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

12 comments:

David C. said...

I don't qualify as someone who favors cap-and-trade necessarily, but I think I see one reason why an ideological split emerges. Although both a straight tax and a cap-and-trade tax invovle significant government regulation and oversight, the cap-and-trade has a real flavor of the free market at work. To conservatives, then, it may seem more desirable.

In some sense this is, as the post suggests, nonsense, as there is heavy government involvement in both taxes. On the other hand, there is no purely free market anymore---antitrust laws, collective bargaining, minimum wage, etc. ensure that. So if cap-and-trade can be construed as just one more background law in an otherwise free market, as opposed to an inflexible tax that leaves businesses feeling like they have no control, then perhaps the conservatives can swallow the cap-and-trade a bit more easily than the direct tax.

I have no idea if this is right, but if we start from the premise that the preference is largely irrational, then this reason seems not implausible.

Dan said...

If you look at the Supporters pages on our Carbon Tax Center web site, you'll note that there is very significant conservative support for a carbon tax. The American Enterprise Institute has been a powerful carbon tax advocate. Perhaps the most widely published advocate for higher fuel taxes in the economics profession is Gregory Mankiw, Harvard professor and chair of the President's Council of Economic Advisers, 2003-2005.

Dan Rosenblum
Co-Director
Carbon Tax Center

Jamison Colburn said...

I've always had the sense that conservatives favor cap and trade over a carbon tax--when it isn't just about political feasibility--because cap and trade retains at least some moral oppobrium attached to the act in question where a tax may not. Of course, communitarians like Sandel (who I think did an op-ed in the Times years ago to this effect) also usually give some weight to political feasibility . . . by other names.

BDG said...

I think the political economy issues (e.g., cap and trade is opaque, and so more manipulable by industry) cut both ways.

The main thing is that you'll likely have to keep changing the tax rate. As I understand the issue, using a tax to reduce emissions demands a lot of information. The government has to set the tax price. Unless we know very precisely the internal cost structure of big polluters, we'll probably start with a number that doesn't result in the emissions-reduction target we wanted. If we'e too high, great: tax cut. If we're too low, you've gotta push through a tax increase that will almost certainly be wildly unpopular. And keep in mind this will probably have to be repeated over time.

So, yes, hiding the tax inside a cap-and-trade regime does open the possibility of industry lobbying. But it also hides some necessary tax increases.

Greg said...

For now, I come down firmly in favor of the Carbon Tax approach for many of the reasons you mention and in the links you cite. It will simply work better and sooner, in my opinion.

The biggest obstacle to moving this forward seems to be that we call it a "Tax" and we know that that assures almost certain political death. What we need to do is to reframe the debate (and maybe tweak the proposals a bit).

Just as TerraPass, Carbonfund and others sell offsets for individuals and their activities, why can't we create a national "offset" policy instead of a tax. If every "tax" dollar collected is used to "offset" other taxes in a zero-sum approach (or at least close to it), then it would create no new net taxes.

Then we can reframe it as a Carbon Tax Rebate because it's money that's given back. I mean, come on, if we can call the recent shenanigans an "Economic Stimulus" rather than the increased debt it really is, then we can turn this around too.

We could even try to simply call it a Carbon Offset, although this perverts the usual notion of offsetting carbon into one of offsetting taxes.

Framed in some way like this, as a rebate or an offset instead of a tax, the public could 'buy into it' much more readily.

Daniel said...

While I agree that Americans are looking at new ways to drive and become more energy efficient, we see that gasoline price hikes have not particularly dissuaded consumers in the US (http://tonto.eia.doe.gov/dnav/pet/pet_cons_psup_dc_nus_mbblpd_a.htm). There has been a slight decrease after a historic high in 2005 (though 2007 consumption is still well about 2003), but not of a drastic nature by Mr. Dorf alludes to. The idea would be that the US consumer demand for oil is not very elastic. There are not many comparable goods of equal use and price (why ethanol has come into question as an option is that the prices are now coming close to competitive with oil). Also, the US consumer demand is not willing to give up (or maybe not capable) energy intensive attitudes.
Now, the cap-and-trade wants to play with demand and use open markets to discover the social costs of emissions. This social cost would then be shared by the producer (in his cost of production) and the consumer (in the price of the product produced by the emitter). The demand curve? How much does the consumer matter clean air over the product. A sorting of this on an emissions market platform is the "market solution" to the skies we saw in Beijing.
This may be an important mechanism in the future, I am not particularly positive about cap-and-trade. This is a heavily politicized process that has tried to pin left greenies and right capitalist against each other while this is not the case. Both US presidential candidates have come out for cap-and-trade systems. Greg Mankiw, a noted economist who has worked for the current administration has come out for a Pigovian tax (and has even started a group for economists on that note: http://gregmankiw.blogspot.com/2006/10/pigou-club-manifesto.html)
There is a bit about the cap-and-trade system that seems bizarre: 1) If the system is not global how much use can there be? The US would not willingly increase production costs to the benefit of China not increasing their's. There is a comparative advantage issue; 2) if it does become global, who is the international and legitimate body to uphold and do oversight for this market?; 3) CEMS (continuous emissions monitoring systems) are not accurate . . . so how and how monitors?
While I don't know if a tax would be the answer, and as being someone who likes my money in my wallet as opposed to the government's . . . I would much rather see mu money in the form of taxes going to government than to the pockets of corporations that are parting up the emissions markets already (see Citigroup, Cargill, BP, Shell, etc.) http://www.chicagoclimatex.com/content.jsf?id=64

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