Gerry Canavan

the smartest kid on earth

Cap and Trade Redux

with 2 comments

A commenter at MetaFilter who works on cap-and-trade legislation argues that I’m wrong about cap and trade. Here’s a memo from Pew Climate they cite to make their case.

Cost certainty v. environmental certainty. By setting a cap and issuing a corresponding number of allowances, a cap-and-trade system achieves a set environmental goal, but the cost of reaching that goal is determined by market forces. In contrast, a tax provides certainty about the costs of compliance, but the resulting reductions in GHG emissions are not predetermined and would result from market forces….

This review of cap and trade and taxes suggests that many of the longstanding myths about these approaches fail to recognize advances in design options aimed at addressing earlier concerns. While a tax regime sounds simpler in theory, history suggests that special provisions would be added, for example, to avoid adversely impacting specific regions, to exempt feedstocks and to mitigate competitiveness concerns. While a cap-and-trade regime doesn’t directly provide price certainty, recent proposals include temporal flexibility (e.g., banking, borrowing, and multi-year compliance periods) as well as floor prices and offset provisions that would dampen price volatility. In the end, history suggests that it is unlikely that a tax would result in a simpler system. The greater flexibility for firms and greater certainty that environmental objectives will be met appear to be the greatest strengths of a cap-and-trade policy.

UPDATE: And from the comments, a response to the Story of Cap and Trade video I posted earlier.

Written by gerrycanavan

December 3, 2009 at 6:58 pm

2 Responses

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  1. Eric de Place (who’s been doing a lot of work on Cap-and-Trade and related programs for years) has a very grumpy post about the Leonard video here:

    I’m personally for heavy-handed regulation with minimal market action, but a system that involves a cap of some sort (cap-and-tax, even?) is definitely necessary. And, like your view on the public option, getting a climate plan – ANY plan – in place, is probably better than nothing. … But I guess James Hansen disagrees, so I dunno.

    Chris L

    December 3, 2009 at 7:38 pm

  2. […] on this; in addition to the stark political realities surrounding carbon taxation, the fact that a properly regulated cap sets a hard emissions limit while a carbon tax sets a hard emissions cost is, I think, a simple but strong argument in cap-and-trade’s favor. I’m not fully […]

    Copenhagen « Gerry Canavan

    December 8, 2009 at 1:16 am

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