On Mar 15, 2009, at 11:53 AM, SA wrote:
> I've got a few questions about carbon policy, about which I'm pretty
> ignorant.
>
> 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.
I condensed too much. Most market-friendly *enviros* prefer cap and trade - they like the cap part, because it's a direct lid on carbon emissions, rather than an indirect one through carbon taxes, and they like the trade part, because they're market-friendly. Most people coming at it from economics (like my intermediate macro prof, William Nordhaus, who has a couple of good papers on the topic) prefer the tax, because it so clearly internalizes the costs, and rises in a steady and predictable way.
> 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?
You've got a point. But it seems the last thing we need right now is to create a whole new derivatives market. I saw the creator of the carbon futures market in Chicago <http://www.chicagoclimatex.com/> at the Council on Foreign Relations a while back, and he was enthusing about the possibilities of a new $10 trillion market.
Reading ahead, I see that Hans Ehrbar brought up the offsets issue. Offsets don't have to be part of c 'n' t, but they usually are, and they're largely bogus.
> 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?
We're seeing EU carbon prices crash lately because of the weak economy. (About a year ago they were around EUR30 a tonne - now they're around 10.)
History: <http://www.ecx.eu/media/xls/ecx%20eua%20futures%20contract%20-%2012%20march%202009.xls
>
So the problem with volatility in this context is that prices can go down as well as up, and that's not a good thing over the longer term.
Also, the proceeds of a carbon tax can be used for virtuous things, like R&D subsidies and rebates for the poor. You could do that with the auction proceeds for carbon permits, but that's mostly a one-off thing. The tax keeps giving.
Doug