A carbon tax has efficient sticks, but what about carrots?
I’m finding the carbon tax vs. cap-and-trade debate unsatisfying, for several reasons. Here I’ll try to get at just one of them.
In broad terms, you want greenhouse gas policy to do two things (well, more than two, but let’s focus): penalize the emission of GHGs and reward the prevention of GHG emissions. Sticks and carrots. In a market democracy, that basically means taking money from those who emit and giving money to those who prevent.
Two points about this:
First, sticks alone are not enough. Pricing carbon is not enough. Avoiding carbon charges is not sufficient incentive. Perhaps more accurately, a price on carbon alone could work, but only if it were so stratospherically high as to make it politically untenable. Sean Casten has made this point here and here. Joe Romm has made in various ways here and here.
This is what fans of fully refunded carbon taxes (or cap-and-dividend) miss — fatally. Their proposal has a stick but no carrot. (And no, "avoiding the stick" doesn’t count as a carrot.) It is, as Sean says, one hand clapping.
Second, neutrality is efficiency.
All advocates of carbon pricing, taxers or traders, seem to instinctively understand this on the stick side: every ton of GHG emissions, no matter the source, ought to cost the same. Policy should not penalize emissions from cars more than emissions from coal (or whatever). By pricing emissions equally no matter where they occur, you allow the private sector to make the most cost-effective reductions first. You don’t "pick winners," in the argot.
Lots of people fail to appreciate that this applies equally to the carrot side, for the very same reasons. For maximum efficiency, you want to reward every ton of avoided GHG emissions equally, regardless of how it was avoided, by whom, with what technology (conservation, cogeneration, renewables, carbon capture, land use changes, whatever).
Now, cap-and-trade, whatever its flaws, at least attempts to address this. Not only do you have to pay if you pollute, but you can make money if you avoid polluting, by selling your permits. Anyone can sell or buy permits, so everyone’s got access to both sticks and carrots, and the government is not in the middle deciding who gets which. Markets, efficiency, blah blah.
You certainly don’t need to tell me about the many ways that cap-and-trade systems in the real world fall short of this Platonic ideal. I’m only making the point that some way of addressing "carrot efficiency" (as I shall dub it!) is built in to the idea.
To finally get the point I was intending to make in the first place: Carbon tax advocates almost always fail to address carrots and carrot efficiency. Either they talking about refunding the money directly to consumers (no carrots) or using it as a huge slush fund to funnel money to favored technologies and industries (rent-seeking and inefficiency).
So I end with a challenge to carbon tax advocates: You always boast about the efficiency of a tax. How would you make positive incentives — carrots — equally efficient?