Wednesday, March 03, 2010

Cap or Tax???

Here's what 8 "experts" think. Me, I'm with Jeff Sachs on this one.


Elsa said...

I agree that a carbon tax is the best approach to solving the emissions issue. I think it is important to recognize that a tax will be in the best interest of the public. While politicians may not like using the "t-word", it clearly defines the price of pollution and unlike a cap and trade, does not fluctuate or change, based upon deals and exchanges outside of the public's control. With a carbon tax, the price to pollute is definite, and therefore, people can make informed decisions now and for the future. If they do decide to pay the carbon tax, then this tax can be used for further research into alternative methods. Ultimately, I think that while the word tax may not right away appeal to the public, in the end they will realize that is in their best interest, and for the environment, to proceed with a carbon tax.

Robert said...

I'm going to take the opposite side and say cap and trade provides the greatest benefits. Beinecke makes a great point in saying that it sets a very defined goal for reducing emissions. The government (or governing body) will clearly establish X as the aggregate emission reductions in the United States for given years. I feel that if taxes don't hit the optimal level on the first try, it will only frustrate taxpayers as they keep adjusting taxes to match emission goals. I believe consumers will be much more comfortable with a price that varies due to market forces as they feel more in control of their interacting with the carbon markets.

stuttsb said...

The discussion over a tax or cap & trade for greenhouse gas emissions, raises key questions of:

Do we prioritize price or quantity certainty?
Even after selecting tax or cap & trade, there is a clear tradeoff between price and quantity certainty.
Under a tax regime, quantity certainty can be increased by mandating the tax rate adjust to achieve a quantity target.
Under a cap & trade regime, price certainty can be increased by setting a price floor (price at which government buys back permits) and price ceiling (price at which government sells additional permits).

How much of total greenhouse gas emissions will the method capture at what administrative/enforcement cost?
I'm interested to learn more about how different sources of emissions can be included under either regime and about administrative/enforcement cost.

Which is most resistant to loopholes or perverse/unintended incentives?

Perhaps more important than whether we adopt tax or cap & trade, is that under either tax or cap & trade we (1) maintain simplicity, avoiding interference that could prevent cost minimizing emissions reductions (aka no exemptions, special allowances, treat all emissions the same; if cap & trade should probably be 100% auctioned) and that we (2) ensure the tax rate or number of permits issued is close to where marginal social cost = marginal social benefit and that either the tax rises or the number of permits falls over time, providing increasing incentive to reduce emissions to try to keep pace with an outward shifting marginal damage curve (as greenhouse gas concentrations in atmosphere increase).

With regard to revenue raised, I think considering the present budget realities, revenues generated from a tax/permit auction that actually increases net social benefit would be welcome, allowing fewer potentially less beneficial other tax increases/spending cuts to end the budget deficit.

Caitie said...

I agree with Robert. The uncertainty that goes along with setting a tax would present significant difficulties in making the emissions cuts we need. Beinecke makes a good point in stressing that we need to act now, and we don’t have time to play around with a new tax system. Cap systems are already in place in other countries . Additionally, a cap-and-trade system is a cost-effective solution. The ability to trade emissions rights ensures that reductions will be made where it is most cost-effective to do so.
Though I prefer the certainty of the cap policy, both options offer a solution to our environmental issue. I’d be happy to just see something done.

Michael said...

I agree with much of the sentiment here. Cap and trade, although not perfect, is the better option. Since it allows for there to be an actual cap on the level of emissions, it is more effective when dealing with something with so many negative externalities such as carbon. For many items, the simplicity of a tax is an overriding benefit. However, the fact that "tax" is a bad word in politics and is often unusable makes taxes difficult in practice, easy in theory. Cap and trade has a nice ring to it, making voters more likely to agree with it. My main point however, is what I started with. Since the negative externalities are so great and affect all of society, allowing for the physical amount of carbon to be regulated is the best way. However plain regulation is not effective as it creates shortages and surpluses. Allowing a cap and trade system means that economic forces will be allowed to function properly while still allowing the government to wholly govern the amount of carbon that is emitted.

Michael said...
This comment has been removed by the author.
Chas said...

In the long run, the only way to completely solve the problems created by carbon emissions is to dramatically reduce our reliance on fossil fuels to sustainable energy sources that either are a part of the carbon cycle or do not emit carbon when the energy is used. In order to achieve this goal, research and development in alternative energy sources must be increased dramatically. A carbon tax provides the greatest boost in the research and development of alternative energy sources. A tax covers the entire economy and creates a greater demand for alternative energy sources and thus incentives to invest in these energy sources. With a tax, both consumers who are taxed on emissions from their cars and firms who are taxed on factory emissions have an increased demand for alternative energy. With a cap and trade, only firms demand alternative energy and thus less money will be invested in a cap and trade system than in a tax system. A tax system also provides revenue which can be used by the government to subsidize research and development of alternative energy, whereas the cap and trade system does not have this revenue to invest. We must eliminate our dependence on fossil fuels to eliminate the problems created by carbon emissions and a tax on emissions is the best and quickest path towards achieving that goal.

Jarrett W. Brotzman said...

I think the two most important opinions offered by the experts (even noting their invested interest in passing such legislation) are those offered by Jeffrey D. Sachs and Charles Komanoff.

I am more in favor with a potential system of carbon taxes over the vastly more complicated "cap-and-trade" for the following reasons.

1. Simplicity: A tax, if politicians have the courage to do so, can be a very simple piece of legislation. A set cost of emissions is simple. The cost of polluting simply rises from 0 to (cost per unit of pollution * units of pollution).

