"System change is now inevitable. Either because we do something about it, or because we will be hit by climate change. '...

"We need to develop economic models that are fit for purpose. The current economic frameworks, the ones that dominate our governments, these frameworks... the current economic frameworks, the neoclassical, the market frameworks, can deal with small changes. It can tell you the difference, if a sock company puts up the price of socks, what the demand for socks will be. It cannot tell you about the sorts of system level changes we are talking about here. We would not use an understanding of laminar flow in fluid dynamics to understand turbulent flow. So why is it we are using marginal economics, small incremental change economics, to understand system level changes?"

Tuesday, May 12, 2009

A Couple of Defenses of Cap and Trade

Kevin Drum has a good introductory pro-cap article that seems to summarize the conventional wisdom in some circles. It's better than nothing. I pretty much found myself starting to be convinced until this bit:
With a tax, you know exactly what the price of carbon will be, but you don't know for sure how much carbon reduction that tax will get you. You have to guess. With cap and trade, you don't know for sure how much carbon will cost, but you do know exactly how much carbon reduction you'll get. Whatever technical flaws cap and trade may have compared with taxes, this by itself is enough to convince most environmental groups that it's a superior approach.
As I've said before, I think it's pretty trivial to work around this. All you have to do is adjust the tax rate annually, and you won't be too far off your targets.

The other part of the article that bothered me was this:
Cap and trade's market-friendly trading mechanism, combined with the fact that the acid rain program was so successful, makes it far more likely than a tax to survive on Capitol Hill.
In this case it's probably true, but it isn't something to be tolerated indefinitely. Unless we have a really deep redesign of how money works, deeper than I expect could work at this point, we'll have taxes. So the amount of taxes should be determined by reason, not by ignorant voters and cowardly politicians. As long as the voters don't understand taxes and the politicians avoid explaining them, we have a problem. Still, this would only be an argument in favor of cap and trade to the extent people don't notice that it is, effectively, a complicated tax, something they have already noticed.

Joe Romm is also making the case in more detail. Perhaps most valuably, he points to a readable summary of the proposed legislation. (Don't get me wrong, it's still a slog, but it's a relatively short slog.)

And Joe certainly has credentials as far as being worried about people gaming the system. He defers to WRI (second link in previous paragraph) on the likelihood that it won't happen in this case.

I think a simple tax for carbon extraction and a simple credit for sequestration, per mass, is the best place to start. People who actually live or work on farms and ranches or in very rural areas could get a 100% rebate. (And I am sure hobby farmers would game this, but it's the least of our problems.) The rest should be a dividend for all taxpayers. This would not actually work out regressive.

That said, I do appreciate the extra information. I am still wondering who drafted the legislation, when, and how. And I am wondering if such a faltering start as this bill provides might not do more harm than good.

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