A small point in an otherwise rather good NYT Op/Ed on the various methods of taking action about carbon emissions and climate change. Their political argument, that regulation is very much a second best solution but if Congress won't allow anything else then, well, whaddayagonnado I have some sympathy with. However, there's a definite economic problem with this statement of theirs:
In Washington, faint whispers of a carbon tax are still occasionally heard as a solution for budget and environmental problems in a single policy. But even if that were to happen, the tax would probably be small and would not guarantee the reduction in emissions needed.
But the point of a carbon tax isn't to generate some certain number of emissions reductions. Quite the contrary, it's to fix the cost of emissions reductions.
Conceptually cap and trade and a carbon tax seem similar. They're both fairly simple interventions into markets to deal with something that we know markets without intervention won't deal with. The externalities of carbon emissions: the things we call externalities precisely because they're external to market prices and thus markets don't deal with them. However, in another sense they're entirely different.
Cap and trade fixes the amount of emissions. We issue permits for only so much and that's it. No more emissions than that happen. The price can be all over the place of course. If emissions are easier to reduce than we think then permit prices approach those of spit. This is what has happened in Europe. Some say because too many permits were issued, some because we've just had a massive recession, but emissions are below the cap and permits thus cost near nothing. It could work the other way of course: emissions reduction is more difficult than we had thought and prices soar. But the really important point here is that emissions are fixed and it is price that varies.
A carbon tax, in this sense, works entirely the other way around. We fix the price of emissions and it is the volume of them that changes. If they're easier to reduce than we thought then emissions will reduce more than we thought for any given level of tax: if more difficult then less.
Which you prefer out of the two is really a matter of personal preference. Mine is the tax: for I'd rather fix the cost than the emissions. It's entirely feasible for people to disagree with me on this point.
However, the more basic one about the differences needs to be noted. A carbon tax, by its very nature, indeed built into the design of it, doesn't guarantee any particular level of reduction in emissions. That's just not the point of it. The point of a carbon tax is to fix the cost of what we're doing, not the outcome of our actions.
