The following guest post by Steve Kirsch presents a persuasive case that cap-and-trade systems (also called an emissions trading system[ETS]) are NOT the right way to put a price on carbon. This is relevant to the US Waxman-Markey bill, and Australia’s Carbon Pollution Reduction Scheme [CPRS]. Instead, a ‘fee and dividend’ approach is advocated. Read on to find out why…
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Four key reasons why it is important that we use a fee-and-dividend approach to regulating carbon emissions:
1) Fee-and-dividend is, without any doubt, the best way to regulate carbon emissions.
There is near universal agreement among experts including Al Gore, Jim Hansen, the inventors of cap-and-trade, economists, the CBO, EPA regulators, and Sierra Club that fee-and-dividend is the best way to achieve the goal of carbon emission reductions because it puts a predictable price on carbon. Conversely, cap-and-trade, even in the most optimistic scenario, would achieve virtually no reductions and in any practical, real-life scenario, would actually make the problem worse because at best it would lock in today’s emissions for decades.
2) Fee-and-dividend is popular with voters.
Fee-and-dividend is politically viable. In British Columbia where the opposition party made it an election issue, they proved it was political suicide to oppose it. The opposition party now supports it. There are now carbon fee laws all over the world, including in the US.
3) Fee-and-dividend helps our economy and our environment: it is a double-dividend.
Fee-and-dividend helps our economy whereas cap-and-trade would hurt our economy. So fee-and-dividend is a great idea even if you don’t believe in global warming; we pass the bill for the economic benefit and we get the environmental benefit for free. Economists call this double benefit (economy and environment) the “double dividend.” Cap-and-trade does not have a double dividend.
4) Cap-and-trade would irreparably harm our environment and hurt our economy.
The cap-and-trade bills would, even under ideal circumstances, insignificantly reduce emissions by 2020 according to the CBO analysis. Under any practical scenario, it would hurt the environment irreparably because it allows business as usual (BAU) for 17 years. This is why Jim Hansen is so against it and why key individuals within the green groups are personally opposed to the cap-and-trade part of the House and Senate bills. Cap-and-trade is a “double whammy,” hurting both our economy and environment.
Cap-and-trade must be defeated because it will do irreparable damage to our ability to mitigate climate change and hurt our economy at the same time. There is no analysis anywhere that disputes what Hansen says.
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The alternative, substituting Senator Cantwell’s bill (CLEAR Act of 2009) for the cap-and-trade section of the Senate bill, will help both the economy and the environment. Unfortunately, nobody is paying attention to Cantwell’s bill because cap-and-trade is sucking all the oxygen out of the room. It can easily replace the cap-and-trade part of the Senate bill. There is also an excellent 10-minute YouTube video entitled “The Huge Mistake” which summarizes the case for fee-and-rebate. I highly recommend this video.
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The four biggest myths about fee-and-dividend
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Myth #1: The cap-and-trade bill isn’t perfect, but it will get the job done and it has everyone behind it so it’s the only game in town. If you want to get something done, this is the train to get on.
Nope. Reality check. If you look at the objective analysis, you’ll realize it won’t get the job done. That’s what people thought when they originally supported it. The truth is that, at best, would reduce emissions by 2% by 2020 according to the CBO analysis. But the more likely scenario is that because it allows offsets (which are impossible to regulate), it will allow actually emissions to get worse for decades while the same timing hurt our economy through higher and unpredictable energy prices. It will also drain dollars from the US and send them overseas for a questionable environmental benefit. That is a “double whammy:” hurts the environment, hurts the economy. A fee-and-dividend provides a “double dividend”: helps the economy, helps the environment. Unfortuately, people are locked into their position and the only way they can rationalize their continued support is to ignore the facts and hope that things will turn out better than all the unbiased analyses say. This is stupid when there is a superior alternative, fee-and-dividend, that has no downsides (other than a perception myth) that virtually everyone is saying is the superior solution including the CBO, Al Gore, Jim Hansen, the creators of cap-and-trade, economists, EPA regulators, and even Exxon Mobil.
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Myth #2: Fee-and-dividend will never pass. It’s a tax. There is no traction for this.
This is a self-perpetuating myth that is true only as long as people contine to believe it is true. The reality is that if properly positioned (see communication tools for making a carbon tax palatable to the public), a carbon fee and rebate is not only politically viable, but it is political suicide to oppose it, as the lawmakers in British Columbia now know.
