Carbon markets and carbon taxes: can’t we all just get along?

Written by adam


We’ve never once written on the ongoing, slow-boiling debate between those who favor a cap-and-trade mechanism for reducing carbon emissions and those who favor a carbon tax. This is surprising. Not only are these issues in which we have some professional interest, they also involve all sorts of good wonky fun.

The fun turns out to be mostly theoretical, though. In practice, the debate often turns into an arid shouting match between people who ostensibly share an interest in not seeing the planet roast. Witness, for example, this latest exchange in Grist.

Why the acrimony? One possible reason is that there isn’t much new to say on this topic. The relative pros and cons of carbon markets and carbon taxes are fairly well-understood, easy to communicate, and not even especially controversial, other than to partisans. After you go back and forth a few times, the only thing left to do is trade insults.

Another possible reason is that the debate is regarded by many as moot. Conventional wisdom holds that carbon taxes are a political dead letter, leaving cap-and-trade as the only viable legislative option. This conventional wisdom can lead to a bit of smugness on the part of cap-and-trade advocates. It is also undoubtedly insanely frustrating to carbon tax advocates, who view it as a self-fulfilling prophecy.

Perhaps it’s this frustration, then, that leads some carbon tax advocates to such heights of rhetorical overreach in arguing their position.

For example, one of the major advantages of a tax over cap-and-trade is simplicity. Taxes are easier to administer and harder to cheat, and for these reasons among others are believed by economists to be the more efficient policy prescription. Score one for carbon taxes.

It does not logically follow, however, that cap-and-trade systems are too complex to function. They’re just more complex. This is a disadvantage, not a fatal flaw. Charles Komanoff writes that the “old Hollywood maxim that a story line can’t exceed 25 words should disqualify cap-and-trade systems from the get-go.” Even allowing for a bit of tongue in cheek, it would be hard to come up with a more vapid criticism of a piece of environmental legislation.

Some carbon tax advocates have an unsettling habit of simply denying the problems with carbon taxes. The most glaring of these problems is that carbon taxes don’t actually require anyone to reduce carbon emissions. It is ironic that carbon credits are so often referred to as “permits to pollute,” because this is a far more apt description of a carbon tax: pay the tax, keep polluting. Obviously a stiff enough tax will discourage fossil fuel usage, but a large body of evidence points up the fact that it is distressingly difficult to convince people to stop using energy. (Recall those Indian builders from last week.)

Throw in a little gratuitous conspiracy theorizing among carbon tax proponents, and you’ve got a pretty strange brew.

I am not, despite appearances, making an argument for the superiority of cap-and-trade over carbon taxes. My personal view is that implementation specifics matter a good deal more than the broad shape of the legislation. The most important matter is setting the price of carbon high enough.

I would, however, like to see a bit more evenhandedness in an argument between people who share a policy objective of reducing carbon emissions. If you’re interested in a more detailed look at this debate, check out this recent article in Reason Magazine.

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