Tax or Trade
Warning - economic terms flow freely below.....
I sent the following quick response to Henry Aubin's column in today's gazoo.
He was writing on the advantages of a carbon tax over a cap and trade system and I wanted to synthesize a few of my thoughts on the issue that seem to be missing from most media coverage.
M. Aubin,
Just a quick comment on today's column regarding a carbon tax vs cap and trade.
While undoubtedly both techniques can (should?) contribute to the goal of reducing emissions, I felt your analysis (I use the term loosely as it was just a column and not a paper after all) of the efficacy of cap and trade was a little one-sided. You are not alone in this; I have seen similar commentary elsewhere.
Several points are missed by cap and trade's critics:
1) it has been used with great success before - specifically in the fight against acid rain where NOX and SOX objectives were exceeded by a significant margin - so we know it does work, even in North America and that the regulatory framework already exists at least in template form. Energy on the other hand is a fairly inelastic product, so the impact of a carbon tax is hard to gauge. To date, oil has gone from $13 to almost $150 a barrel in just a few years with limited reduction in consumption, it seems likely that a few more cents is not going to take us over a tipping point. At least I have seen no evidence that we know where that tipping point would be.
2) while it is true that at a macro economic level cap and trade would impose similar pain for similar levels of reductions, I do not believe it is accurate to suggest that individuals will necessarily feel the same effects. The notion that any cost imposed on a business just flows through to consumers is not borne out by basic supply-demand theory (there are shifts in consumer and producer surplus). Given that higher prices usually lead to lower profits, there is incentive to keep prices and costs low. That creates an incentive to look for solutions rather than just higher costs. Often times scale plays a role here as industries can find solutions that aren't available at the individual level.
In a recent interview (probably CBC radio), Marc Jaccard made the point as follows: as a consumer, what did you do to cut back on the use of CFCs to help restore the ozone layer? Answer is nothing; it was regulations that forced corporations to come up with an alternative and at the end of the day they were able to do so at minimal cost to themselves and therefore did not need to pass any costs on to consumers.
3) tradeable permits allow for smooth integration into international systems, creating the largest possible market and thus the greatest opportunities to maximize reductions at minimal cost. A tax does not and risks getting into carbon tarrifs which could be the thin edge of the wedge into any number of restrictions on free and fair trade which in the end could hurt consumers and producers (meaning those of us with jobs) very hard.
There are other advantages, and no doubt disadvantages, but I thought this would at least be a fair counter-point.
Regards,
Adam Davies
Any flaws in my reasoning/anything to add?
I sent the following quick response to Henry Aubin's column in today's gazoo.
He was writing on the advantages of a carbon tax over a cap and trade system and I wanted to synthesize a few of my thoughts on the issue that seem to be missing from most media coverage.
M. Aubin,
Just a quick comment on today's column regarding a carbon tax vs cap and trade.
While undoubtedly both techniques can (should?) contribute to the goal of reducing emissions, I felt your analysis (I use the term loosely as it was just a column and not a paper after all) of the efficacy of cap and trade was a little one-sided. You are not alone in this; I have seen similar commentary elsewhere.
Several points are missed by cap and trade's critics:
1) it has been used with great success before - specifically in the fight against acid rain where NOX and SOX objectives were exceeded by a significant margin - so we know it does work, even in North America and that the regulatory framework already exists at least in template form. Energy on the other hand is a fairly inelastic product, so the impact of a carbon tax is hard to gauge. To date, oil has gone from $13 to almost $150 a barrel in just a few years with limited reduction in consumption, it seems likely that a few more cents is not going to take us over a tipping point. At least I have seen no evidence that we know where that tipping point would be.
2) while it is true that at a macro economic level cap and trade would impose similar pain for similar levels of reductions, I do not believe it is accurate to suggest that individuals will necessarily feel the same effects. The notion that any cost imposed on a business just flows through to consumers is not borne out by basic supply-demand theory (there are shifts in consumer and producer surplus). Given that higher prices usually lead to lower profits, there is incentive to keep prices and costs low. That creates an incentive to look for solutions rather than just higher costs. Often times scale plays a role here as industries can find solutions that aren't available at the individual level.
In a recent interview (probably CBC radio), Marc Jaccard made the point as follows: as a consumer, what did you do to cut back on the use of CFCs to help restore the ozone layer? Answer is nothing; it was regulations that forced corporations to come up with an alternative and at the end of the day they were able to do so at minimal cost to themselves and therefore did not need to pass any costs on to consumers.
3) tradeable permits allow for smooth integration into international systems, creating the largest possible market and thus the greatest opportunities to maximize reductions at minimal cost. A tax does not and risks getting into carbon tarrifs which could be the thin edge of the wedge into any number of restrictions on free and fair trade which in the end could hurt consumers and producers (meaning those of us with jobs) very hard.
There are other advantages, and no doubt disadvantages, but I thought this would at least be a fair counter-point.
Regards,
Adam Davies
Any flaws in my reasoning/anything to add?