Brad DeLong sums up:
I would say that to first order cap-and-trade and carbon taxes are the same, that there are five first-order differences:
- Cap-and-trade involves less redistribution because the losses of
the losers are partially offset by their initial awards of tradeable
- Cap-and-trade runs the risk that the cap will be set at the wrong
place and so the price will go damagingly above its social optimum
- Carbon taxes run the risk that the tax will be set too low and so
the quantity emitted will go damagingly above its social optimum value.
- Carbon taxes have the advantage that the government gets money that
it can use for good–either to cut existing taxes that have large
deadweight losses or to expand underfunded programs that have large
- Carbon taxes have the disadvantage that the government gets money
that it can use for ill, and that the recipients and beneficiaries of
that ill-used money will then dig in and defend their rent-seeking
gains beyond death itself.
and that there are two third-order differences:
- It’s easier to get not-too-bright Republicans to vote against
something that is actually in their long-run interest if you can
demagogue it by calling it a tax.
- It’s easier to get not-too-bright Democrats to vote for something
that actually is not in their long-run interest if you can demagogue it
by claiming that it’s just a restriction on the behavior of corporations and not something that directly impacts people.
The fourth-order considerations would, of course, look at time consistency problems and irreversibility problems.