Carbon Tax or Cap and Trade

[shawny boy]

Which is better and why?

[bobman0330]

Tax - administrative efficiency.

EDIT: plus it's more economically accurate. Say we cap CO2 emissions at 10 million tons/year. 10 million tons/year will be produced, even if the least-valuable CO2 use is less (or more) valuable than the marginal harm of that use. If it's a properly-set tax, only those CO2-producing activities that do more good than harm will be done.

[ConstantineX]

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Tax - administrative efficiency.

EDIT: plus it's more economically accurate. Say we cap CO2 emissions at 10 million tons/year. 10 million tons/year will be produced, even if the least-valuable CO2 use is less (or more) valuable than the marginal harm of that use. If it's a properly-set tax, only those CO2-producing activities that do more good than harm will be done.

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Attempting to right this thread again, Greg Mankiw, a prominent economics blogger posted the following economics equation:

Cap-and-trade = Carbon Tax + Corporate Welfare.

First of all when you auction off tradeable permits you have to realize that you're giving an implicit subsidy to large incumbent firms that can afford to buy those permits. It raises barriers to entry and thus stifles innovation in the energy sector, which isn't something we want since demand for energy is going to increase rapidly in the coming decades and we are already facing severe supply constraints.

Also realize the way quotas are going to be auctioned will be gamed politically, with favored companies lobbying for some "quota breaks". This will add the advantage enjoyed by incumbent firms, because these permits will undoubtedly increase in value as energy demand grows.

In Econ 101 you learn that you can design a percentage tax that has the same effect as a quota. So for example if you wanted to cap emissions at 10 billion tons (I have no idea even the proper range is here, don't feel like looking it up) there is some tax rate t you can implement that gives you the same quantity of carbon supplied at the same price. The difference between the two policies happens when demand increases - when a percentage tax is levied, government captures some of the producer surplus. When there is a quota, suppliers get to keep more of the producer surplus. Look these terms up in Wikipedia to get a clearer understanding (everyone should really understand simple AD-AS curves IMO). Suppliers LOVE quotas, and try their hardest to lobby for government rules that enforce them - unfortunately when they try to enforce quotas amongst themselves there is too great an incentive to cheat, where a competing firm has big incentives to grab some of that "lost" surplus it forgoed when it formed a cartel.

[ConstantineX]

Oh and there's Bobman's point too.

[shawny boy]

sorry, what is the quota? there is a cap on the total amount of emissions permitted. how is that a quota?

[adios]

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sorry, what is the quota? there is a cap on the total amount of emissions permitted. how is that a quota?

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Quota on the total amount of C02 emissions in the U.S. Also quota's on which each entity gets as far as CO2 emissions initally I believe.

[tomdemaine]

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Which is better and why?

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Wow. You must have to try pretty hard to get so many fallacies out of so few words.

[shawny boy]

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Which is better and why?

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Wow. You must have to try pretty hard to get so many fallacies out of so few words.

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WTF? What fallacies does my question contain?

[mosdef]

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Which is better and why?

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Wow. You must have to try pretty hard to get so many fallacies out of so few words.

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WTF? What fallacies does my question contain?

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You left out option 3 - do nothing. It suggests a the "fallacy" that something must be done and here are the two options.

[shawny boy]

I didn't ask what the ideal solution was, I asked which was the better option.