Sunday, February 24, 2008

The Gobbles Have It

I thought it was Felix Salmon who made a very good argument for a carbon dioxide tax rather than a cap-and-trade system, referring to British Columbia's decision to introduce a progressively increasing levy on fossil fuels and make a matching cut in general taxation. But it wasn't; anyway here goes.

If you read this blog you're probably aware that I think cap-and-trade is too much of a fancy, thinktank hipster/wonk solution; there are a lot of interesting failure modes. Instead, I support the tax that gets to the cause of your problem; higher VAT on fossil fuels is hard to evade (and harder the more fuel you're trying to evade it on), simple to apply, cheap to collect through the existing and very efficient administration, and directly matched to the problem. It's regressive, but that can be fixed by paying out the cash, perhaps under a negative income tax or citizens' income system. (As Daniel Davies would say, many schemes to aid the poor have been proposed but the only one to show consistent success is money.) And we could do it tomorrow; if it only took two days to nationalise the Northern Rock, this is quite a lot simpler.

Anyway, Salmon - in fact, it was Gar Lipow whose argument this is; read the whole thing - made the point that cap-and-trade implies the creation of a market in CO2 permits. That is, after all, the point of the exercise. Then you start to reduce the cap, squeezing the total permits in circulation. But here's the rub; if the policy is a success and people are busily trading the permits, there will be a substantial new lobby against any reduction in the cap - the traders. There is no way they can win from reduced volume, so they will be a powerful opponent of reductions in the cap and a powerful supporter of any move to loosen the definitions of what contributes to the cap.

A carbon dioxide tax, of course, doesn't need a carbon dioxide market and therefore isn't subject to this problem. It doesn't need to decide what counts as an offset; it certainly doesn't require some fiendish extension of the surveillance state like road-pricing or personal cap-and-trade. It just requires a higher rate of VAT on stuff that burns and came out of the ground.


Dan Hardie said...

Looks like a good argument to me. One thing any serious lefty (and to be honest any decent rightwinger as well) needs to start doing as a very high priority, is to work out how big the impacts of either a cap-and-trade or a carbon tax system will be on those in the lowest income brackets, and work out how to avoid cutting their incomes still further.

On a semi-related point- which I really ought to develop on my own blog when I have time- the UK domestic gas market is actually *even nastier* than the more excitable newspapers say it is. Centrica's profits are in large part derived from screwing those customers who don't have the wealth to pay by direct debit, who tend to be the poorest people in the country. Oh, and Ofgem and the Department for Business, Enterprise and Regulatory Reform are fine with them doing that. A Labour Government- a Labour Government....

Dan Hardie said...

Badly phrased comment by me above: I shd have said 'every serious lefty' etc should work out what the best way to reimburse the poor is. I wd favour straight grants equal to the percentage of their heating and power bills caused by the carbon tax, rather than the citizens' income. This latter policy seems to me to have a lot of things wrong with it, which is another thing we need to kick around at greater length.

It seems another argument in favour of the carbon tax that it's a lot more obvious how much it adds to bills, and hence reimbursing poor families is far simpler, and more likely to be done properly, than it would be under a cap-and-trade system.

Felix said...

A cap-and-trade system is no easier or harder to evade than a carbon-tax system, assuming both are applied at the same point on the upstream-downstream spectrum. (The further upstream the better, as a rule.) In both cases, you have to measure and report carbon, that's about it.

As for the traders, they want to make money, and the way they make money is for the thing they're trading to go up in value, which means caps coming down. Do stock traders prefer to trade Google, where there's a small number of valuable units, or some ultradiluted penny stock with gazillions of shares in circulation and no value or liquidity?

Gar Lipow said...

>s for the traders, they want to make money, and the way they make money is for the thing they're trading to go up in value, which means caps coming down.

That is true only up to the point where price rise exceeds the drop in volume. But the whole point of exercise is to encourage alternatives to the point where the price rise does NOT make up for the volume.

If you you want an empirical argument, what is the point of stock splits? In practice traders have really good reasons for favoring higher volumes.

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