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 – carbon capture and sequestration – 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.

3 comments

  • The fight at the federal level is currently a lot of political posturing over incomplete and vague policies. I suspect that the Liberals will be soon producing a more robust series of policies. I’m curious to see if it includes Cap and Trade, as some rumours have come my way saying so.

  • For all my negativity, I will say this, any action is at least action and change towards a far off future starts somewhere. It is complex problem and a multifaceted solution will be required.

    Today’s announcement by Ontario and Quebec for a joint cap and trade system, shows that politically much can be gained by moving forward. I like the province’s idea of putting the Tories do nothing policy on the back burner. As if John Baird was ever going to put some significant policy in place for the environment.

    Now if we could only get that cooperation on the economy and try the same strategy to get the manufacturing sector moving forward. The tories are sliding, and I hope it eventually starts turning to a landslide.

    Not sure why it has taken the liberals so long to figure this out. I think we had stated this a long time ago on this blog.

    pt

  • Right on the money, M.Lee. A carbon tax is tougher to screw up than a cap-and-trade. I prefer the former in times of minority government and the latter with a majority government dedicated to addressing climate change.
    Europe messed up their first cap-and-trade system by not auctioning off the permits, but got it reasonably right the second time around. Another advantage of the tax is it is simpler to understand.

    These types of holistic tax shiftsare the wave of the future for Canada’s economy (might already exist in parts of Europe). For health, you’d give favourable tax treatment to Medonyx’s gelFAST, this handwash reminder: http://www.care-mates.com/blog/?cat=344
    …and other MRSA fighting strategies, along with tax breaks for low-cost beds like nursing home construction contractors, “modular housing” contractors, medical provincial public database providers, at-home nurses and aides…with the idea of freeing up high-cost emergency room beds before the first boomers start to get really sick in three or so years (avg lifespan of men born in 1947 is 66 and health problems really increase in last year of life).
    If we keep Harper in power until 2012 there will never be any money to address climate change.

    Every generation since the last ice age has left a better world for their offspring. GWB and S.Harper’s will be the first in 499 generations to break the chain of progress.

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