Tyler Cowen weighs in on the cap-and-trade debate. He focuses on my criticism of Samuelson’s seeming failure to understand the relationship between cap-and-trade and a carbon tax:
But Samuelson is correct here and Avent is misleading. When there is uncertainty about the location of the social optimum, and uncertainty about elasticities, a carbon tax and cap-and-trade are by no means equivalent. If you see very high costs from setting the binding cap too low and choking off growth — as Samuelson mentions — you should prefer the carbon tax. The price of carbon is more certain and you bear less risk from uncertainty about how fast solar power and other technologies will develop. Alternatively, you might say that risk is transformed into price risk rather than “you can’t exceed this cap no matter what” risk.Of course the postulated uncertainties are realistic in this context and you don’t have to invoke uncertainty about the science of global warming.
If there is very high environmental risk to having emissions above a certain level, and we are unsure about the relevant elasticities (again, uncertainty about the pace of technological development can drive this), that militates in favor of cap and trade. It is then easier to ensure that emissions do not exceed a particular level.
You can see that we are comparing the "growth threshold problem" to the "environment threshold problem." Samuelson is apparently more worried about the former than the latter. Maybe he shouldn’t be so sure he is focusing on the right problem, but on the economics he is on the mark in the criticized passage.
Mark Thoma offers a nice response here. I think Tyler’s right that if we assume certain uncertainties there are relevant differences between the plans. I think it requires an extremely generous reading of Samuelson’s piece to see that kind of argument in the text. Too generous. Samuelson is clearly uncomfortable with the very idea of making energy more expensive:
Fuel prices would rise, but because people would use less energy, the impact on household budgets would be modest.
This is mostly make-believe. If we suppress emissions, we also suppress today’s energy sources, and because the economy needs energy, we suppress the economy. The models magically assume smooth transitions. If coal is reduced, then conservation or non-fossil-fuel sources will take its place. But in the real world, if coal-fired power plants are canceled (as many were last year), wind or nuclear won’t automatically substitute. If the supply of electricity doesn’t keep pace with demand, brownouts or blackouts will result. The models don’t predict real-world consequences. Of course, they didn’t forecast $135-a-barrel oil.
As emission cuts deepened, the danger of disruptions would mount. Population increases alone raise energy demand. From 2006 to 2030, the U.S. population will grow 22 percent (to 366 million) and the number of housing units 25 percent (to 141 million), the Energy Information Administration projects. The idea that higher fuel prices will be offset mostly by lower consumption is, at best, optimistic. The Congressional Budget Office has estimated that a 15 percent cut of emissions would raise average household energy costs by almost $1,300 a year.
He’s not saying that we might accidentally set the cap too low and blow up the economy. He’s saying that consumers and producers won’t respond to price increases, that politicians will steadily and heedlessly lower the cap (or raise the tax) regardless of economic conditions, and that the real evil of the plan is that it increases the cost of dirty fuels. And there is seemingly no recognition that a carbon tax would, in fact, make energy more expensive, that it would "suppress" emissions, and so forth.
And if we’re willing to acknowledge that there are uncertainties about the location of the social optimum, elasticities, pace of technological development, and so on, then I think we should also be willing to acknowledge that the likelihood of a real-life political body setting a cap too low or a tax rate too high is quite low, and that furthermore, the likelihood that such an eventuality would be rapidly addressed through tax rate or cap adjustments is quite high. If we’re going to have reality, let’s have all of it.
But in Samuelson’s world, environmentalists are scheming, omnipotent economy destroyers, and cap-and-trade is nothing like a carbon tax. That’s just not so. In all the ways that matter to Samuelson, the two plans are identical. Neither will be particularly scrutable to voters, both offer considerable opportunities for industry giveaways, both will make energy more expensive, and both can be adjusted if we find that we’ve set a dial incorrectly.
As Mark Thoma says, it’s Samuelson who’s being misleading. Either that, or utterly confused.