Cap And Trade is a Costly Lunch

I've always been against carbon taxes, and I've only been slightly kinder to at least the theoretical idea of a (permit auctioned) US cap and trade system.

Generally speaking, I've been slightly kinder to cap and trade since it allows adjustments to made on 'quantities' of emissions as opposed to 'price.' A number of economists disagree that that is better, but to me it makes sense to control the quantity since that is the ultimate aim of such a policy. Then, if the policy is too costly or not costly enough, changes could be made in the emissions cap easily and gradually. If we instead controlled the price, we could set some price via a guesstimate as to the social efficiency gained, but it would be just that, a guesstimate with myriad assumptions. If we set the price too high (low), it would need to be continually graduated downward (upward) until it became socially and politically acceptable. Letting government control the price would only serve to increase inflation and economic uncertainties. By controlling quantity, price can be determined in the market (hopefully subject to only mild fluctuations). Beyond that, the psychological effect of cap and trade on the consumer, and the political feasibility of it, make it a better choice than a carbon tax.

But I've only been slighly kinder, having said that, since an auctioned cap and trade policy would still have some of the negative side effects of a gas tax (distributional issues, regional issues, regressivity potential, "feed" the beast problems, etc.).

Nevertheless, it is likely that we will see (perhaps this year) some form of cap and trade happen in the United States. It is also nice to see that the Congressional Budget Office is really looking hard at the costs and benefits of such a policy. But noteworthy in their analysis are the huge 'unknowns' - the variability in terms of the kinds of benefits and costs this would mean for the US.

If I were a legislator, I would vote against cap and trade by noting that the Reinvestment and Recovery Act signed by President Obama already provides billions of dollars to supporting alternative technologies to oil-based ones. Subsidizing a change in the infrastructure of the US (toward a green infrastructure) while simultaneously gradually increasing fuel efficiency standards, in my opinion, is the correct approach to the problem of climate change. Though, my only fault is that the spending, by necessity of the recession, means that little study or thought was made as to what types of green technologies and infrastructure we should support. I hope that will change in the future as the US recovers.

But I'd vote against cap and trade for a second reason. The reason would be that I would be a legislator for the State of Indiana. As the CBO document discusses, the midwest would likely be hit the hardest under cap and trade. Consider that we have relatively little public transportation (compared to say the East Coast), we have the largest density of oil-demanding industry (manufacturing, coal, etc), AND we have the double-whammy of being the region hit the hardest by the current recession. A cap and trade policy, depending on how potential government revenues would be distributed, would likely throw Indiana and its neighbor States into an economic tailspin - which could, potentially, injure the already suffering auto industry even more, which could, in turn, negatively reverberate across the nation.