Geoscience Reference
In-Depth Information
wastes fi scal resources and is not necessary to offset the impacts of the
emissions cap on the profi ts of fi rms.
Under a carbon tax, the valuable revenues go to the government to
be used for recycling to consumers or to buy important collective goods.
Some current cap-and-trade proposals require the government to auc-
tion the allowances. With auctions, the two systems have equivalent
fi scal impacts.
Carbon taxes have two major disadvantages relative to cap-and-
trade systems. The fi rst is that the quantity of emissions is uncertain
under a carbon tax. If we set a universal carbon tax of $25 per ton, we
would not know the actual quantity of emissions. If we have a defi nite
idea of a dangerous level of emissions, this would be a major disadvan-
tage of carbon taxes. So here is a genuine difference. The price of car-
bon would fl uctuate under a cap-and-trade regime while the quantity
of CO
2
emitted would remain constant. Under a carbon tax, the quan-
tity emitted would fl uctuate while the price would be stable. This sug-
gests that, unless it can be periodically changed, a carbon tax cannot
automatically ensure that the globe remains on the safe side of “danger-
ous anthropogenic interferences” with the climate system.
A further point, emphasized by its advocates, is that cap-and-trade
systems have greater political appeal and greater durability. One reason
is that political opposition from industry groups who would be dis-
advantaged by tighter regulation are bought off by allocation of free
allowances. Indeed, the value of the free allowances appears to be much
greater than the lost profi ts from the tighter regulations. This source of
political glue from cap and trade would disappear if governments moved
to auctioning allowances.
A fi nal political argument is that taxes are hard to introduce but
easy to cut. Perhaps scientists would persuade the government to intro-
duce a high carbon tax, which would give a strong signal to fi rms to
begin making low-carbon investments. But if the political winds shifted,
the next government might reverse that policy and repeal the tax. In a
sense, the price volatility in Figure 35 might be replaced by political
volatility with a carbon tax if the tax gets caught in partisan political
struggles.
