Doug wrote somewhere recently that "market-friendly" types prefer cap-and-trade, whereas a carbon tax would be a better option. The main reason given was the extreme volatility of carbon prices in the EU system. So here are my questions:
First, other than the simple fact that cap-and-trade entails the creation of a "market," why should it be more "market-friendly" (in the bad sense)? It actually targets the quantity of carbon emitted, which is the whole point, whereas a carbon tax targets only the price, which may or may not achieve the emissions target you're aiming for.
Second, according to this Bloomberg story I found (below), none other than the CEO of ExxonMobil seems to be for a carbon tax and against cap-and-trade. He uses the same argument: Carbon prices in the EU are too volatile (which he claims inhibits anti-pollution investment.)
Third - and this is just naive questioning - given the above, isn't it possible that some of the more lefty/pink environmental types who oppose cap-and-trade oppose it for the vague and somewhat stupid reason that it just has a neoliberal "flavor" to it - i.e., it's a market? That wouldn't seem like a very good reason, in itself, to oppose cap-and-trade. Is there something to that perception? (Again, this is a naive question, I'm not making an accusation.)
Fourth, isn't it possible that the ExxonMobil CEO is for a carbon tax because he reasons in the following way: If we impose a tax, it would have to be periodically raised in order to work. But in practice, raising taxes in the US political system is a semi-impossible, once-in-a-blue-moon event. And "raising taxes" sounds a lot scarier to US ears than "lowering pollution caps." So it's better for ExxonMobil to go the tax route: That way, if they play their cards right, the tax could just languish at a low level and never be raised.
Fifth, isn't the whole idea of a cap-and-trade system that it's supposed to be equivalent to a tax? The price of carbon credits is the tax "rate." The only difference is that the rate, rather than being set legislatively, is constantly adjusted by market forces to reach whatever level is necessary to attain the legislatively mandated emissions target. Given the obstacles that I mentioned to adjusting tax rates legislatively (especially in the US context), isn't there something to be said for a system that adjusts the rate automatically?
Sixth, to deal with the problem of volatile prices, what about this idea? Set up a cap-and-trade system, but don't let prices float freely. Instead, a sort of "carbon central bank" engages in something akin to the Fed's open market operations: It sets a price target and buys and sells credits on an open market to achieve it. This means that the aggregate supply of credits - and thus the effective emissions cap - can float around a bit, within a narrow range, in order to achieve some price stability. But the "carbon central bank" would be given a legislative mandate to keep emissions within a certain range at all times. The range can be adjusted (i.e., lowered) periodically. Has anyone proposed anything like this?
SA
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http://www.bloomberg.com/apps/news?pid=20601072&sid=ajRA9Y0OYNYo#
Carbon Trading Will Delay Greenhouse-Gas Reductions, Exxon Says
By Joe Carroll
March 5 (Bloomberg) -- A U.S. carbon-trading program would slow reductions in industrial greenhouse gases as volatile carbon prices discourage anti-pollution investments, said Exxon Mobil Corp. Chief Executive Officer Rex Tillerson.
Since December, Tillerson has been publicly telling lawmakers that adoption of a carbon-trading system akin to that used in the European Union would be ruinous to the U.S. economy. A carbon tax would work better because it would eliminate most of the volatility inherent in buying and selling emission credits, he said today.
“A cap-and-trade system is going to be opaque to consumers and, I would argue, even to investors,” Tillerson said today in a meeting with reporters in New York. “That’s been our experience in Europe, where prices have been very volatile. When prices are very volatile you tend to do things at the edges and avoid making significant changes right away.”
Tillerson, entering his fourth year as leader of the world’s largest gasoline producer, said he shares President Barack Obama’s goal of lowering greenhouse-gas emissions linked to climate change.
“The objective is to cause people to alter their behavior and change the choices they make,” Tillerson said. “The best way to do that is when people have clear information on what the costs are to them.”
Irving, Texas-based Exxon may face $2.8 billion a year in extra costs to comply with carbon limits at its oil-sands projects in northern Alberta within the next decade, more than any other oil-sands producer, Yulia Reuter, an analyst at Innovest Strategic Value Advisors, said yesterday in a note to clients.
To contact the reporter on this story: Joe Carroll in New York at jcarroll8 at bloomberg.net. Last Updated: March 5, 2009 13:10 EST