Saturday, July 19, 2008

Gore, Carbon, Taxes, Cap & Trade

Al Gore's bold call to take the entire electrical grid off of carbon sources within a decade will be, and already has been, dismissed as prohibitively expensive and wildly unlikely. No doubt it will be defended as a useful statement of principle---the sort of truly ambitious plan against which much more modest proposals can be measured. Another way to put that point: Gore's ambitious goals can be used to give some political cover for those who want to do something valuable but less ambitious.

Here I want to raise a question, more in the interest of sparking a debate than anything else. The question is whether there is anything to be said for a cap-and-trade program versus a simple carbon tax. A useful summary of the advantages of a carbon tax over cap-and-trade can be found here. The argument in the other direction can be found here. I think I'm persuaded that a straight tax is, all things considered, better policy than cap-and-trade. Certainly the dramatic effects in American driving habits that we've seen since gasoline prices topped $4/gallon illustrate the simple economic truth that energy consumption responds to price.

At the same time, however, I'd favor the adoption of a cap-and-trade program with serious caps if it were more politically palatable. One supposed advantage of a carbon tax over cap-and-trade is that the tax is simpler. But the very complexity of cap-and-trade might make it harder to portray as a "tax" and thus easier to get enacted.

The choice of cap-and-trade versus tax thus strikes me as having a policy dimension and a political dimension, but I don't see much of an ideological dimension. Someone who thinks that global warming is a creation of the liberal media or that it is real but not worth doing much about would likely oppose both cap-and-trade and tax. On the other side, someone who, like me, thinks that we need to do something serious to limit carbon emissions will favor doing whatever is the most effective thing that can actually get accomplished.

And yet, there appears to be an ideological dimension at play here too, with moderate conservatives on this issue (e.g., McCain) favoring cap-and-trade rather than tax. I get the political reasons why McCain would take this position: He doesn't want to come out for something called a "tax." But I sense that this is not simply politics or simply a shrewd assessment of where the electorate is. I get the feeling that there are conservatives who both understand the economics and think that cap-and-trade really is better, not just because it lacks the word "tax." That's the part I don't get. Wouldn't a conservative who wants to do something about global warming prefer a straightforward tax, which seems to require much less of a government asssessment of market conditions than does cap-and-trade? Or, at the least, wouldn't such a person end up where I am, i.e., wanting to do the most effective politically viable thing?

Explanations in the comments---especially by those who favor cap-and-trade over tax on grounds other than ability to sell it to the public---are invited.

Posted by Mike Dorf