Carbon taxes and cap-and-trade redux
I have equivocated on carbon taxes vs cap-and-trade on this very blog. But more recently I’ve been leaning towards carbon tax – with the caveats that distribution be addressed and that carbon taxes be part of a suite of other policy measures. That is, carbon taxes are only part of the solution, so I am somewhere between the skeptics who think carbon taxes will not work at all and the ideologues who think that “getting the prices right” will lead us to some sweet equilibrium spot.
There is an empirical relationship between prices and consumption. I have trouble when people say there is NO effect of carbon taxes. It’s just that the elasticities are rather small (and probably not stable over large changes in prices). So some fairly large price increases are needed to effect behavioural change.
There is another school of thought on this, advanced by Mark Jaccard and others, that lower levels of a carbon tax will have a cumulative effect over the course of decades by changing the technology mix of society as capital stock gets upgraded and replaced. This is an important argument, though one major technological solution in the modeling â€“ carbon capture and sequestration â€“ is having a tough time getting past the small demonstration stage (see this NY Times article). If CCS cannot be the big solution many are hoping for, we are back to major changes in how we live, work and play.
With cap-and-trade implementation is a lot messier because of cross-border issues around state/province-level allocations and how allocations are determined within each jurisdiction; how to deal with offsets; sectoral coverage. We’ll see how the Western Climate Initiative goes, but check out their website and draft recommendations for an indication of what I am talking about. That said, if a workable system can be implemented and it moves us closer to our emissions reduction targets, then great, but what works in theory may not in the “frictions” of the real world.
A carbon tax could actually play an important role in a mixed system by putting a floor on the trading price. This would prevent a problem in cap-and-trade systems, which is price volatility and a potential for prices to drop too low. An extended post at Sightline teases out some of these nuances, and how they might play out for a mixed system, in particular averting the potential for an Enron-like gaming of the system. It is kind of abstract, as much depends on the details of how the system gets implemented.