TL;DR: nothing new to see here.
Anyway, I was pushing my favourite theme, How to decarbonize? More free market! and to my absolute astonishment it didn’t go down terribly well. A number of questions in the comments were re-hashing stuff from Carbon tax now but no-one ever re-reads old blog posts just because I link to then, so I’ll repeat myself.
When I say, or rather imply, that everyone hated it I’m not being accurate. Eli offered The goal is a system which can minimize gaming. Trading schemes maximize gaming, A broad tax does does a much better job of minimizing it which is a pretty good summary.
Disclaimer: I’m going to have to venture into economics, which I don’t understand. If you don’t like that, go argue about carbon taxes with someone who does.
In the course of comments, rc made what was (to me) the novel assertion that a carbon tax wasn’t very free market; for example “If you don’t consider ETS a “free-market solution” then neither is a carbon tax, which is arguably less free-market”. That seems to me obviously wrong, but perhaps not everyone agrees what a free market is. I’ll use Wikipedia’s definition
A free market is a system in which the prices for goods and services are set freely by consent between vendors and consumers, in which the laws and forces of supply and demand are free from any intervention by a government, price-setting monopoly, or other authority. It is a result of a need being, then the need being met. A free market contrasts with a regulated market, in which government intervenes in supply and demand through non-market methods such as laws creating barriers to market entry or price fixing. In a free-market economy, prices for goods and services are set freely by the forces of supply and demand and are allowed to reach their point of equilibrium without intervention by government policy…
Adding on a tax to prices is clearly an intervention, but arguably the minimal possible one; in particulalr I think it satisfies “Friedrich Hayek argued in The Pure Theory of Capital that the goal is the preservation of the unique information contained in the price itself”. So before you read free from any intervention too literally, look at Laissez-faire where we have
Laissez-faire (/ˌlɛseɪˈfɛr-/, French: [lɛsefɛʁ] ( listen)) is an economic system in which transactions between private parties are free from government interference such as regulations, privileges, tariffs, and subsidies.
Note that taxes are not one of the things being listed as transactions having to be free from. And note that no-one (apart from the most wild-eyed of libertarians) is proposing markets that are entirely unregulated; most would accept, say, food safety standards quite happily. “Free market” is short hand for either “desire for minimal govt intervention” or “less govt intervention”, in most discourse. Like here.
By contrast to a carbon tax a carbon trading scheme requires more government intervention. But, as wiki says, it is still a market based approach. The problem is that it either requires pre-allocation of permits – which is inevitably gamed, and is subject to pols interfering, see the ETS – or an auction every now and again, and has the problem of who sets how many permits are to be issued. I don’t think the generally perceived success of the US Acid Rain Program can be used to conclude that a similar scheme for CO2 would be effective1.
But it might not reduce emissions!
KON says the goal is to reduce emissions & virtually *eliminate* the externalities – not make them simply economically pay for themselves. If producers and consumers are willing to pay the tax *without* reducing emissions has the tax succeeded?. This I did my best to cover in CTN so if you didn’t like what you read there you won’t like what I’ll say here, but never mind.
With cap-n-trade the Great and the Good get to decide what level of emissions is acceptable, and in theory permits are issued to this level. The ETS shows how badly this can work; arguably the Common Fisheries Policy shows similar. Allowing pols to set acceptable emissions levels seems to me to be doomed to be gamed to failure. But anyway, once you’ve done that, your job is done, and anyone worrying that the price of permits has fallen to low is stupid and has failed to understand what the system is for. That doesn’t stop people saying it; the sort of people who like ETS-like schemes like to keep fiddling, which is yet another reason for not having it.
With a carbon tax you work out what the externality is and charge people that (yes, I know it isn’t possible to work it out exactly, any more than it is possible to work out the correct emissions levels for permits exactly; it isn’t a problem; just set a level and (slowly) ramp it up (inevitably; in theory down is possible too) as required). In which case, people are paying up front the cost of their emissions, and you can no longer complain that they are getting a free ride. In this case, unlike cap-n-trade, you are not guaranteed emissions reductions. But anyone who thinks that cap-n-trade would actually guarantee reductions is fooling themselves.
Worrying that this might not reduce emissions is reasonable in theory but not in practice; no-one doubts that carbon tax levels of, what, $50 per tonne CO2, would reduce emissions.
But I’m still skating over the question of “what if you really do want to reduce emissions”. I think – but am not sure; I told you I don’t understand economics – that this really becomes a non-economics question. Wanting to reduce emissions, as a goal in itself, is non-economic. If you re-frame it into economic terms – say, wanting to avoid future damage to the Earth – then you’re back to the externalities. And all economics can do is require you to pay those externalities. Deciding you’re not happy with that – that you want the damage to be guaranteed not to occur – is a non-economic requirement. I think. Cue “ha ha that just proves economics have no soul” etc etc. But as a useful practical argument I think this is meaningless, per previous paragraph.
Timescales for externalities
In theory, externalities are calculated by integrating costs out to infinity, deflated by appropriate discount rates. In practice, no-one bothers, because so many other unknowns intervene that it would be a waste of time. I can’t see any point of trying to go beyond 2300, and indeed even that seems too far. We can’t possibly usefully try to plan that far ahead, except in the most vague and general terms. Even 2100 is pushing it. See discussion from 2009.
1. You might find carbontax.org/cap-and-trade-problems more convincing than my hand waving.
* From the Carbon Tax Center, A Call to Paris Climate Negotiators: Tax Carbon via VV’s twitter feed.
* The Problem of Carbon Tax Border Adjustments from IER. Disclaimer: I haven’t read it and I think they’re just trying to put you off.
* MMM makes some points I like in #15 about when you might prefer tax or cap; or even when you might prefer reegulation.
* Polluters’ Proﬁts and Political Response: Direct Controls versus Taxes. James M. Buchanan, Gordon Tullock. The American Economic Review provided by DZ who also offers his Pigouvian taxes do NOT produce deadweight losses.
* Praise Canada, Finally Someone Does The Right Thing – Timmy, Forbes, 2016 / 10.