Friday, October 23, 2009

The Anti-Carbon-Capping Left: Simply Confused

It has to be said: the leftist assault on the very idea of capping carbon emissions stems from deep confusion over what a cap consists of, how taxes would be used, where the leakages lurk, and what effect all these things have on who pays what. Every now and then, I am embarrassed by the public face of the left; this is one of those times.

This diatribe has been provoked by a new wave of silliness in response to tomorrow’s international day of action on climate change. You can read about it on Common Dreams, and you may also butt up against it in your own community, as I have in Olympia. (A fake issue of our local daily newspaper, dubbed The Olympiun, has several articles hyping the anti-cap line.) It’s a veritable anti-cap convergence. Read on for the particulars.

In a nutshell, here’s what the anti-cappers say. 1. A carbon cap means “carbon trading”, and “carbon trading” means that there will be no real emission reduction, because carbon permits will be traded for pseudo-reductions in agriculture, forestry and foreign investment projects. 2. “Carbon trading” is typical neoliberal claptrap, market idolatry, a scheme to pad the pockets of speculators, the next bubble primed to burst. 3. The solution is a carbon tax, which has nothing to do with market idolatry, guarantees real reductions, and makes the true climate villains pay through the teeth.

It’s all wrong, every bit of it.

1. A carbon cap requires a system of permits: you need a permit to emit a certain amount of carbon. Cap the permits and you have a carbon cap. There is nothing the matter yet. The problem comes with all the bells and whistles. (a) Instead of capping carbon upstream at its source (the extraction or import of carbon fuels), you cap it industry by industry. Then you have the coverage problem: which industries or uses are covered by the system, and which are not. The less coverage, the more leakage. (b) Instead of insisting on a permit, you give emitters the alternative of purchasing an “offset”, a promise (hope) that an equivalent amount of emissions will be averted by buying into some land use scheme, a foreign investment, etc. We can expect quite a bit of leakage here too. (c) Instead of auctioning the permits and rebating the revenue to households, you could give them away. Since the value of the permit is there regardless, it will be passed along to consumers, while the recipient of the freebie enjoys windfall profits.

A perfect carbon cap would have none of these defects, and the more coverage, fewer offsets and more auction we can get, the better.

2. A carbon permit system, with a cap on total permits, is what economists would call a quantity control. A tax is a price control. The first, if it can contain leakage, directly controls carbon emissions. The second relies on markets to arrive at whatever emission reduction occurs. Which one is more market-dependent? Moreover, a truly upstream cap would apply to only a handful of energy companies who would have little need to trade their permits between one another. It would be nearly all cap and very little trade—kind of like a cap on fishing permits to protect fish stocks.

3. A perfect carbon tax would be better than a deeply flawed cap (e.g. Waxman-Markey-Boxer-Kerry), but who says our actually existing political system will produce a perfect tax? All the same problems can crop up. (a) A carbon tax can be set too low, as is the case, for instance, in the recently announced French tax. (b) It can have only partial coverage, taxing some activities but not others. (c) It can reduce your tax liability in return for your contribution to an offset, with the additional leakage that implies. (d) It can funnel tax revenue to whatever the policy-makers want: nuclear power plants, biofuels, even coal companies. Nothing about the idea of a tax prevents this.

In the end, the choice of tax vs cap comes down to two things. (a) Since we don’t know how high a price it will take to bring carbon emissions down to a sustainable level, should we set the level and later find out about the price, or set the price and later find out about the level? (b) Can we have a more rational public discussion about what carbon cap to set, or what tax?

You tell me, what’s “leftist” about denouncing a carbon cap and demanding a carbon tax?

4 comments: said...


Well, there is an irony in this. Back in the early 1970s when the EPA was created and the main enviro laws were passed, it was the market oriented people who supported Pigovian taxes, and their opponents said this was a market solution, which was bad, because pollution is sinful and should be forbidden. So, set up quantity limits. Those quantity limits are the caps that have since evolved into cap and trade.

Aside from the politics (is Mankiw for taxes because he knows Congress will never pass them?), another problem is that they are very difficult to harmonize across international borders. Cap and trade will work better at that, and was established at Kyoto, over the objections of the Europeans, who have now followed Kyoto and established a carbon market. For the US to go to taxes rather than cap and trade is spitting in the face of the rest of the world.

TheTrucker said...

How will this thing be policed and who will be paying for the enforcement? I think that might say a lot about whether or not it will work.

Like is there some sort of weather balloons that can track where the CO2 is coming from and demand that the offenders purchase some credits? That sounds pretty silly, but I am just trying to clarify the question. I have no clue how this will be monitored/enforced and can't seem to find anything that tells me.

Peter Dorman said...

Sr. Truck,

Your question is an important one. In reality, it is hopeless to control "emissions" in any general sense, since there are far too many emitters. I apologize for using this shorthand, which feeds into the misconceptions of many (e.g. Dubner and Levitt, with their now-infamous 2% statement) regarding the nature of anthropogenic climate change. It's really not about emissions at all, since there is a global carbon cycle: carbon is exchanged between earth, atmosphere and water every moment; trees "emit" carbon when they die and "sequester" carbon when they grow. The root problem is the introduction of new carbon into the system, caused by the extraction of fossil fuels buried in the earth for untold eons. Ideally, a cap would cap this extraction and a tax would tax it.

Alas, the programs we see on planet Earth (rather than planet Theory) are a hodgepodge of controls and incentives on this industry, that process, etc. And you're right: the further we go down the road to the end user, the harder it is to determine how much carbon has been "emitted". That's either a bug or a feature, depending on where you stand -- a bug if you're trying to prevent catastrophic climate change, a feature if you're trying to protect your profits.

gordon said...

Two things:
1) I think Peter Dorman has successfully destroyed both cap-and-trade and carbon taxes by pointing out how they both can and probably will be corrupted. The only real emissions solution is wartime-style rationing and price controls.

2) I am coming to think of emissions reduction and CO2 removal/sequestration as two different problems. Concentrating on emissions reduction alone and relying on the natural carbon cycle alone to eventually remove excess CO2 (and other greenhouse gases) from the atmosphere is going to take too long, given the scale of the existing and projected excess. We need to think a lot harder about removal/sequestration.