Environmental Law & Economics: The Great Global Warming Dilemma: "Cap and Trade" vs. "Carbon Taxes"

Radovan Kazda
Environmental Policy Analyst
Conservative Institute of M. R. Stefanik

Monday, July 07, 2008

The Great Global Warming Dilemma: "Cap and Trade" vs. "Carbon Taxes"

How to eliminate carbon dioxide from atmosphere?

What a childish government's hobby to think about that! But seriously: if the governments want to do it, they would have to look at economic arguments. Two of light economic analysis of the "great global warming dilemma" offer Stephen Gordon and John Whitehead.

Stephen Gordon at Worthwhile Canadian Initiative (link):
What distinguishes the two is what happens to π - the difference between the price the consumers pay at B and what it costs suppliers to produce at Q1. In the case of the carbon tax, the money goes to the government. But if output is capped at Q1, that difference is pure profit: a permit to produce one unit of output allows its owner to collect a rent equal to to the difference between the selling price and the cost of production. If permits are traded, their price will be bid up so that their price will be equal to π. So where that money goes depends on how the permits are allocated in the first place. If the permits are simply given to existing emitters, then those profits are pocketed by the firms. If the permits are auctioned off, the price will be bid up to π, and the government gets the money.
John Whitehead at Environmental Economics (link):
In terms of the market failure, the negative carbon externality, both a carbon tax and carbon cap-and-trade will achieve the same level of increased efficiency by achieving the optimal abatement level at the minimum cost. The only difference is the distributional implications. The cost to the firm is lower for carbon cap-and-trade. The government receives tax revenue with a carbon tax. Both policies are preferred over techological or output standards (i.e., command and control regulation).

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