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Myth #3: Fee-and-dividend is unfair. It will result in a net transfer of wealth from states that use a lot of coal for electricity to states that have a cleaner energy mix.
Senator Cantwell’s (D-WA) bill reserves 25% of the fee so that the government can even out regional disparities.
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Myth #4: It will unfairly hurt poor people because they pay a greater percentage of their income for energy prices.
Exactly the opposite is true. Percentages don’t matter. As long as rich people use more energy than poor people, poor people will always benefit from fee-and-dividend. Fee-and-dividend is the only solution that is progressive and will help the economy. Suppose we have two residents: a rich person and a poor person. The rich person makes $100K/yr and pays out $100 per year in the fee because he has a big house and a private jet. Our poor person makes $1,000/yr and pays $10 per year in the extra fee since the poor person uses less energy than the rich person. What happens is that each person gets a $55 rebate. So the poor person doesn’t pay more for energy under this plan…he actually makes money! So instead of paying out $10, the poor person is now $45 a year richer. So the people who can least afford higher energy prices are always better off in a fee-and-dividend scheme.
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For the full, printable 15 page document, download here or read it at Steve’s new blog, here. I really do recommend that you take the time to read this. The full paper includes some key background material (including a quote from me!), a detailed list of 14 reasons why cap-and-trade is the wrong answer for controlling carbon emissions, another detailed list of 16 reasons why fee-and-dividend is favoured, 3 reasons why green groups aren’t supporting it (?!), and a lucid explanation as to why a shoddy alternative bill is currently being shoved through the US Senate and Congress.
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Digging into the BNC archives, you can read more about cap-and-trade vs carbon taxes here and here. For Jim Hansen’s argument for a fee-and-100%-dividend scheme, see here.
Brave New Climate 
47 replies on “Fee-and-dividend is superior to cap-and-trade for effective carbon emissions reductions”
to me the title should be “a pure and uncompromised Fee and Dividend is superior to the cap and trade you are being offered”, but the same could be said for a pure and uncompromised Cap and Trade.
Unfortunately the debate at least in Australia is Cap and Trade vs climate skepticism. The opposition seems incapable of framing their debate in terms of the fundamental flaws of the CPRS (ETS) on the table, or at least pushing the “why before copenhagen” line.
It is probably going to be down to the good old USA so bring about any change from an ETS, as Europe seems to be committed.
It may frustrate Tax and Rebate fans, but I can’t even see that it is part of the debate from where I’m sitting. If Al Gore is a fan he doesn’t make much noise about it.
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This isn’t a very good argument. It compares an imperfect cap-and-trade scheme with a perfect tax scheme. Taxes will be subject to the same exemption pressures as emissions quotas.
Many of the claims are just wrong and flawed economics. Cap-and-trade does yield economic benefits as a ‘double dividend’ once quotas are auctioned off indeed the resulting carbon price then acts exactly as a tax.
BAU is allowed for a few firms but most are bound by costly emissions quotas – in Australia after 2012. The exemptions that are given can be argued against but this is a policy design issues not a problem with cap-and-trade. Exemptions can also be provided to taxes which would be similarly poorly motivated.
A tax pegs the price but not the level of emissions – a cap-and-trade scheme does both. In the absence of uncertainty they are equivalent policies since you can set a tax to produce a certain emissions level.
An advantage of global cap-and-trade is that it can reduce mitigastion costs by 20% below those that would be experienced without trade.
For goodness sake too the Waxman-Markey Bill is up and running in the US and the CPRS has a chance here. Don’t divert attention away from the real emission control capabilities of these bills by making erroneous claims about a competing and close to equivalent set of policies. The issues of selecting between alternative approaches are second-order compared to getting something done to control emissions.
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I haven’t seen any papers which compare the approaches and conclude that cap-and-trade is the superior approach.
Fee-and-dividend is much harder to distort and game. That’s one of the key advantages. See the video in the full reference.
It’s clear that cap-and-trade, even under BEST assumptions, doesn’t reduce emissions. But a predictable carbon tax would because THERE ARE NO OFFSETS. Big difference. Again, see the video in the full article.
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This idea appears to be revenue neutral carbon tax by another name. I believe that cap-and-trade or ETS is superior because it hits the target every time rather than overshoot or undershoot and the spot price of CO2 can reduce with lower demand. The chief bugbears are free permits and generous offsets. However these giveaways will become exemptions and deductions under a carbon tax. Under either approach they should be severely limited which means telling the rent seekers to suck it in .
