Timmy Elsewhere

At the ASI.

In theory, cap and trade is better than a carbon tax. But because politicians are involved, this reverses.

3 thoughts on “Timmy Elsewhere”

  1. Cap and trade and taxes are not entirely equivalent, because they bring different risks. Cap and trade produces a known abatement (or level of emission) over the permits’ period of validity at an unknown price. Taxes produce a known unit price for carbon, but unknown quantity or abatement. As it is only the total stock of GHGs in the atmosphere – the product of 100 years emissions – that matters, the rigidity of the cap and trade system in insisting on a given reduction in any one period (such as five years) makes it inferior, surely?

    So I would say ‘in theory a carbon tax is better’. So would Paul Klemperer (and unlike me he’s a really good economist).

    Of course, over time they will converge. If taxes are not producing as much abatement as expected, the marginal damage increases and the optimal tax rises. If cap and trade prices are low, the optimal abatement is higher, so the cap should be tightened. etc.

  2. Basically summarising my thoughts.

    Coming up with a reasonable estimate of the cost of carbon (subject to refinement of course) is surely easier than guessing at what level CO2 emissions should be.

  3. A carbon tax would probably have to be more than 1000 GBP per tonne to cause big reductions in use, its already about 500 GBP per tonne for petrol.

    Tim adds: Well, yes, that’s one of the points. Given that the damage done by CO2 from petrol is under £50 a tonne, the tax is already too high.

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