Why a Carbon Tax is Superior

I don't think that government action on greenhouse gasses is justified.  That's not to say that man is not helping nature warm the planet some, its that the man-made warming, when you strip away the exaggerations, does not justify the cost of preventing it.  Since I wrote 80+ pages on it here, I won't delve much further into it. 

However, if we are going to take action, a carbon tax is way, way better than cap and trade.  I used to think that cap and trade made more sense, but I have changed my mind.  Cap and trade systems have a lot of potential for error and abuse, but there is one issue that is not adequately discussed:  They are also a huge subsidy and protection for current businesses, effectively penalizing new entrants.

Why?  Because most cap and trade systems begin by giving out emissions credits to current industry incumbents.  These are credits that new entrants will have to purchase, tilting the playing field in favor of current industry leaders.  This is the kind of thing Europeans love, because their largest business interests effectively control the government and keep out new competition, causing their economies to stagnate.  Steven Milloy is one of the few folks raising the red flag on this issue:

Under
the LCEA, the federal government would annually issue rights or
"allowances" to emit GHGs. In the first year of the bill, slated as
2012, allowances would be issued for approximately 6.65 billion metric
tons of GHGs. The amount of allowances slightly decreases every year "“
for example, 6.59 billion metric tons in 2013, 6.53 billion metric tons
in 2014, etc. "“ until it finally levels out at 4.82 billion metric tons
in 2030 and beyond.

These allowances have monetary value "“ a lot.

Owners
of allowances can either use them to pay for their GHG emissions or
they can sell them to other emitters who need allowances. Emitters can
also simply pay the federal government directly to emit GHGs at a cost
of $12 per metric ton of carbon dioxide starting in 2012. This price is
slated to increase annually by the inflation rate plus 5 percent. By
2030 "“ and unrealistically assuming that no inflation occurs "“ the
pay-to-emit price would be about $27.50 per metric ton of carbon
dioxide.

Using the pay-to-emit price, the GHG emissions
allowances issued by the federal government in 2012 will have a
potential market value of $80 billion. The annual market value of these
government-issued allowances will rise to over $100 billion by 2018 and
hit $130 billion in 2030. It will only take about 10 years "“ exclusive
of any inflation "“ for value of the allowances issued by the government
to exceed $1 trillion.

And incredible as it sounds, the bulk of
these allowances "“ 76 percent for the first five years, declining to 47
percent by 2030 "“ will be given away at no charge to special interests
including private industry, farmers and states. This global warming
giveaway works out to a total of $1.34 trillion of free money "“ not
adjusted for inflation "“ that would be handed out to global warming
special interests from 2012-2030. After 2030, the annual amount of free
money handed out is about $65 billion, increasing by 5 percent per
year, exclusive of inflation.

Unfortunately, politicians will always favor an indirect tax over a direct tax because they are gutless and entirely free of any nagging principles.  Cap and trade systems would raise consumer prices at least as much as a carbon tax, but the price increase would appear to be made by industry and not due to a visible government tax.  Congress can point the finger at industry and say, it's not our fault, it's those greedy guys in industry driving up prices.

Further, the carbon tax is hard to game.  Everybody pays.  But cap and trade - Oh the beautiful potential to milk various constituencies for donations!  If the government sets up a program where some groups get credits for free, and some have to pay for them, well of course every industry is going to pour millions upon millions into politician's hands trying to make sure they are in the favored group. 

What a mess.  We are already seeing the huge distortions coming from nutty ethanol subsidies, and that is due to the pressure of just one industry (farmers and ADM).  Just think of the distortions form this program.  There may be a good chance that misguided attempts to manage greenhouse gasses may well be the largest threat to the American economy and free marketplace, well, ever.  Which, by the way, is why every Marxist and socialist on the face of the earth are right at the forefront of the global warming movement.

If you suspect that the world may be warming, but not nearly enough to justify such costs in terms of both dollars and lost freedom, you might want to read this.

  • Michael Miller

    Nix on the Carbon Tax and the whole eco-socialist scheme behind it.

    We won't ever see this, short of another American Revolution, but the only tax I find acceptable
    is a small excise tax.

    Mike

  • Bob Smith

    The governor of my great state (FL), Charlie Crist, has just signed an executive order instituting a cap-and-trade system, "green" (read damnably expensive) building codes, and other such global warming nonsense. Plus he's cozying up to the Germans and French. I predict very sad days ahead if this idiocy can't be squashed immediately.

  • http://bhayden.blogspot.com/ Bruce Hayden

    So, what happens if the global warming we have seen turns out to be primarily due to solar radiation levels? Do they reverse the credits, and start charging those with them, instead of giving them away?

    In a subsequent blog entry, you talk about positive and negative feedback. Well, one thing that may introduce some positive feedback, but in the wrong direction, may be these schemes for combatting global warming, since governments find it far easier to impose taxes and the like than to remove them.

    But, yes, I agree that a carbon tax would be better economically than the cap and trade system, and for similar reasons.

  • eddie

    The problem I have with a carbon tax (versus cap-and-trade) as a way to limit the amount of carbon released is that it's pretty hard to determine what the correct tax level should be. Even if almost everyone agrees that we don't want more than a certain amount of carbon released into the atmosphere, there's no way to know what level of carbon taxation will produce that result. You could go with an interative approach, I suppose - every year that emissions exceed (or fall short of) the target, the tax is raised (or lowered).

    Cap-and-trade still appeals to me. To eliminate the problem of incumbent subsidies, emissions rights should be auctioned rather that given away. Everyone starts with a cap of zero, and to emit anything they have to buy emissions tickets. The government determines the total emissions target in advance and auctions off that many tickets. Nobody gets an allocation for free.

