Thomas Crocker’s weird arguments against cap-and-trade

By Felix Salmon
August 13, 2009
Thomas Crocker's opposition to cap-and-trade and his support of a carbon tax instead: all of his arguments why a carbon tax is preferable to cap-and-trade are exactly the same as my arguments why cap-and-trade is better than a carbon tax!

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There’s something rather odd about Thomas Crocker’s opposition to cap-and-trade and his support of a carbon tax instead: all of his arguments why a carbon tax is preferable to cap-and-trade are exactly the same as my arguments why cap-and-trade is better than a carbon tax!

Let’s take Crocker’s arguments one by one, with the proviso that they’re coming second-hand, via the WSJ, rather than directly from Crocker himself.

First, Crocker says that a carbon tax “would be easier to enforce” than a cap-and-trade system. But it’s hard to see why that should be the case: both of them involve measuring the same carbon emissions. It’s certainly easier to enforce when you measure upstream rather than downstream, but that applies equally to carbon taxes and to cap-and-trade.

Crocker then gets into the meat of his argument:

Mr. Crocker sees two modern-day problems in using a cap-and-trade system to address the global greenhouse-gas issue. The first is that carbon emissions are a global problem with myriad sources. Cap-and-trade, he says, is better suited for discrete, local pollution problems. “It is not clear to me how you would enforce a permit system internationally,” he says. “There are no institutions right now that have that power.”

Yes, cap-and-trade is better suited for local pollution problems than it is for global pollution problems. But that doesn’t mean that a carbon tax is better for global pollution problems than cap-and-trade is. Indeed, the opposite is true. In theory, once a number of jurisdictions implement a cap-and-trade system, carbon traders will start arbitraging the various different carbon permits, and we will end up with something approaching a global system. Carbon taxes, by contrast, are ever and always local. Crocker is right that a US cap-and-trade system wouldn’t necessarily slow global carbon emissions if China and India refuse to play ball. On the other hand, neither would a carbon tax. But at least a cap-and-trade system has the ability to scale into China and India.

But moving on:

The other problem, Mr. Crocker says, is that quantifying the economic damage of climate change — from floods to failing crops — is fraught with uncertainty. One estimate puts it at anywhere between 5% and 20% of global gross domestic product. Without knowing how costly climate change is, nobody knows how tight a grip to put on emissions.

In this case, he says Washington needs to come up with an approach that will be flexible and easy to adjust over a long stretch of time as more becomes known about damages from greenhouse-gas emissions.

Agreed, 100% — which is exactly why we need a flexible cap-and-trade system rather than an inflexible carbon tax. A cap-and-trade system can be tweaked much more easily than a carbon tax, both in terms of the level of the cap and in terms of the proportion of the permits which is auctioned off rather than given away. Crocker says it’s hard to adjust a cap once it’s in place — but he neglects to mention that it’s harder still to adjust a tax once it’s in place.

In the first instance, the important thing is to get something in place, which can then be improved over time. A cap-and-trade system fits the bill perfectly; a carbon tax, by contrast, doesn’t.

12 comments

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Re: “In theory, once a number of jurisdictions implement a cap-and-trade system, carbon traders will start arbitraging the various different carbon permits, and we will end up with something approaching a global system. Carbon taxes, by contrast, are ever and always local.”

Why wouldn’t they arbitrage carbon taxes in the same way?

Posted by steve | Report as abusive

Felix,
Excellent analysis. I don’t think there is that much of a difference between either approach but, as you wrote, cap & trade is more flexible.

Posted by kman | Report as abusive

I have to completely disgree, though from the sounds of it, Mr. Crocker is a fairly ineffective advocate for cap-and-trade.

I would argue that internationalizing taxes is much more straight-forward than a cap-and-trade system. You just have to add tariffs to imports from countries with lower carbon taxes equivalent to the difference. (The WTO already allows this sort of thing is already done for VAT taxes.) Allowing permits to be traded internationally lowers the standards of the system to those of the countries with the worst cap-and-trade systems.

For example, if one country issues permits for dubious carbon offset programs, those questionable permits could become traded around the world. Even in the best case, international trading in carbon permits would be similar to trying to have a world currency which every government is relatively free to print.

The main argument against cap and trade though, from a business perspective I would imagine is the amount of uncertainty it introduces into the system. Prices of offsets will fluctuate. If they end up functioning anything like natural resources, they could even fluctuate wildly. This makes it difficult to make rational investments in future carbon reductions. This might also tempt some governments to issue more permits if prices spike too high. A tax can be set to a fixed level or maybe to a level that increases at a known gradual level over time. This makes is much easier for businesses to plan ahead.

