May 15, 2008

Carbon Tax v. Cap And Trade

Yesterday's Wall Street Journal editorial looked at John McCain's climate change policy. In it there is an evaluation of "cap and trade" (such as the proposed NZ emissions trading scheme) and a carbon tax. The WSJ seems to agree with The Hive that a carbon tax is the better policy instrument. Aside from the economic logic of the carbon tax (offset against business and personal tax) is that it would end the plans of all the vested interests to make a buck out of emissions trading. Here are selected quotes

In fact, if "the market" is your favored mechanism, Mr. McCain's endorsement of a "cap and trade" system is the worst choice for reducing greenhouse-gas emissions. The Bush Administration has pursued one option, which combines voluntary measures with subsidies for "clean" alternatives. Since 2001 under this approach, U.S. net carbon emissions have fallen by 3% – that is, by more than all but four countries in cap-and-trade-bound Europe.

At the other end of the market spectrum is a straight carbon tax, which would at least distribute costs more efficiently. It would also force politicians to be honest about – and take responsibility for – the true price of their global-warming posturing.

The problem is that once government creates an artificial scarcity of carbon, how the credits are allocated creates a huge new venue for political rent-seeking and more subsidies for favored industries. Some businesses will benefit more than others, in proportion to their lobbying influence and how well they're able to game the Beltway. Congress itself will probably take the largest revenue grab, offering itself a few more bites out of the economy and soaking politically unpopular businesses.