QUESTIONS, ANSWERS: CARBON CAP-AND-TRADE

Carbon taxes vs. emissions trading: politics and other practical problems
Gar Lipow, 20 February 2007 (Grist)
- Charles Komanoff's excellent work on carbon taxes vs. emission trading tends to attract certain frequent objections. This is an attempt to answer some of them:

- …Politically, we can never win a carbon tax.
Answer: Cap and trade has political heft mainly because it was instituted at a low level over a long period of time -- thus it did not require very high emission reductions…emission credits can be bought from nations without such caps, the emission reduction as a percent of total emissions in countries taking part in the Kyoto negotiations is even lower than the nominal target…there is no question that a fair percentage of Kyoto credits are fraudulent -- excessive credits were granted to EU utilities, and many of the CDM credits sold in China are bogus…Put a tight enough cap on the number of credits, with stricter controls to prevent fraud, and you will find political resistance is as great as resistance to a carbon tax.
- …You need high prices indeed to lower carbon use.

Answer: Elasticity is as much a problem for cap and trade systems as for carbon taxes. Carbon prices have fallen under cap and trade because the system is producing extremely small emission drops, and because of fraudulent credits. A cap and trade system that actually resulted in the main signatories dropping their emissions the percent originally agreed to would have raised credit prices exactly as high as a carbon tax (or perhaps slightly less -- at the expense of delaying technology improvements, resulting in higher costs at later stages)…under both systems…add regulation and public initiatives that compensate…
- Cap and trade…guarantee[s] a given reduction.
…If you want something close to a guarantee, a carbon tax could have a built-in escalator that would raise taxes if emission reductions were lower…
- What will stop import of goods from nations without a carbon tax?

- …same problem with a carbon trading system…same solution…charge a tariff (or require carbon permits) from non-cooperators.
- Carbon Taxes…cost the poor more than the prosperous, the prosperous more than the wealthy.
Answer: So are emission caps. The price of emission credits gets passed along to consumers, one way or another. There is a simple solution…use the revenues for the benefit of ordinary people, either by dividing the revenue equally…or by using them for beneficial purposes…I favor dividing the revenues…a number of states are proposing substituting per-mile taxes for per-gallon gasoline taxes, because hybrids and other efficient vehicles are costing them highway revenues…Peter Barnes proposed this year ago inWho Owns the Sky...
- …refundable carbon taxes directed towards industries rather than individuals.

Answer: One problem…industries…won't necessarily pass along refunds to customers. But really, refunding to individuals meets most of the goals…A polluter has to pay a carbon tax or buy emission credits and raise prices…Consumers receive the revenue raised and use it to pay the extra prices. Both consumers and polluters have incentives…they can save much more by doing so…
- Pollution taxes provide revenue to…government…trading is purely private…no nasty taxes.
Answer: Both pollution taxes and emission trading systems require massive government intervention…Even when we give permits away, it is still a tax system…where the taxes are collected by private institutions for their private benefit…