route plus it does tend to stop the mini games that go on with trying to transfer funds to contributors and the like
It's eminently reasonable to have a different goal: prevent the activities whose environmental cost (via CO2) is greater than its economic benefit. In that case, the tax is sufficient to achieve that goal because it adds the cost in directly.
Then, for every case where the economic benefit is small relative to such a cost, people will stop doing it. And even if they don't, the government now has collected an amount of money equal to the environmental costs and can work on mitigating them with it! [1]
(That goal is, incidentally, the point of Pigovian taxes -- or at least, it should be, rather than "to give me cover for restricting something I disliked for other reasons", which is how they often get used.)
[1] If you want to go the route of saying that the costs are unqiantifiable ... don't. That way lies insanity (and arbitrary policy).
Is it? I would say the the goal is to reduce carbon usage to situations where the benefits outweight all (social and economic) costs. So, our goal shouldn't be to reduce emissions to some arbitrary level, but to reduce usage to the level where benefits=costs.
sorry, what? A tax is simple, like a sales tax or VAT, and there is a strong incentive to collect it at a centralized source that is pretty easy to monitor.
How is that complex vs. creating a new commodity in the form of carbon credits, and checking that the emission is backed up by credits?
At best, cap-and-trade is equivalent to a carbon tax plus some corporate welfare to return the tax to the polluters.
In the most likely scenario, it's an opportunity for rent-seeking politicians to dole out the credits to those who either currently pollute most or just have their ear, for worst current polluters to cash in on opportunity to reduce pollution, for financiers to make big bucks trading credits.
At worst, it's a fraud where people will buy credits from people who don't reduce pollution or would have done so anyway.
How the eff does it work? Who gets the credits to start with? Why do you think the companies prefer cap-and-trade? of course it's more complicated to end up monitoring both the pollution and who owns what credits.
the whole point of cap-and-trade is to avoid the word 'tax', and to create a vast rent-seeking system and potential for gaming the system, and make it politically palatable by paying off the people who might object.
my comment referred to a choice between carbon tax vs. cap-and-trade for reducing emissions, which seems unrelated to ethanol credits.
I just think taxing coal/oil/natural gas as it's produced and sold, based on how much carbon it contains, is easy and effective, enforcing a carbon credit system is hard and prone to shenanigans, fraud, corruption.
Economically they're essentially the same and the shenanigans are a massive bug. But politically, shenanigans are a feature.
You still have to check if everybody has paid their emission tax.
Also a tax has to be high enough to offset the average cost of lowering Co2 emissions (since you force everybody to lower their emissions), whereas in a cap-and-trade system the price will the the lowest cost to lower the emissions, since anybody who would pay a higher price will be better of buying the emission permissions and anybody who can save co2 cheaper will be better of selling them.
Thus a cap-and-trade system is always going to be more efficient.
I think you're confused about the mathematics here - cap and trade for cap (C tons) is EXACTLY equivalent to some carbon tax (T dollars) in the behaviors it incentivizes.
> When you start with a cap and work backwards towards the clearing price, you are guaranteed to be meet that cap. But when you start by setting a price, there is zero guarantee that you're going to meet your emissions target.
If you can't generate a good estimate of how much tax is needed to hit your target, hitting the target no matter what is actually a bit of a problem.
If the necessary tax would have been less than you expected then your emissions target is likely too conservative and you could reasonably have picked a more aggressive one.
And if the necessary tax is much higher than you expected then you could end up wrecking the economy, because the cost of credits will then be outrageously high and get passed on as high energy costs.
There is another advantage to cap and trade as opposed to tax.
With cap and trade, you may have a politically motivated allocation of emission rights initially, but it's a one-off transfer and soon enough they end up the hands of the people with the most productive use of emissions.
With a carbon tax, people will continuously expand resources in the form of lobbying to try and receive the proceeds of the tax. The government has to stay in the loop forever.
The missing Carbin tax is correcting an externality which subsidies coal and other fossil fuels. We may chose to produce zero coal or the same amount, but markets only work with accurate information.
> Cap and trade doesn't work the way you say. It isn't an auction. See the article.
The initial credits can be allocated either through an auction, by giving them away to existing polluters, or through some combination. But after the initial allocation, credits are traded on the market. That's the 'trade' part in cap and trade.
It doesn't matter who gets the credits as far as efficiency in reducing carbon emissions.
It matters quite a lot financially however, because the credits are worth money, so anybody who gets them for less than the market price is in for a windfall.
The Coase Theorem says it wouldn't matter for purposes of optimal allocation if there weren't transaction costs.
The Coase Theorem doesn't guarantee the absence of transaction costs in practice (and they are likely to be huge here, since the dude who likes incandescent light is going to be very far removed from the high-volume market), and it does guarantee that initial allocation will affect the wealth distribution.
They're right to be concerned: A tax goes to the government and the price is set wrong. What's the correct amount? $5 per barrel[1]? $25? $250? $3000? $3000 would be insane, right? The People would rise up against those who decide that price. Plus, if it's a government tax, it goes to the pocket of the government. If it's traded on the stock exchange, at least it's not the government who's to blame if the pricing is too high, and it's not the government who gets the money - it's redistribution at its most noble name[2].
There are two axes: How high it should be to reduce demand of petrol to a sustainable level, and how high to account for the cost of the global warming. CO2 emissions were stable in 1990, meaning they were consumed by plants which would emit the equivalent O2. All those policies do is attempt to come back to the levels of 1990. So we just have to let companies purchase their emission rights and see where the price goes. If we don't succeed, it will cost trillions, so again we need to factor those trillions into the cost of barrels. If we just get the cost high enough, we'll either use alternative sources or avoid spending[3]. So, yes, basically, the right cost of a barrel of petrol is the cost of switching to an alternate source, plus the cost of the damage of the global warming: It could very well be $3000.
And fact is, a government isn't going to raise a $3000 tax per barrel. So, when replacing a stock-exchange-traded price with a tax, I wonder why "most economists we read seem to agree".
[1] Meaning: 5% of the price of a publicly-traded barrel of petrol that have the same effect on global warming.
[2] The only thing against trading emissions on the stock exchange is that a lot of people don't trust stock trading anymore. They point out speculation, HFT, subprimes. Sometimes it's a misunderstanding of the usefulness of capitalism, sometimes the public is correct (The financial industry reaps the benefits instead of the end user does). Whether or not it's right, it's extremely sad for the Earth if we replace a $3000 emission cost with a $5 carbon tax.
[3] "Avoid spending" is not a light term here. It basically means a group is going to be really, really poor because we can't build enough goods for them given the CO2 limit.
