Give away rights or sell them?
Joseph Romm in his post on Dingell’s carbon tax proposal says:
Politically, you can’t raise carbon prices high enough to raise gasoline prices since even $1 a gallon — probably the minimum to significantly change fuel economy if Europe is any evidence — would require a carbon charge of $400 per tonne of carbon — which would be very harsh to coal, adding more than 10 cents per kilowatt-hour to coal electricity, and politically impossible (I’ll post more on this later).
Also, the reason cap-and-trade has not worked well in Europe is that the Europeans didn’t have a lot of experience with it and during their trial period they issued too many permits.
I don’t know If Romm noticed, but paragraph two represents exactly the same weakness for caps as paragraph one represents for a carbon tax: it is politically difficult to get a high-enough tax or a low-enough cap through. Romm also notes that the Clinton administration could not get through even a weak carbon tax. True enough, but the Clinton administration also could not get through ratification of the Kyoto treaty — which would have included a really easily met cap, much weaker than most (though not all) of the cap-and-trade proposals now before Congress.
My problem of course is not with caps or even with permits. It is the trade part of the equation. I think most carbon-tax advocates would be glad to settle for an auctioned permit system as a second-best answer, or in some cases even as a best answer. Require the permits as far upstream as practical, either at the extraction, the importing, or the processing/refining of fuel. Auction those permits, or charge a tax.
Refund that revenue back to the public as Barnes proposes in his Sky trust plant, and I think you end up with a politically plausible bill. Also giving the permits away creates all sorts of perverse incentives in terms of innovation and technology development.
Just because I disagree with Romm on some points does not stop me from thinking him one of the smartest analysis out there on this sort of issue. Even in the post I’m criticizing he makes a critical point:
Historically, the best way to push energy conservation is with improved government standards. Higher carbon prices will promote fuel switching, but only have a secondary effect on efficiency.
And since I mention the modest nature of the Kyoto goal, let me also point out there was good reason for this. It was not supposed to be complete solution, but a show of good faith by the rich nations. The idea is that the rich nations would show their willingness to make real, even if modest, cuts in emissions; at a later date the comprehensive deal could be hashed out with the rich and poor nations. The point I’m making here is not that the goal was too modest, but that even this modest goal could not be passed through the U.S. Congress.