David Friedman discusses the theoretical and practical differences between cap-and-trade and carbon taxes in dealing with greenhouse gas emissions.

Which brings us to current proposals for cap and trade of carbon dioxide as a solution to problems of global warming. In a system run by philosopher kings, the only important difference between that and a carbon tax is the information required to set the level of emissions or amount of tax. In the real world, cap and trade has the (political) advantage of getting large parts of the regulated industry in favor of the regulation and thus eliminating a lot of potential opposition. The cost, possibly more than a hundred percent of it, is shifted to the customers, which is to say the general public—a dispersed and politically impotent interest group. And if the government retains considerable flexibility in just how emission permits get allocated, it can use some of them to buy political support from other groups or to reward them for past support.

Cap and trade has a political disadvantage as well, of course; a carbon tax would bring in lots of money. But that money would show up in the budget, get labelled taxation, and so make it harder for the administration to deny that it is raising taxes to pay for its programs. And much of it might end up spent to get the carbon tax passed by buying off organized interest groups that were potential opponents.

Think of the cap and trade version as eliminating the middle man.

Advertisements