My sympathies in economics lie with the so-called “new institutionalists.” I think institutionalists are going to see more clearly than neoclassicals the rather big difference between a carbon tax and a whole new market institution for trade in government-created and government-rationed permits.
But let’s back up a little, to the pre-applied political economy context. It is a fundamental finding of Vernon Smith-style experimental economics that, say, theoretically equivalent auction institutions in practice lead to different results. So you ought to be pretty unimpressed by the fact that there is a possible institution of tradeable carbon permits that is equivalent to some carbon tax on the blackboard. Even were a cap-and-trade permit market or a carbon tax implemented without a hitch according to the blackboard assumptions, there would be little reason to expect them to actually produce equivalent results, since the way actual people interface with an institutions depends on the way actual humans process the rules of the game. Mathematical equivalence doesn’t imply cognitive or motivational equivalence. Therefore it does not imply policy equivalence.
Moving back to the applied political economy context, the fact that cap and trade creates a new set of institutions in a way tax doesn’t is pretty important, I think. For one thing, there is a question of reversibility. I think Arnold gets it right when he writes:
In practice, cap-and-trade creates an irresistable opportunity for politicians to use carbon permits as political favors to be handed out to special interests. This in turn means that there will be special interests with a large stake in keeping cap-and-trade policies in place, regardless of what transpires in terms of global temperature.
What is the probability that the United Nations derivation of climate model consensus overstates the problem of man-made global warming? Unless that probability is zero, it seems to me that we should prefer a climate change policy that is reversible to one that it irreversible.
Because I think that the probability that the UN is misleading us is significantly greater than zero, I think that the issue of irreversibility is quite important. Therefore, I think that a carbon tax is far preferable to cap-and-trade. Ten years from now the global warming scare might be completely debunked, and yet we will still be unable to unwind cap-and-trade. As with farm subsidies and many other policies, the problem will be long gone but the solution will be with us in perpetuity.
I think the probability that global warming is a significant problem is low. I think the probability that carbon externality pricing policies will meaningfully reduce global warming is even lower. If we are going to have global warming policies at all, I want them to be minimally damaging, which means maximally reversible. Like Arnold, I think it would be a lot easier to simply keep cutting a carbon tax until it hits zero than it would be to dismantle the institutional framework of a carbon permit trading system and all the subsidiary industry that grows up around it. Better yet would be to do nothing. If global warming does turn out to be a problem in a few decades, then unleash the carbon sequestering trees, or what have you. The idea that doing something now is better than doing nothing has, as far as I can tell, a surpassingly thin empirical rationale.
I think you are right about the institutional analysis of permits v. tax.
But, pretend that you DID think global warming would be a serious problem (a position the vast majority of climate scientists endorse). And, being a rational politician, you realized that any solution that has the word ‘tax’ in it will be politically dead in the water.
From this view point, doing nothing is not really an option. If warming gets to 550 ppm, then the effects could be irreversible and devastating. Planting trees will be too late.
On the other hand, a carbon permits scheme and the handouts that go with it will definitely be a drag on economic growth. But really, not a huge drag on growth. The US economy is very resilient. It would be worse for 3rd world countries if they actually had to forgo growth. But they probably won’t-instead, they’ll just buy renewable tech from us when it gets cheaper. This means that western caps on carbon emissions will not effect warming as much. But they still could conceivably slow it down somewhat. Maybe the higher price of carbon will cause a technological breakthrough. It’s feasible. And if not, the price of carbon permits is not terribly high anyways.
I am not 100% persuaded by this analysis, since I think the permits scheme will be too watered down to do much, and 3rd world carbon emissions will overwhelm it. But your analysis would be much stronger if you confronted this view point, in which warming is really a serious threat, and think about the dangers of waiting if warming is that bad.
I think you are right about the institutional analysis of permits v. tax.
But, pretend that you DID think global warming would be a serious problem (a position the vast majority of climate scientists endorse). And, being a rational politician, you realized that any solution that has the word ‘tax’ in it will be politically dead in the water.
From this view point, doing nothing is not really an option. If warming gets to 550 ppm, then the effects could be irreversible and devastating. Planting trees will be too late.
On the other hand, a carbon permits scheme and the handouts that go with it will definitely be a drag on economic growth. But really, not a huge drag on growth. The US economy is very resilient. It would be worse for 3rd world countries if they actually had to forgo growth. But they probably won’t-instead, they’ll just buy renewable tech from us when it gets cheaper. This means that western caps on carbon emissions will not effect warming as much. But they still could conceivably slow it down somewhat. Maybe the higher price of carbon will cause a technological breakthrough. It’s feasible. And if not, the price of carbon permits is not terribly high anyways.
I am not 100% persuaded by this analysis, since I think the permits scheme will be too watered down to do much, and 3rd world carbon emissions will overwhelm it. But your analysis would be much stronger if you confronted this view point, in which warming is really a serious threat, and think about the dangers of waiting if warming is that bad.
You make a strong argument about the practical irreversibility of conferring property rights. However, I hope that your are just being cheeky by saying: “If global warming does turn out to be a problem in a few decades, then unleash the carbon sequestering trees, or what have you.” Otherwise, such flip comments suggest a profound lack of scientific understanding.
You make a strong argument about the practical irreversibility of conferring property rights. However, I hope that your are just being cheeky by saying: “If global warming does turn out to be a problem in a few decades, then unleash the carbon sequestering trees, or what have you.” Otherwise, such flip comments suggest a profound lack of scientific understanding.
Will, I’m interested in learning more about the evidence and knowledge you’ve synthesized to come to the conclusion that “the probability that global warming is a significant problem is low.”
Will, I’m interested in learning more about the evidence and knowledge you’ve synthesized to come to the conclusion that “the probability that global warming is a significant problem is low.”
We should assume it’s as bad as the scientists say, given our collective ignorance of the subject on this comment board. Given that, taxes can be overcome – companies can choose to pay them – but caps are a mandate to reduce carbon emissions. We should favor the latter course, no?
We should assume it’s as bad as the scientists say, given our collective ignorance of the subject on this comment board. Given that, taxes can be overcome – companies can choose to pay them – but caps are a mandate to reduce carbon emissions. We should favor the latter course, no?
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