On the ‘dividend’ side these schemes can raise considerable revenue if loopholes are kept to a minimum. While the spot CO2 price is variable in an ETS it can have a floor price. For Australia minus free permits and a floor price of $20 the revenue should be 500 Mt X $20/tCO2 = $10 bn, a handy amount. The cost of black coal fired electricity would rise by 2c a kwh and petrol by 5c a litre. If spent on subsidies for home insulation, smart meters and solar HWS then many households could avoid the impact altogether.
In the generation sector I propose none of that money is wasted on ‘clean coal’ research. Nor should the coal burners be compensated. The firms involved should get preferential help for low carbon technology such as nuclear. All funding proposals should be ranked on capacity adjusted capital cost. Some revenue should also go to new transmission.
Whatever form it takes imposed carbon pricing is superior to renewables quotas and prescribed standards (eg car mileage) since the tradeoffs are transparent. It is indifferent to whether coal is replaced by gas or nuclear for the first round of CO2 cuts. The longer it is delayed then the more likely panic measures will be adopted that don’t allow those tradeoffs.
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[…] Is Superior to Cap-and-Trade for Effective Carbon Emissions Reductions (Brave New Climate) Filed under Cap-and-Trade, Carbon Tax, Equity, News, Politics Comments […]
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“It’s clear that cap-and-trade, even under BEST assumptions, doesn’t reduce emissions”.
This statement is false. Under the BEST assumptions there would be no exemptions given to non-internationally traded goods and all the other questionables.
Then a tax that reduced emissions by X gigatonnes could be equivalently delivered by an emissions quota equal to (current emissions – X). The value of this quota would be exactly equal to the tax.
The advantage of cap-and-trade over a tax is one of the most discussed issues in environmental economics*. As John Newlands says it hits the target every time whereas a tax will not if market conditions are uncertainty. The disadvantage is that the carbon price becomes variable as market conditions change.
Some people don’t like this feature but it has its merits. The carbon price goes down in recessions (e.g. now) and increases during booms – it automatically stabilises the economy. There are, of course, costs but to say there is no case for cap-and-trade in the literature is quite wrong.
* Specific reference: Tom Tietenberg and Lynn Lewis, Environmental Economics and Policy, Pearson, Sixth Edition, 2009, p 313-314. Probably the world’s most used environmental economics text.
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“It’s clear that cap-and-trade, even under BEST assumptions, doesn’t reduce emissions”.
Sorry, i was referring to the cap-and-trade in the Waxman-Markey bill.
Sure, if you have cap-and-trade without any offsets, it would be better, but say you are PG&E. You can’t predict next years power demand since it depends on climate and economy. So what do you do? Overbuy the permits? Or under buy and risk having to buy later on the open market? And what happens if the economy goes wild and demand goes up. You’re screwed.
And tell me what incentive I have to cut my emissions once i have my permits. So i can sell my permits? how do I know there will be a market.
So tell me how it works in those cases, please.
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This isn’t true
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The permits are assets – they have value. Practicing conservation and limiting your emissions allows you to sell these assets.
There will be futures markets in emissions permits so, at a price, you can offset effects of uncertainty. Otherwise you will need to buy or sell in the spot market. In some ETSs you can borrow or lend emissions permits to help deal with uncertainty.
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skirsch I think offsets should be limited to just 10% of the required CO2 cuts since many of these offsets are borderline fraud. Specifically carbon sinks are most likely temporary and ‘clean development’ offsets are an accounting fiction based on the idea of unused free entitlements.
If the CO2 spot price went through the roof that could be a sign the emitters are doing well and can afford it. More likely as with spot electricity markets there would be price ceilings and floors, called ‘gateways’ in Australia’s aborted ETS. If permits got all used up by year’s end and new ones couldn’t be bought cheaply the emitter would have to supply customers with zero carbon electricity from somewhere else. If not maybe some customers could sue. In that case they obviously haven’t planned ahead. There are other ideas floating around like ‘carbon banks’ but I don’t think we need to worry until carbon reductions start getting serious, say 30% less than current levels.
In Australia some major emitters like brown coal generators say they will exit the industry for a cash payout. Give them nothing I say because there are big bucks to be made selling low carbon energy electricity. They have the transmission lines and the cooling systems so they are in the box seat to switch to nuclear.