(I made this argument more fully in my infrequently updated blog: http://nofreelunchblog.blogspot.com/2009  /03/on-reducing-carbon-emissions.html)

Call me a cynic, but I find it weird that we’re rehashing the cap-and-trade vs carbon tax debate again. There’s nearly universal agreement that a carbon tax could never pass congress, so the real debate should be about whether cap-and-trade can work, what’s the best way to implement it, and what will it cost us.

IMO, like a lot of what’s getting published at the once great WSJ, this article/opinion piece produces more smoke and confusion than it does fresh information or new understanding.

Posted by Jim | Report as abusive

I hadn’t really considered the possiblity of arbitraging permits across jurisdictions. My international finance is a little shaky, so I’m not sure precisely what would be the arbitrage mechanism, but basically I’m thinking that if traders are buying permits in countries where they are priced lower, this is going to show up as a capital inflow and a surplus in the current account. Since countries tend to prefer current account surpluses, wouldn’t this potentially promote a kind of cap-and-trade version of competitive currency devaluation, where countries compete to have lower permit prices to bolster their current accounts? (This sort of goes along with what Victor is saying in his third paragraph).

It seems like kind of a perverse outcome, at least in theory, and certainly wouldn’t help the environment. Though in practice this doesn’t happen with currencies (much), so there’s no real reason to expect it would with permits, but its something to consider.

Posted by Jim B | Report as abusive

I would like a Carbon Tax, but can accept Cap and Trade as a compromise ( I see them as equivalent, basically ). The problem with both will be govt fiddling in the future ( Leigh Caldwell has a good post on fiddling in the future with a tax ). You’re assuming that the fiddling will be for the better. Based on the current plan, I’d worry about exemptions going forward.

The question is: Does Cap and Trade pass muster because it’s better, a compromise, or easier to water down?

As Ezra Klein put it:

“That, at least, is the difference in a perfect world. There’s also the argument that a tax is, in theory, simpler, and less likely to get mucked up with exemptions and off-ramps and so forth. For a good discussion of the relative merits, see this roundtable from the Bulletin of Atomic Scientists.”

I simply believe that a Tax would be easier to monitor for fiddling. The more complex the plan, the more Congress can fiddle away and not be heard.

Then again, I don’t know how to play the fiddle.

“A cap-and-trade system can be tweaked much more easily than a carbon tax”

Precisely. The tweaking will be performed by whichever members of Congress have been, er, ah, “incentivized” the most. With the incentive only slightly more delicately delivered than the stuff in Congressman Jefferson’s freezer.

Doesn’t that trouble you in the slightest?

“the important thing is to get something ”

Most adults realize that a badly designed something is not always better than nothing.

Posted by enoriverbend | Report as abusive

I can see how a Carbon tax can be impemented such that it impacts my driving decision. How would the proposed cap and trade system impact gasoline prices and the cost of driving?

Posted by DM | Report as abusive

I almost always nod agreement when I read your stuff, so I’m surprised to find myself opposed – it seems to me that a tax is going to be a lot cheaper to run, that Goldman will find a way to extract huge rent from trading cap allowances, and that money to Goldman (well, Wall Street) is a social waste if we don’t need to pay to allocate investment, etc. Also, nobody thinks the carbon emissions from one year are the problem, it is our multi-year patterns which are putting emissions up, so we can adjust the tax higher or lower to get closer to the carbon use we want based on results.

Posted by dave.s. | Report as abusive

I’m also worried that it’s easier to give away permits in a cap-and-trade system than it would be to exempt specific individuals from a tax. Right now, if cap-and-trade passes and we give out 85% of the permits, it becomes equivalent to a tax on those emitters to small or not well enough connected in Washington. That’s worse than nothing.

Additionally, if the amount of permits are given out based on previous carbon emissions (as opposed to some standard like X tonnes of CO2 per MWh generated by a power company) the system ends up penalizing those that already reduced their emissions. Such a system would then create perverse incentives to emit more carbon now in the hopes of squeezing out more free permits in the near future. That’s a lot worse than nothing.

While a tax may not be politically feasible at this time, a non-crooked cap-and-trade system isn’t either. The only way they will become feasible is if we shift the terms of the debate to that point whether it’s not a question of whether we will adopt some system to reduce emissions, but rather which system we will adopt.

Cap & trade and carbon tax are failed concepts as carbon prices have been pathetic both in US ($ 3.5) and Europe ( Euro 8.0) during most of last year. CER has stopped issuing new carbon permits to prevent prices to fall sharply during the Bonn Conference. Australian parliament has rejected carbon trade, India refuses to consider it. I agree with those who say that Governments of U.S. and Europe have been fooling the people for last 15 years on climate change, delaying investments in Clean Energy on the pretext of huge revenues that will be generated by the Carbon Trade. One such show in slideshare.net “COP15: Bullshiting 15 years on climate change ” is an eyeopener.

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