There needs to be an analog to the word “gerrymandering” for referring to the (endogenous) dislocations that these sorts of tax/subsidy undertakings engender.

“There’s a specific reason why a carbon tax might not work, and why it might not stimulate the optimal levels of R&D investment that economic theory indicates.

That reason is the inability of governments to credibly bind themselves in the future.”

That’s great. Then I read the Kemp post. I’m glad that you and Kemp can understand that bill since it seems to me to be designed for future finagling:

“The government could have allocated allowances in proportion to the volume of carbon dioxide emitted by different industries and firms in the baseline period (2005-2010) and then gradually reduced the allocations pro rata. That would have been the “neutral” approach.

Instead the bill opts for a discretionary allocation of emissions allowances that reflects a complex mix of environmental objectives and the need to secure support from coal-producing and heavy industrial states.

By divorcing the initial allocation from emissions in the baseline period, the bill has in effect created a new form of “currency” and an alternative “carbon budget” that can be used to reward particular industries by granting them valuable emissions rights that can be used to support business activity or sold for conventional dollars. ”

This quote produces in me a feeling not unlike being taken for a fool. I was for either alternative. Now, I haven’t a clue. I’d much rather talk about simpler things, like Gaussian Copulas and CDSs and CDOs and Systemic Risk, for example.