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I’m sorry, the blog software somehow submitted my partial comment. :(
This isn’t true; there is exactly as much dividend as revenue, so there is no net dividend. The utility of the carbon tax hinges on the assumption that climate change is real and damaging, so that the tax rate is matched to the external cost of CO2 emissions. Without climate change (your hypothetical), a carbon tax would not be countering any external cost, and so it would be an artificial distortion of prices, which would be predicted to cause deadweight losses. It would be damaging to the economy, as businesses expend effort to adjust to a cost that doesn’t exist.
There is net benefit (in the model of Pigou taxes), but naturally it depends on the existence of the external cost! (social cost), which is not borne by the CO2 emitters. Obviously you can’t tax-and-dividend arbitrary things and expect economic benefit.
This conclusion isn’t justified by the evidence: you just showed that a politician won (by a narrow margin), and that that politician supported a carbon tax. This is meaningless if you can’t disentangle one single issue from the rest.
Now here’s a direct poll of a carbon tax with dividend – in a relatively liberal public at that (France):
[Reuters] Most French oppose idea of carbon tax: poll
And this is a fully-rebated carbon tax:
[Reuters] French carbon tax to start at 14 euros per tonne
If you read through the journalists’ analyses of that poll, the common thread is that the carbon tax would be heavily regressive – disproportionately impacting the poor, and especially certain demographics (e.g. farmers). In fact socialist parties joined in to oppose this tax, which is pretty telling considering their usual environmentalist positions:
[NYT] France Mulls CO2 Taxes on Citizens
You claim the opposite, that tax-and-dividend is not regressive (and even progressive):
But your reasoning is faulty. In actually economics pretty much agree that a carbon tax is inherently regressive – which is why they are jumping through hoops to modify it, such as by pairing it with progressive rebates (high percentage rebates to lower income), to make the combined policy break even as flat. Here’s Gilbert Metcalf’s proposal:
[Gilbert Metcalf] A Green Employment Tax Swap: Using a Carbon Tax to Finance Payroll Tax Relief
Why is a pure tax-and-dividend regressive? Precisely for the reason you dismiss: at lower income levels, a larger percentage of income goes to necessities, many of which are energy-related – fuel, heating. I can dig up some news stories from not too long ago, showing the extreme burden of fuel prices on the poor (which any CO2 tax would exacerbate).
You do include a version of progressive rebating in your hypothetical example, however you do a misservice to claim this represents the idea of tax-and-dividend: it does not. It is a secondary tax policy added on top of a carbon tax precisely because the carbon tax is in itself regressive. And this is bad because many advocates of the carbon tax propose the straight Pigou tax, which is a flat rebate of income tax and deeply regressive. Your progressive description does not describe carbon taxes policies in general, or perhaps even a majority.
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Rather than worry about Cap and Trade vs Tax, is there a strategy to derail the ETS (Australia) using pro-warming science, as opposed to the seemingly skeptical opposition? Barry you;ve managed a lot of coverage re: nuclear, but surely your more immediate goal is doing everything you can to prevent the ALP passing the ETS, at least in its current incarnation, pre-Copenhagen short of becoming a climate skeptic yourself?
Labor is positioning itself as the champion of climate, wedging the opposition as confused and mostly skeptical… but to the public it appears that the ALP are acting as demanded by the scientists, wheras it seems to me that the scientists are really saying that the proposed ETS is a mess, with too many loopholes, and does not achieve the scientific goals.
If Turnbull had control of his party he could suggest that they pounce on the growing unrest about the convoluted and innefective ETS, and have SCIENCE on his side… and use that as a tool to wait until after Copenhagen on the grounds that there is global uncertainty about Cap n Trade or Tax, and it is useless us making a premature and incorrect choice (like betamax vs VHS).
Unfortunately that would rely on his party believing the science. But I think with a legitimate strategy to outmanouvre the government many of his party would back him in just to get past Copenhagen.
Lastly, the opposition would then be wise to insist as part of its amendments that Australia open the doors to a future of nuclear energy.
They move from being a party that is ridiculed for skepticism to being a party with an alternate vision for carbon control, not to mention being the one that is championed by Hansen et al… combined with making a major contribution to actually solving the problem by advocating nuclear energy be given a chance.
The sweetner to the skeptics in the party is that firstly the Libs would hold a very strong hand in negotiations, and then with nuclear power Australia will face much lower carbon costs, which really is the outcome these skeptics want.. ie not totally messing up the economy (their opinion not mine).
