Monday, September 17, 2012

Why the difference between carbon taxes and cap-and-trade isn’t as important as you think

An interesting article on carbon policies which, I think, gets the conclusions wrong.

Why the difference between carbon taxes and cap-and-trade isn’t as important as you think - Business, Econowatch -
In the case of the carbon tax, the money goes to the government. But if output is capped at Q1, that difference is pure profit: a permit to produce one unit of output allows its owner to collect a rent equal to to the difference between the selling price and the cost of production. If permits are traded, their price will be bid up so that their price will be equal to T. So where that money goes depends on how the permits are allocated in the first place. If the permits are simply given to existing emitters, then those profits are pocketed by the firms. If the permits are auctioned off, the price will be bid up to T, and the government gets the money.
So if permits are auctioned off by the government, then cap-and-trade and a carbon tax are equivalent: same quantities, same prices, and the government gets revenues equal to the area in the green rectangle in the graphs.
Read the article at

There is an elasticity to supply too, and the statement that carbon taxes would obviously drive up prices is suspect - particularly as the price elasticity of supply, for energy, has been greater than the price elasticity of demand.
The cost of regulation is very much dependent on the regulation. As a comment on the McLean site notes, CAFE standards are cost controlled through application in multiple jurisdictions - and the improvements in emissions from transportation has been quite impressive recently.  There are also relatively few coal plant ... building codes exist anyway, etc.
The main problem of both cap-and-trade, and/or carbon taxes are the political problem coming from the economic reality that both, if applied only locally, are intended to present a universal benefit at a local cost.
That is a problem.

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