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The Difference Between a Carbon Tax and Cap-and-Trade

By December 8, 2009

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A great piece by Krugman today (no, seriously) - Unhelpful Hansen. One thing I do not understand is this:

For here's the way it is: we have a real chance of getting a serious cap and trade program in place within a year or two. We have no chance of getting a carbon tax for the foreseeable future.

Why is there no chance of getting a carbon tax enacted? I hear this asserted all the time without explanation. British Columbia recently enacted a carbon tax. If B.C. can do it, why not America? It is not as if carbon taxes are new things - Canadian provinces have had carbon taxes since the 1920s. When Alberta enacted their first gas tax, the Yankees had yet to win a World Series! It is not as if this is a radical new proposal.

Krugman does a terrific job in describing the ways a carbon tax is similar to cap-and-trade - but there are two important differences if the cap-and-trade permits are not auctioned off:

  1. The revenue generated from a carbon tax can be used to reduce other taxes. If the carbon tax is less damaging to the economy than the tax it replaces (say, the corporate income tax for small and medium size enterprises), there is a net benefit to the economy. There is no such benefit under cap-and-trade.

  2. Under cap-and-trade without auctions, permits are given away to companies that already pollute - if companies reduce their emissions, they can sell the permits to other companies. Under this system, billions of dollars in assets are given away to polluting companies by the government. Some of you may be okay with rewarding past bad behavior. Some of you may be okay will billions of dollars of corporate welfare. For me, it leaves a bad taste in my mouth.
Serious question time - Are there any 'progressive' economists (by any definition you want to give to the term progressive) left who believe that giving billions (trillions?) to Wall Street and billions in corporate welfare to big business is bad economics? Other than me, that is.


December 10, 2009 at 8:12 pm
(1) Lord says:

Don’t worry. Under a carbon tax there is at least as much room to grant tax subsidies to favored powerful companies as there is under cap and trade. It would be surprising if the result were any different. The reason a tax would be difficult is it is a tax while cap and trade is an amorphous entity whose nature is obscured. The one advantage of a carbon tax is it could be levied purely on producers and importers rather than consumers but that also means they are more concentrated and powerful making it more difficult.

December 10, 2009 at 9:00 pm
(2) right on says:

Using public money to prop up and subsidize corporations who have no corporate social repsonsiblity ( or ignore effects of their reckless actions that society is bearing) is the worst hypocricy . Corporate welfare is the biggest embarrasment this generation has seen while the mainstreet is told to be responsible for their actions. Krugman has come out with some really detailed information out there that makes sense.

December 14, 2009 at 1:40 am
(3) Ken Crook says:

I don’t understand the need for a carbon tax or cap and trade.

Just require polluters to quit polluting!

Polluters (power plants, factories, etc.) will just pass the cost of the pollution control equipment on to their customers. And for those worried about competing with foreign companies, add an equivalant import tax on imports from countries that do not require similar pollution control equipment.

Keep it simple.

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