If the Libs don’t pick it up, then who is your champion for the tax and dividend?
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Not quite, because the price becomes volatile, unlike a tax which fixes the price to a constant. You would have to add in manipulation to counter price fluctuations. See:
http://www.washingtonpost.com/wp-dyn/content/article/2008/07/08/AR2008070802465.html
Mankiw’s summary:
http://gregmankiw.blogspot.com/2008/07/orszag-on-cap-and-trade.html
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I notice no has brought up the big floundering whale in the room: that any sort of carbon pricing is not a simple domestic policy, but requires an extreme amount of cooperation between nations. Otherwise international trade completely undermines the whole intent, as well as punishing the economy of whoever has higher carbon taxes. (Is this the prisoner’s dillema game? I think it is.) And the closely related issues, that
* no one is actually cooperating (if anything China is drifting towards a trade war, with their aggressive subsidies and tariffs);
* the developing countries are explicitly against anything like what’s being proposed here, on economic grounds (again, because carbon pricing is regressive and punishes industrial nations);
* the 1st-world population, politically, is against the large scale migration of wealth that would result. Particularly the right wingers.
In my guess, carbon pricing will forever be dead in the water for these reasons.
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whoops in the first para I forgot the last few words…
Barry surely your immediate goal is doing everything you can to prevent the ALP passing the ETS, at least in its current incarnation, pre-Copenhagen short of becoming a climate skeptic yourself?
[Ed: Fixed]
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I would support an immediate start flat CO2 tax as low as $5 a tonne with no free permits and no offsets. The higher coverage will partially offset the lower rate. It means telling brown coal generators and aluminium smelters to shut up or shut down. All the revenue (not all that much less) goes on green tech with a measurable quick return.
The usual culprits will say the sky is falling and it’s the thin end of the wedge. Correct on both counts. Make them look like spoilers. If electricity goes up nearly 1c per kwh we’ll just have to get it from China, or something. As the song says ‘let’s get this party started’.
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To me cap and trade seems much harder to game and it also divides business since it creates property rights.
We have a currency which is a kind of cap and trade system. Everyone has an interst in the size of the money supply and its integrity.
Same with c & t. A tax can be the victim of lobby groups in ways that a c & t can’t
A bad c & t of course is worse than a bad tax. But a good c & t is much better than a good tax.
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A carbon tax is regressive. Not really a big deal if the revenue raised replaces other regressive taxes. Payroll tax is a regressive job destroying tax. I’d happily see it replaced with a carbon tax. Increasing the tax free threshold for income tax is another way to cut taxes in a progressive way.
Fee and dividend seems to be little more than a rebranding exercise designed to remove the word “tax” from the equation. It sounds like spin which many in the electorate tend to equate with fibbing. I’d suggest that it’s a dumb form of rebranding.
Tax reform is hard to sell but it can be done. The Howard government took the revenue neutral GST reform proposal to an election and won. If the Liberals decided to oppose the ETS and support a revenue neutral carbon tax applicable to electricity and transport only (they could fold in and replace the existing federal fuel tax) I suspect they would be in a safer poltical positon than they are now. Taxes are awful evil wicked things (serious they are) but they are a heck of a lot easier for the lay person to understand than cap and trade.
Australian libertarians have done this debate to death. A sample:-
http://blog.libertarian.org.au/2008/03/05/the-gerry-chronicles-carbon-tax-bad-economics/
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The belief that taxes can be used as a replacement for hard legislation is a idea that has been as great a failure in the latter half of the 20th century as tariffs were in the first. The problem, of course, is that it doesn’t matter what the intentions are, or how well the programs are designed, the nature of Western democracy with its reliance on lobbyists, guarantees the final result will not meet expectations.
In all cases where social engineering has been attempted with taxation, the result has been a transference of liability away from the targets, and down to the majority. In this case you can be sure that any carbon tax ( no matter how it is dressed up, with terms like ‘cap-and-trade’) will have the consumer stuck with surcharges for heating and transportation fuels, while the major polluting industries somehow will manage to continue as usual.
I am no socialist by any stretch of the imagination, but the history of these things is not encouraging.
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DV82XL,
Are you denying:-
i) the idea that demand elasticity exists
ii) the idea that product substitution occurs
iii) the notion that governments are capable of levying taxes
Are you aware that government bans frequently lead to licensed exceptions. For instance Syndey gets one casino owned by Australias richest man whilst all others are banned.
