Politicians much prefer increasing the cost of oil by cap and trade schemes. Why? Because it offers them a whole new sandbox for creating special goodies for special interests.
So SeekerBlog is on the lookout for objective studies comparing revenue-neutral carbon taxes to cap and trade schemes. Today I noted that Greg Mankiw has linked to this American Consumer Institute study lead by Robert Shapiro, former Undersecretary of Commerce for Economic Affairs:
A key benefit favoring a very simple carbon tax is the predictability of energy costs which has a big impact on investment decisions. For more, read at least the executive summary, which summarizes the shortcomings of Cap-and-Trade programs this way:
Although both policy approaches result in significantly higher prices for fossil fuels, carbon taxes also are much less vulnerable to evasion and market manipulation, providing a more stable and transparent system for consumers and industry alike. A cap and- trade approach also would produce much greater volatility in energy and energy related prices, and be much more complex to administer. The ineffectiveness of the cap and trade system is currently exemplified by the European Emissions Trading Scheme (ETS), under which European CO2 emissions actually increased in 2005. The European Environmental Agency has projected that under the ETS, the EU is likely to achieve no more than one-quarter of its Kyoto-targeted reductions by 2012. Moreover, much of those “reductions” will simply reflect credits purchased from Russia or Eastern European countries, with no net environmental benefits.
The best policy would approximate a revenue-neutral trade of the new carbon taxes for existing taxes. Ideally $1 of carbon tax would be offset by $1 of investment taxes [dividends and/or capital gains]. If you don’t like reducing investment taxes, then perhaps a direct-to-taxpayer rebate of the total carbon tax takings [or offsetting regressive payroll taxes].
Yale economist William Nordhaus has probably written more on climate policy economics than any other researcher. E.g., on the topic of this post, see Life After Kyoto: Alternative Approaches to Global Warming Policies [PDF]. Like most economists, Nordhaus refers to these alternative policies as “price type” = harmonized carbon taxes, and “quantity type” = cap and trade schemes. See his section VI. Comparison of Price and Quantity Approaches where he discusses the ten key differences between the competing policies.
On the issue of rebating carbon taxes to achieve revenue-neutrality, Nordhaus writes
If the carbon constraints are imposed through taxes that are then rebated in taxes with approximately the same marginal deadweight loss as the carbon taxes, then the overall efficiency loss from taxation will be unchanged.
BTW, there is a new advocacy center called the Carbon Tax Center whose website offers lot’s of useful resources on this policy issue, including links to the Shapiro study, and to this critique of recent misleading punditry.
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