2. Transparency: A tax, again if implemented well, can be a very transparent vehicle for both companies and the public to visualize and "appreciate," in the sense that a set additional cost is an far easier concept to envision and plan for. Companies will prefer this system as it can be easily be incorporated into a variable cost structure, can be planned for, and its impact on the bottom line is clearly delineated by the language of the tax.

3. (Following the sentiment from point 2.) Investor reassurance: Investors (and our IRA's and 401ks)
prefer stability to extreme volatility. If business can plan for a stable additional cost, than that cost can be factored easily into the value and profitability of a firm, and hence, their respective per share price.

One discussion that is not common, but I believe deserves some discussion, is what to do with all the new revenue this tax will bring in.

Since emissions of any sort have negative externalities, I believe the only morally correct use for these new revenues is to minimize/combat the negative externalities of emissions. Perhaps by direct investments into healthcare of respiratory deceases, cleaning up environmental resources, etc., the government can properly begin to reduce the long-term negative effects of centuries of pollution. This will be difficult for a Democratic Congress who is drowning in the mountain of debt they did little to reduce and helped build, and is desperately searching for new sources of revenue, but a who knows? A little political courage can go a long way.

Just my two cents.

Roberta Santana said...

Of course this discussion needs to be improved, but, in my opinion, the best way to reduce greenhouse gases emission is applying for taxes. Which need to be analizes is who will pay for that cost. Everybody wants the benefits, but don`t want to pay the cost of them. Cap-and-trade can be a good solution, but I can`t see it implemented in developing or undeveloped countries without financial incentives. The best level of emission brings a huge uncertainty to the efficiency of both methods.

Aparajita said...

If we were to approach this problem standing at the intersection of public policy and economics, Cap and Trade would seem like the best option. We not only have to get the economics of an issue right but also have to make sure that we design policies that would allow us achieve our goals. As we all know, tax is always an unpopular policy. Cap and Trade seems more likely to be accepted by the public and politicians, even though not by all economists.
Like Jeffery Sachs argues, there are certainly advantages of simply putting a direct tax on emissions but Cap and Trade will not be a bad compromise either.
With Cap and Trade we will have a little more certainty of the emission level and it will also give people incentives to innovate and cut down emissions. In a free market, it will lead to the socially optimal level of emissions. As stated in the article, we already have experience with the Cap and Trade system and policy wise it seems like a good way to curb emissions.

Frank said...

The debate over a cap and trade system or tax policy designed to decrease carbon emissions has gained incredible support for both sides of the argument and the disagreement continues to slow necessary changes. I think the most important action is to choose a policy quickly so we can begin to make progress as opposed to arguing. In this article, it seems that more experts support the cap and trade system. They argue the importance of setting a clear level of carbon emissions so that we know exactly what we are doing to the environment. They say that the system is more clean cut and could more easily be understood and agreed upon by congress. Advocates of the tax policy disagree. They believe a tax would be more accepted and easier to gain support in the political environment. They explain that the tax revenue can be re-allocated to tax payers along with providing necessary funding to R&D in order to provide new solutions in the future.
I personally agree with the carbon tax. While both policies will likely raise the price of energy, it seems the tax policy will benefit consumers more directly with repayment and new research. I also think congress is more comfortable with taxing than a completely new system. Lastly, the argument fails to mention the technological influence that we learned in class. If we are expecting technological increases in this industry in the near future which would lower carbon emissions, we would definitely prefer a tax because this type of policy would reduce carbon emissions even further as opposed to reduce costs for companies. Both arguments have their advantages but I believe the tax policy is more beneficial and realistic.

Beth said...

The main problems I see with the cap and trade system is the lack of incentives to decrease carbon use for the long-term. If a company is emitting below the cap, it simply allows another company to emit above the cap if they buy the permits. This does not seem sustainable even though I understand that the primary argument for cap and trade is the certainty of emissions reduction. Also, the public would feel the cost of cap and trade through increased energy prices while Wall Street will most likely make billions of dollars through trading.
Also, the concept of offsets seems slightly counter productive. The cap for a company can increase if it does things such as not cut down forests in certain areas or plant trees. This does not help with sustainability because demand doesn't change and carbon emissions increase. This also doesn't stop another firm from cutting down the newly planted trees since the demand for wood doesn't decrease.

Ellie said...

Although there are some benefits of a carbon tax, I believe our government should take the cap and trade approach to control emissions. As many of the experts who responded to this article pointed out, a cap sets a definite and clear goal for reducing the amount of emissions. Fred Krupp (president of the Environmental Defense Fund) bluntly states, “A cap puts a legal limit on pollution. A tax does not. Guessing what level of tax might drive the pollution cuts we need to avert runaway climate change is a risk we simply can’t afford to take. Only a cap with strong emissions reduction targets — and clear rules for meeting them — can guarantee that we achieve the environmental goal.” The uncertainty of the necessary tax that will lead to emissions cuts is way too risky. We can’t wait around for the creation of a new tax system, we must “act now” and set a cap to reduce emissions.

Rosemary said...

I think environmentally a cap would be better in the short run since the amount of emissions would have to be decreased to a known amount as noted by Stavins and Claussen. But as Sachs points out, the system might be “manipulated” and result in more emissions. Pielke supports the tax since it will result in long-term reductions in carbon emissions in the “global economy.” However, it would only be global if every country participated (or at least the US and China as pointed out in class yesterday).