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A carbon tax is preferable to cap-and-trade because major polluters will find ways to get around a cap-and-trade system whereas big business has never found a way to evade ta….. um, hang on… errr…
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Gaz – tax avoidance isn’t as big a problem as you infer.
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Thanks for the post Barry & Steve.
I strongly agree. A fee and dividend approach, as advocated by Hansen and others for some time now, applies a price incentive right where it’s needed most – at the consumer level. Whether an individual is looking for a new home or apartment, a new car, or even a decent meal; those items that cost more carbon to produce, operate or maintain will tend to be passed over for others that do not. This approach is the best idea I’ve seen for generating the large scale lifestyle changes that will form the foundation of the significant emissions cuts required in the very near future.
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Nuclea Oz, can you explain how a cap and trade does not apply a price at the consumer level? The end result is that things that produce emissions will needs permits = input cost = reflected in the costs of products/services = behaviour change by consumers making economic choices.
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A good illustration of all that is wrong with blogging.
WTF is fee and dividend?
The post NEEDS a paragraph at the top explaining in simple language. Besides which, Eli prefers his simple plan to save the world, which basically is a fee and dividend policy but avoids the free rider problem
Nations wishing to make major progress on decreasing greenhouse gas emissions should introduce emission taxes on all products. These taxes should be levied on imports as well as domestic goods at the point of sale, and should displace other taxes, such as VAT, sales taxes, and payroll (e.g. social security, health care) in such a way that tax revenues are constant, and distributed equitably.
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Matt B.
How many permits will I need to obtain for my weekly commute to work? From whom do I buy them, and how much will they cost and a Cap and Trade scheme?
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[…] recent post on BraveNewClimate examine why the Cap and Trade approach taken by most governments is ineffective, […]
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N.A. you don’t need to buy any. the fuel company will buy them on assumption their fuel will be burned in engines (reasonable). You’ll just get the extra bit included in your petrol costs. How much will they cost? that will be determined in the same way that the cost of the fuel itself is determined… by the market.
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TerjeP: “Gaz – tax avoidance isn’t as big a problem as you infer.”
But it is a big problem and I can’t see any reason to suppose avoidance will be a bigger problem with cap and trade than with a tax.
Is anyone suggesting the cattl and sheep lobby in Australia would have been any more receptive to a tax than to an ETS? Or had nothing to say about just how much tax would apply to beef?
Matt Buckels – you are right – a cap-and trade will transmit price signals effectively, no matter at what stage the cost is added.
Nuclear Australia – you’re the first person I’ve come across who doesn’t seem to think a cap and trade system would affect prices faced by consumers. You need to think a bit more carefully about this.
You won’t have to buy any permits. Their cost will be reflected in the price of stuff you buy.
So, if the price of petrol goes up 200% and the price of a train ticket goes up 5%, you can then make your commuting decision based on that.
The Dept of Climate change estimates only about 1000 businesses will be *directly* affected by the CPRS.
All anyone else will have to do is work out whether they are prepared to pay the extra costs of the permits which those businesses will add to the price of goods and services.
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Gaz – I think a revenue neutral carbon tax would be much simpler to sell to producers because it would not entail the same amount of price uncertainty. Producers could quickly calculate what the tax will cost them and what the offset tax reductions elsewhere will save them. Investers in alternate energy would know what price advantage they would be getting before commiting any capital to a project. Producers may still dislike the reform but at least their fears would be quantified ones.
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TerjeP – essentially the Australian CPRS is a tax in cap-and-trade-clothing as I believe there is a ceiling on the carbon price early on.
Also the argument is that it is difficult to set the tax at the right level, too high you inflict unnecessary pain, too low and you don’t meet your emissions targets. And Gaz is right, if we were discussing a tax you’d be getting the same opposition from emitters who want exemptions, and you’d be getting arguments within the AGW camp saying should be a cap and trade. You can’t win:)
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Yes TerjeP, price uncertainty is a potential drawback for the cap/trade method, as it increases the option value of doing nothing. I think McKibbin and WiIlcoxen are on about this.
On the other hand, using some smoothing mechanism with a cap and trade or something that puts a floor under emissions prices, may be more effective than just bunging on a tax.
With a tax, you still get the volatility that is already there in energy markets, ie look how the price of oil goes from year to year.
Also,importantly, as Matt Buckels says, remember that with a tax you have to pick the right rate to get emissions down fast enough but not so fast the economy suffers too much.
