Friday, May 15, 2009

Carbon tax vs Cap and Trade

A little support for a Carbon Tax

A much better explanation than I can give about the systems

Problem with cap and trade is that it creates no incentives to reduce emissions below the cap, and it is a lot easier to cheat. There will be a lot more administrative paperwork. It also requires accurate projections for demand, which given how poorly the government predicted this recession, probably isn't a good thing.

Carbon taxes, however, are simple, hard to cheat and have the benefit of reducing payroll taxes concurrently. Geographic inequality is tough to deal with, so cap and trade has an advantage there, but by the same measure, you want to hit the highest carbon regions the hardest so that they change fast - ways of life get ingrained into culture, so gradual shifts can be hard.

The issue with cap and trade isn't economic, it's enforcement and logistics. I just don't think we'll be able to enforce it that well. I tend to prefer a carbon tax.

Edit: Krugman makes a very good point:

It would be very hard to figure out if China's actually taxing its factories, while it's much less difficult to monitor the overall level of Chinese emissions. That's a HUGE benefit I hadn't thought of. I suppose given that, cap and trade looks much better.

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