Cap and trade vs. carbon tax

Robert Samuelson writes:

Unless we find cost-effective ways of reducing the role of fossil fuels, a
cap-and-trade system will ultimately break down. It wouldn’t permit satisfactory
economic growth. But if we’re going to try to stimulate new technologies through
price, let’s do it honestly. A straightforward tax on carbon would favor
alternative fuels and conservation just as much as cap-and-trade but without the
rigid emission limits. A tax is more visible and understandable. If
environmentalists still prefer an allowance system, let’s call it by its proper
name: cap-and-tax.

Mark Thoma gets upset at this passage, here is Ryan Avent, Brad DeLong and Matt Yglesias, all upset.  Avent was the fount of the opposition:

Yowza. As any economist worth his or her salt will tell you, a cap and
trade plan with auctioned permits is essentially identical to a carbon
tax. That also happens to be exactly what Barack Obama is proposing.
So, another way for Samuelson to have written this column would have
been to title it, “Barack Obama has a good plan to reduce carbon

But Samuelson is correct here and Avent is misleading.  When there is uncertainty about the location of the social optimum, and uncertainty about elasticities, a carbon tax and cap-and-trade are by no means equivalent.  If you see very high costs from setting the binding cap too low and choking off growth — as Samuelson mentions — you should prefer the carbon tax.  The price of carbon is more certain and you bear less risk from uncertainty about how fast solar power and other technologies will develop.  Alternatively, you might say that risk is transformed into price risk rather than "you can’t exceed this cap no matter what" risk.

Of course the postulated uncertainties are realistic in this context and you don’t have to invoke uncertainty about the science of global warming. 

If there is very high environmental risk to having emissions above a certain level, and we are unsure about the relevant elasticities (again, uncertainty about the pace of technological development can drive this), that militates in favor of cap and trade.  It is then easier to ensure that emissions do not exceed a particular level.

You can see that we are comparing the "growth threshold problem" to the "environment threshold problem."  Samuelson is apparently more worried about the former than the latter.  Maybe he shouldn’t be so sure he is focusing on the right problem, but on the economics he is on the mark in the criticized passage.

Addendum: Here is Mark Thoma with more on the topic, here is Megan McArdle on same.


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