Taxing Carbon – Part 3

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Apologies if you’re getting bored with this, but here is Jeffrey Sachs weighing in on the cap-and-trade debate:

A straightforward carbon tax has vast advantages. (1) It can be levied upstream at a few dozen places — at the wellhead, the mine face, and the liquid natural gas depot — rather than at thousands or tens of thousands of businesses. (2) A carbon tax covers the entire economy, including automobiles, household use, and other units impossible to reach in cap-and-trade. (3) A carbon tax puts a clear price on carbon emissions for many years ahead, while a cap-and-trade system gives a highly fluctuating spot price. (4) A carbon tax raises a clear amount of revenue, which can be used for targeted purposes (R&D for sustainable energy) or rebated to the public in one way or another, while the revenues from a cap-and-trade system are likely to be bargained away well before the first trade ever takes place.

(Numbering mine.) This is amazing.  Sachs is a smart guy.  He’s a famous economist.  But as near as I can tell, there’s only one true statement in that entire paragraph.  Let’s take a look.

First: Cap-and-trade can be implemented either upstream (i.e., you require permits for the inputs, like coal and oil) or downstream (i.e., you require permits for the outputs, the carbon that’s actually emitted into the atmosphere).  It’s just a matter of how you write the legislation.  The Waxman-Markey bill combines both methods, with electric plants and industrial sources covered downstream while refiners and other producers of liquids and gases are covered upstream.  On this score, there’s no inherent difference between a tax and cap-and-trade.

Second: Cap-and-trade can cover the entire economy just as well as a tax can.  Again, it’s just a matter of how you write the law.  Waxman-Markey would cover an estimated 85% of all greenhouse gas emissions.

Third: Yes, a carbon tax does place a clear price on emissions — though it’s worth keeping in mind that every serious tax proposal envisions changing the tax rate regularly in order to hit emission targets.  So this sentence is sort of true.  (On the other hand, it’s worth noting that under a cap-and-trade system, the price of permits naturally decreases whenever demand for energy decreases, as it does in a recession.  So cap-and-trade acts as an automatic stabilizer, which is a handy feature.)

Fourth: Revenue is revenue.  There’s simply no reason to think that revenue from cap-and-trade is any more likely to be bargained away than revenue from a tax.

On balance I think cap-and-trade is superior to a carbon tax on several grounds, but there are nonetheless perfectly good arguments in favor of a tax.  So why make arguments like these instead?  It’s embarrassing.

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