engineering carbon regulation: the goals are inefficient, opaque, and ineffective
http://capitalgainsandgames.com/blog/pet…
…Political leaders don’t want
1. an explicit tax with their name on it;
2. an efficient tax that hurts their supporters; and
3. an effective tax may not encourage the alternatives they support.They prefer a hidden tax, which is why they are considering a cap-and-trade system of carbon allowances instead of a direct carbon tax.
They prefer a less efficient tax, which reduces the impact on the worst greenhouse gas emitters and spreads it around on others.
They prefer a less effective tax, which allows them to pick which alternatives to support and to pick which impacted Americans to compensate…
Fascinating.
Go read the whole thing.
June 3rd, 2008 at 10:57 am
I was hoping for a quantitative explanation of why, in the face of Coase’s theorem, cap-and-trade with open auction of carbon credits is expected to be less efficient than a carbon tax. I don’t see it, but maybe there’s a good argument I’ve missed that is being tacitly assumed by you and the author. Please elaborate?
June 3rd, 2008 at 12:17 pm
An explanation for why David Friedman doesn’t like cap-n-trade can be found at http://daviddfriedman.blogspot.com/2007/03/global-warming-carbon-taxes-and-public.html , although he doesn’t go into the Coase theorem.
/* If I were dictator of the world, the answer would be fairly obvious. Impose a tax on activities that create greenhouse gases designed to reflect the marginal cost they create. That’s the standard economic solution, due to Pigou, for problems of negative externalities. Since the tax brings in additional revenue, combine it with a corresponding reduction in whatever taxes currently have the largest adverse effects.
*/
Looking at the last sentence, I find it interesting that Friedman is willing to put up with a tax system so long as the overall tax burden is kept constant. If you have to apply the brake on some part of the economy it makes sense to ease up somewhere else.
But my understanding about the main concern is that every cap-n-trade system that has been implemented or proposed has similar problems:
(1) The target levels are plucked out of the air (“we’ll use 1998 levels, not because 1998 levels are ‘good’ for the world, not because 1998 levels would lead to some cooling, not because 1998 levels are necessarily reachable a decade later, but because we like that magic number; and we’ll exempt most countries so the overall level can easily rise above 1998 — especially when US and European countries put their factories in an exempt country like China”).
(2) The system leaves itself open to political gaming/rent seeking (exempt countries, or exempt industries, or different prices for consumers versus industrial applications [which, of course, buy the credits with money they made by selling products and services to consumers], decision not to tax Google directly even if their massive server farms require lots of CO2-unfriendly energy, etc.). Even with Coase and the ability to trade these credits to the “relative losers” in the system, those with political connections make money off of a system that wouldn’t exist if it weren’t for their political friends.
(3) They make the assumption that taking money out of the economy today to deal with global warming makes more sense than letting the economy grow to a larger size and then take more money out of it in the future. As an analogy, I have a 401(k). If we ignore taxes and penalties, I could in theory have the option of taking out half of it today (letting the other half grow until retirement) or letting it grow and taking half of the larger amount several years down the road (again, letting the rest grow until retirement). Without good ideas about what “several more years” means, how much I have, how quickly it grows, how much I need for retirement, etc. I can’t say which would be better. The cap-n-trade arrangements I’m familiar with don’t even consider that doing something tomorrow may be a better course of action than doing something today. It may be, it may not. We have the information to determine what it would cost to do something today and we can make some decent estimates on what it would cost to do something later with tomorrow’s technology and tomorrow’s estimated economy. Unfortunately I get the feeling that nobody’s done these calculations.
June 3rd, 2008 at 12:19 pm
Oops:
/* especially when US and European countries put their factories in an exempt country like China
*/
-> especially when US and European companies put their factories in an exempt country like China.