Should we cap and trade, or tax, to reduce carbon emissions?

If we want to reduce carbon emissions, should we cap the total and then allow trading, or should we impose a tax on all carbon emissions? Organizations and Markets looks at the economics. Here is the conclusion:

So the final score is: Permits get a moderate edge on political economy/public choice issues; taxes have a big advantage on institutional/governance issues; and taxes deliver a big can of whipass on traditional economic efficiency concerns. So conditional on accepting the weak case for CO2 emissions control, the Pigou people have a strong case against the cap-and-trade brigade. Maybe they should start making it.

One issue that is not covered here is the distribution between countries. From the point of view of developing countries, cap-and-trade (with equal per-capita emissions targets) presumably has a large advantage over taxing emissions, in the absence of a mechanism to redistribute the revenues from rich countries (which will collect the taxes) to poor countries (who bear most of the costs of adjustment to climate change).

Hat tip: Economist blog. Also Greg Mankiw

1 thought on “Should we cap and trade, or tax, to reduce carbon emissions?”

  1. From a scientific perspective, what is amazing about the Organisations and Markets piece and the subsequent comments chain is the total absence of evidence. 
    O&M say taxes "can be applied quite easily to millions of transportation users by taxing at the pump".  When the UK government introduced a scheme to increase pump prices a bit faster than inflation, they were forced a few weeks later to back down by lorries blockading the ports.  How "easy" was that? 
    If we ask why emission trading is supposed to work, we are always told about the US scheme to reduce sulphur from coal stations.  But the famous benefits of this scheme are based on ex-ante feasibility studies.  The ex-post evaluations paint a very depressing picture (Tietenberg 2006).
    Is it really enough to develop policy by listing some options and them marking them against some arbitrary criteria on the basis of what feels right? 

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