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Wednesday, August 26, 2009

I've been following the carbon abatement issue for a few years now, and in the debate between a carbon tax (tax on price) and cap-and-trade (tax on quantity), Terry Dinan, the Congressional Budget Office (CBO)'s Senior Advisor for Climate Policy, has been the clearest, most reasoned voice. This post will cover her finding in my favorite paper on the issue, available at the CBO website.

I will be speaking largely from the table below (click to enlarge):

If a cap-and-trade system (hereon more accurately referred to as a "carbon quota") were implemented in the United States, the level of emissions would be completely arbitrary. No scientist knows the level of carbon dioxide at which the atmosphere become irreversibly unstable. Without knowing the upper limit, any restriction in quantity will necessarily be made through guesswork (or, even worse, through politics - i.e. what sounds politically popular).

Having stated that, the CBO recognizes that if the government somehow managed to guess the correct carbon quota to match the actual cost of reducing the carbon, then there is zero difference between a carbon tax and a carbon quota (in terms of reduced emissions and cost). This is illustrated in the "Expected Outcomes" column on the table.

It is far more likely that the government will guess incorrectly. If the cost is higher than expected, a carbon tax will reduce less carbon than a carbon quota, but the carbon tax will provide the greater net benefit as the emission reductions were achieved at a lower total cost.

If the cost of reducing carbon is lower than expected, a carbon tax will reduce more carbon than a carbon quota and do so at a greater net benefit. This illustrates an obvious limitation of a carbon quota. Even if the price level would encourage greater reductions, a carbon quota will always reduce carbon by the same amount.

Posted by Eleutherian

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  1. bbrian017 Says:
  2. So if I read this right they will be guessing where the atmosphere will becomes unstable and limiting the carbon copy tax to that number? Also are you saying its irrelevant seeing either way would be better then what were doing today anyways and in directly reduce carbon?

    Interesting read but a bit hard to grasp for me…

  3. The government will set the annual carbon quota based on a guess of where the atmosphere will become unstable.

    I am not saying that either option would be better than what we are doing now (mostly nothing). Here are my other posts on the issue:


    This post was specifically about the debate between carbon tax and cap-and-trade (carbon quota). On this debate, I agree with the CBO that a carbon tax is a better option.

  4. CTF Says:
  5. I believe strongly that Congress needs to abandon Waxman-Markey/ carbon quota legislation and start looking at what leading scientists and economists have been advocating since the beginning: a revenue-neutral carbon tax. A carbon tax would avoid the evasion and market manipulation inherent to cap and trade, incentivize green R&D and return the revenue to families already struggling under the weight of the current economic downturn. It's a win for the environment, a win for the economy and a win for the American family.


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