Cap-and-trade versus everything else

How should countries reduce greenhouse gas emissions? The Economist supports the view that carbon taxes are a fairer and more transparent approach to limiting greenhouse gas emissions than cap-and-trade systems.

It is not alone. The criticisms of cap-and-trade and its associated give aways can go on forever: Give away too many allowances to industry and you’re providing corporate welfare. Ensure those corporations pass on their free allowances to customers, and you’re removing incentives for consumers to use less. Don’t give away any allowances, and you’ll never hear the end of how it is killing industry, or adding a huge cost to families.

It’s a double bind: without levying a cost on carbon that must be borne by someone, at some point, it is difficult to see how greenhouse gas emissions can be controlled. Of course the market-based approach of a cap-and-trade scheme is partly based on the assumption that putting a price on carbon will create an incentive to create more efficiencies, or find alternatives: so emitters will find ways to reduce the cost burdens.

The president of the International Emissions Trading Association makes another argument, together with consultant Ethan Ravage, in a letter to The Economist: that a carbon tax is in fact more susceptible to special favours than a cap-and-trade scheme:

What you always conveniently leave out when promoting carbon taxes is that tax systems, more so than market systems, are prone to tweaks around the edges, giving free rides and special exemptions to favoured industries. The simplicity of taxes is their downfall; both the industries affected and their customers who ultimately foot the bill will cry foul.

As if to illustrate their point, the second letter is from Duke Energy’s Keith Trent, defending the giving away of most allowances to energy companies such as themselves. That companies like Duke actually support the scheme shows the scheme and the giveaways have won over some constituencies that could be expected to naturally oppose it.

Of course it shows Duke is pragmatic too; rather than speaking out against cap-and-trade altogether, chief executive Jim Rogers was vocal in his opposition to auctioning all the initial allowances. As with most debates over how to curtail carbon emissions, it comes down to pragmatism (or perhaps, compromise) versus idealism- and contrasting Duke’s approach with, say, Exxon’s flat out opposition to a cap-and-trade scheme shows views differ just as much within the energy industry.

An argument made by Harvard economist Robert Stavins is that cap-and-trade systems are better than a carbon tax precisely because they offer so many ways to placate interest groups and smooth the way politically.

Mostly though, Derwent and Ravage’s letter makes the point made by many: a carbon tax will simply never get enough political support, any more than would a hike in the US federal gasoline tax rate.

Related links:

Another view on cap-and-trade giveaways (FT Energy Source)

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