The last post about Cap and Trade got some comments on various sites asking if it’s a tax, then why not just impose a Carbon Tax? I agree that a Carbon Tax is a better approach than Cap and Trade. Unfortunately, messaging and political image can be more important than effectiveness when evaluating legislation. Calling anything a tax is a surefire way of killing legislation. No politician wants to be responsible for increasing taxes, they would rather be seen supporting capitalism and ”letting the free market” solve the problem.
One of the major problems with Cap and Trade is that baselines need to be established, which are usually through political processes, not scientific processes. With so much political support for coal and oil production, there is not much that can stop politicians from pushing for overly generous baseline emissions. As the dirtiest emitters implement the cheapest fixes and drop below their artificially high baselines, they can sell their carbon credits for additional profit. There is financial incentive to reduce emissions, but as the technology to reduce emissions gets more expensive than earned credits, the incentive goes away completely.
When a Carbon Tax is in place, there is always a financial incentive to reduce emissions, with no opportunity to profit from being a polluter. Similarly, the incentives go away when the technology gets more expensive than emitting. An additional argument against a Carbon Tax is that the money goes into the hands of the government, rather than the market. I’m not a fan of government efficiency, but if legislation is structured properly, then it can go directly to environmental programs. When the Superfund was first established, the tax on controlled chemicals went directly into the Superfund until legislation expired. After it expired, taxes (and stimulus money) went to the cleanup.
With taxes on bad practices in place, which are directly paid by the ones emitting, the bill can still be passed onto consumers. However, they have the choice to reduce consumption or opt for other alternatives, and directly reduce what they pay. Without programs in place to tax bad practices, the same consumers are forced to pay through taxes and have no way to opt out.
I’m no fan of big government, but there are areas where the free market cannot succeed and government needs to step in. Carbon emissions, and general pollution, are areas where the financial impact is spread over thousands or millions of people, rather than the people responsible for the problems. Cap and Trade is the carrot because you get paid for doing good. Carbon Tax is the stick because you pay for doing bad. In this case, I believe the stick would be more effective than the carrot. However, if politicians continue to be too cowardly to implement a Carbon Tax, Cap and Trade is better than nothing at all.