That’s a problem because if you have to adjust the tax rate from time to time, or if emitters expect they will be successful in arguing it lower, then that increases the option value of doing nothing and reduces the certainty facing invstors in alternatives just the same.
I think either would work, but it’s a mistake to think a tax is some sort of magic bullet.
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The other factor about cap and trade is that providing you aren’t handing out permits like confetti and have a serious penalty on those who haven’t bought enough, the chance that business will err on the side of buying too many is high. That pushes the price up immediately and spurs more development in CO2 avoidance at the early stage of the scheme.
If the holders of permits see that the price is continuing to rise they will continue to buy them and the price will stay high.
With taxes, you pay for what you use, so you never over invest to avoid potential losses associated with potential exposure to future permit price rise losses. Of course, if you do over invest, you can sell your permits and defray losses, so the gamble is less of a gamble.
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Jade every commodity is traded on those terms though… futures, derivatives, spot market, long term contracts whatever… businesses are remarkably good at coping with these price fluctuations.
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Fee and dividend may be the best way, but new taxes have been hard to put in, the British Columbia experience notwithstanding.
Many who are very familiar with BC politics would disagree with your interpretation, i.e. that it is suicide to oppose introduction of a carbon tax. What seemed suicidal at the time was trying to put one in. The opposition party, which had not opposed the tax as it worked its way through the legislative process, was trailing the government in the polls until they seized on the widespread opposition to the carbon tax, especially in rural areas where voters like to drive big trucks which they claim are essential to their lifestyle. The Liberals, the party that brought in the tax, almost forced their leader to withdraw it. The leader, Gordon Campbell, told his party it was either accept the tax and go out and campaign for it, or he would not lead them. People such as myself who lived in BC at the time and have agitated there for climate action for more than twenty years saw the opposition party making political hay out of their opposition to the tax, and we were relieved to see them go down to defeat in the election, which seems most due to their reputation for not being good economic managers.
Furthermore, in federal politics in Canada in the last election, the opposition party lost the election with a carbon tax as the centerpiece of its campaign. The leader, Stephane Dion, talked about the “Green Shift” where he was going to tax carbon and remove taxes from other things, and failed so badly that he was replaced right after the election in an emergency procedure the party cooked up so they wouldn’t have to wait for a convention. The new leader avoided the topic of carbon taxes for a long time, saying if Canadians rejected the idea as the stupidest thing they ever heard, he couldn’t disagree.
In the EU, after many years trying to get carbon taxes in, they finally went for cap and trade after they were convinced that by doing so they could bring the US into the Kyoto Protocol.
Where are all the carbon taxes if what you say is true, i.e. that it is “political suicide” to oppose them?
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Carbon tax revenues on expensive fuels are gigantic. If angels started pushing all our cars, trucks, and aircraft, so that refuelling became unnecessary, millions of public servants would soon be dismissed. Or tens of millions would get salary reductions; probably the latter.
Carbon tax under that name, on all fossil fuel carbon rather than just the most lucrative, seems to be hard to impose. As I’ve said before, hoping everyone would start saying it, if you intend to divide out the proceeds of a new carbon tax, why not start by dividing out existing carbon revenues. That would be a tax cut. “Dividend first”, I said.
Why isn’t everyone saying it?
(How fire can be domesticated)
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Hello?
OK, badly posed question. Everyone can’t answer. Revised question: why aren’t you saying it.
If the present, ultrahuge petrodollar flow from the middle class and the working poor to civil servants and government contractors is a cashflow whose equal dividing-out cannot even be discussed, what weight can there be in proposal to make it even more hypergigantic, and then return it to the citizens in equal dividends?
It will be necessary to show, first of all, that the mention of the dividend represents a genuine intention. The only way to show that intention is by acting accordingly.
(How fire can be domesticated)
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A well designed carbon tax (with dividend, start low and increase tax over the years, legally binding) could work about as well as a well designed cap and trade system (100% auctioning, no loopholes, no offsets, with dividend, legally binding).
The reason that carbon trading is more popular than carbon taxing is precisely because trading is less transparent and thus allows loopholes and offsets for industry. So the industrial and commercial lobby will be behind it.
By contrast, the great transparency of a carbon tax leaves little to manipulate and no room for loopholes. So industry doesn’t like it at all.
If you give dividend to the taxpayer, industry won’t get it. If you give it to industries, the taxpayer will be unhappy.
This is a tradeoff that is unavoidable and has severe political consequences.
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