Fundamental Theorem of ETS

Australia and many countries are moving towards a emissions trading system for carbon. I have favoured carbon taxes to emissions trading for a while now.

Greg Mankiw puts this best.

Cap-and-trade = Carbon tax + Corporate welfare.

He gives the example from a NYtimes article to support this:

How did cap and trade, hatched as an academic theory in obscure economic journals half a century ago, become the policy of choice in the debate over how to slow the heating of the planet? And how did it come to eclipse the idea of simply slapping a tax on energy consumption that befouls the public square or leaves the nation hostage to foreign oil producers?

The answer is not to be found in the study of economics or environmental science, but in the realm where most policy debates are ultimately settled: politics. Many members of Congress remember the painful political lesson of 1993, when President Bill Clinton proposed a tax on all forms of energy, a plan that went down to defeat and helped take the Democratic majority in Congress down with it a year later.

Cap and trade, by contrast, is almost perfectly designed for the buying and selling of political support through the granting of valuable emissions permits to favor specific industries and even specific Congressional districts. That is precisely what is taking place now in the House Energy and Commerce Committee, which has used such concessions to patch together a Democratic majority to pass a far-reaching bill to regulate carbon emissions through a cap-and-trade plan.

The two things to add to this are:

  • Enough Tax: No government appears willing to impose a cost high enough to actually change behaviour.
  • To use the carbon tax dollars for solving greehouse gas issues or decreasing the tax in other areas.

Makiw gives an example of how political wrangling can change the composition of a ETS scheme.

From a Obama-Biden campaign position paper:
Barack Obama and Joe Biden’s cap-and-trade system will require all pollution credits to be auctioned. A 100 percent auction ensures that all large corporate polluters pay for every ton of emissions they release, rather than giving these emission rights away for free to coal and oil companies.


From today’s newspaper:

Under the House bill, only 15% of the emission permits will be auctioned initially. The rest of the permits will be given away — 2% to oil refiners, 5% to free-standing “merchant” coal plants, 9% to regulated natural-gas distributors, and so on.

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2 thoughts on “Fundamental Theorem of ETS

  1. Pingback: Psychological tools for public policy « World is Green

  2. Pingback: Why Tax is better than ETS « World is Green

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