    With Pigouvian taxes, the policymakers (i.e. the electorate and their proxies) have to argue over how much to emit, and at what cost, and how high the taxes have to be to reach those emissions and cost targets. With cap-and-trade you just have to argue over the emissions and costs.

    Note that the scheme described by Steven Milloy is actually a Pigouvian tax, not a cap-and-trade. Emitters can purchase an emissions ticket directly from the government at $12/ton. If anyone can purchase as many as they need at the government price, then there's no cap, there's just a $12/ton tax (with a secondary market for the ones given away to the incumbents for free, which may end up trading below the government price, but will never trade above it).

  • http://comuse.blogspot.com Allen

    Someone who's better at property law may be able to explain the reasons for something like a carbon tax that don't have to do with crazy green rhetoric but in that no one has the right to pollute my air (just as I don't have the right to pollute your air).

  • Anon E. Mouse

    Allen,

    Dig up "Another View of the Cathedral" by Calabresi and Melemed.

    Also, look up some Coase (here's a start: http://faculty.econ.northwestern.edu/faculty/witte/pf/handouts/coase.html.

  • Anon E. Mouse
  • http://stillwaterinfidel.blogspot.com/ Stillwater Infidel

    Now I just found your blog and as a liberal capitalist. Whether you agree with global warming or not, there is an opportunity to do two things.

    #1 Make money.
    #2 Clean up our pollution.

    So if you can find a way to sell or trade on an individual basis, why not?

    Citi-Capital is investing $50B over the next ten years in alternative energy projects...

    I think the government should help get things rolling but at some point the gained efficiencies will make up the gap between coal nuclear vs. solar & wind and subsidies should go away.

  • Burt TUNZI

    Let's change the weather.

    I'd like to see cooler weather in the summer time.

    OH, I changed my mind, let's get rid of smog in LA and then if that is successful, change the sun's energy.

    Oh, I change my mind again, let's define the term "carbon Sequestration". It is a tax on producing energy, that will decrease the efficiency of energy production.

    Or let our government handle the Global Warming problem politically, like they did in New Orleans after the hurricane. Surely if they (not us) can stop a hurricane, they can surely do something to help us increase our taxes so we can support their lifestyle.

    Can anyone find a problem that can be fixed by Washington,DC, and increasing taxes?

    Burt

  • Burt TUNZI

    Let's change the weather.

    I'd like to see cooler weather in the summer time.

    OH, I changed my mind, let's get rid of smog in LA and then if that is successful, change the sun's energy.

    Oh, I change my mind again, let's define the term "carbon Sequestration". It is a tax on producing energy, that will decrease the efficiency of energy production.

    Or let our government handle the Global Warming problem politically, like they did in New Orleans after the hurricane. Surely if they (not us) can stop a hurricane, they can surely do something to help us increase our taxes so we can support their lifestyle.

    Can anyone find a problem that can be fixed by Washington,DC, and increasing taxes?

    Burt

  • Burt TUNZI

    Let's change the weather.

    I'd like to see cooler weather in the summer time.

    OH, I changed my mind, let's get rid of smog in LA and then if that is successful, change the sun's energy.

    Oh, I change my mind again, let's define the term "carbon Sequestration". It is a tax on producing energy, that will decrease the efficiency of energy production.

    Or let our government handle the Global Warming problem politically, like they did in New Orleans after the hurricane. Surely if they (not us) can stop a hurricane, they can surely do something to help us increase our taxes so we can support their lifestyle.

    Can anyone find a problem that can be fixed by Washington,DC, and increasing taxes?

    Burt

  • Burt TUNZI

    Let's change the weather.

    I'd like to see cooler weather in the summer time.

    OH, I changed my mind, let's get rid of smog in LA and then if that is successful, change the sun's energy.

    Oh, I change my mind again, let's define the term "carbon Sequestration". It is a tax on producing energy, that will decrease the efficiency of energy production.

    Or let our government handle the Global Warming problem politically, like they did in New Orleans after the hurricane. Surely if they (not us) can stop a hurricane, they can surely do something to help us increase our taxes so we can support their lifestyle.

    Can anyone find a problem that can be fixed by Washington,DC, and increasing taxes?

    Burt

  • Pieter

    I think I'm with Eddie in having difficulty accepting your position on this issue.

    You've already given your opinion on whether you believe global warming is a major problem, but, for this post, you're accepting that it's a real problem and asking what would be an efficient way for governments to limit CO2 emissions. In particular, suppose that a particular emission level is considered safe. The question is, how to distribute that total amount.

    I would have expected that you would support a market-driven mechanism for distributing this scarce resource. It would take a gifted central-planner to set and adjust the tax rate necessary to keep consumption of emission rights beneath the target threshold.

    I agree that there's a question of how to initially distribute these resources, but that's always a problem in capitalism. The current proposal seems to be that those who are currently emitting be given the right to emit what they currently are. Sure, I'm a socialist. I'd love to see those emission rights taken from them and equally distributed among the entire population. We could do the same with ownership rights to factories next, but it's not going to happen. According to standard, market-economic theory, it doesn't matter how the resources are initially distributed, through market trading, they'll become efficiently distributed. Initially distributing them in the way they currently are is a politically realistic way of getting the market system started. I'd prefer auctioning, but, if we're going to accept a market system anyway, why not accept the market theory that says initial distributions don't matter anyway?

  • Pieter

    I forgot to add that I agree the $12/ton allowances beyond the cap-and-trade scheme is absurd. A non-concave supply function? Surely, that should be concerning people. I guess, in 3 words, that's my criticism to a carbon tax.