Cap and Trade. Good, bad or ugly?

[saskganesh]

If they really believed carbon emmisions are so bad for us they would outlaw them completely, not make a market for selling permits to pollute. Don't know, seems like more feelgoodism to make it look like they care for the environment while making money out of it.

the idea is to use free market mechanisms to make money off pollution so that players will use the money to fund a post carbon economy within 41 years.

the alternative is to tax pollution so government will make money to fund a post carbon economy within 41 years.

I think an overnight switch down wouldn't suit most people.

[DGuller]

If they really believed carbon emmisions are so bad for us they would outlaw them completely, not make a market for selling permits to pollute. Don't know, seems like more feelgoodism to make it look like they care for the enviroment while making money out of it.

1)  That's impossible.
2)  Just because something is bad doesn't mean you can't put a price on its "badness".
3)  That's economically stupid.  The point of cap-and-trade is to reduce emissions in the most economically efficient way possible.  Industries that don't really need to emit lots of carbon, but do it anyway because it's free to do so, would have economic incentives to stop.  Industries that can't really do it, on the other hand, would pay rather than be forced to undergo very expensive retooling, or being legislated out of existance altogether.

[Neil]

now, a carbon flat tax would avoid the complexities of a cap and trade system, and take immediate effect. we would pay for pollution, pound for pound, every single day we bought or consumed something.

Well, that would certainly take care of the budget deficit, wouldn't it?

[grumbler]

like, if I plant 100 hectares of trees tomorrow, I'll eventually get credits because my forest is a carbon sink, which I then sell on the market to some rich polluter , but say in 16-20 years I harvest those trees because they are fast growing hybrids and I want to cash out, and I reintroduce the CO2 I sequestered back in the atmosphere, what happens to the credits I generated 16-20 years ago? do they still exist or has their value changed? and would whoever owns those credits now know about it? the room for corruption makes my head hurt.

Credits only are the equivelent of a ton's carbon production.  Every year you have the farm, you can sell a year's worth of credits.

now, a carbon flat tax would avoid the complexities of a cap and trade system, and take immediate effect. we would pay for pollution, pound for pound, every single day we bought or consumed something.

A carbon tax wouldn't reduce carbon emissions directly, and would be subject to massive political pressures if one wanted to increase the tax to cut production.  Taxes are generally an unweildy way to control consumption, are generally unpopular, and are more directly subject to political presure than quotas.

[grumbler]

Exactly.  We have a hard enough creating a system that trades something that is real nevermind creating a system that trades something completely notional.  Forget the old saying "I have a bridge to sell you."  I now have some carbon credits to sell you.

About 20 years ago the Canadian government had a tax credit system for companies conducting scientific research.  The program had to be stopped because corruption and fraud was rampant.  People were setting up companies just to claim the tax credits without ever conducting any research.  I remember reading that the vast majority of companies claiming the credits were entirely fraudulent.  I can see a similar thing happening here.

Yes, your example is an excellent argument against the tax-based approach.

[grumbler]

If they really believed carbon emmisions are so bad for us they would outlaw them completely, not make a market for selling permits to pollute. Don't know, seems like more feelgoodism to make it look like they care for the enviroment while making money out of it.

The Battlestar Galactica approach only works in fiction.

The concept behind creating permits and then allowing the market to determine their value is that companies can make cost-benefit tradeoffs on pollution control technology.  Some would reduce pollution more than the "required amount" because it would allow them to sell the "unconsumed pollution" on the market (or avoid having to buy them in the first place, depending one how much foreknowledge they had of the effectiveness of their new controls).

[crazy canuck]

Yes, your example is an excellent argument against the tax-based approach.

And how does the cap and trade system stop people from selling fradulent credits?  The buyer doesnt care.  They just want the credits so they can keep polluting.  There is no market force at work here to keep anyone invovled honest.

[grumbler]

good point.

ok, supposed my trees are flattened by a tornado and the carcasses are devoured by mutant Korean pine beetles. same end result. do I have to buy insurance, or does that come bundled with the original credits and is transferred with the sale. and what kind of verification trace scheme will be in place to trace destruction of forests in one place to a smug credit holder in another?

If your trees are no longer absorbing tons of CO2, you couldn't sell the credits.  You may, indeed, want to buy insurance for your forest if you want to be sure of generating credits or being compensated for being unable to.

[grumbler]

And how does the cap and trade system stop people from selling fradulent credits?  The buyer doesnt care.  They just want the credits so they can keep polluting.  There is no market force at work here to keep anyone invovled honest.

The mechanism is the same as that for currency.  The reason people care about being able to distinguish between good currency/credits and bad currency/credits is because you cannot spend bad currency or bad credits.  Every year, you have to file a sort of "carbon tax return" showing that you have purchased the credits necessary to offset your tons of pollution.

Credit enforcement, like currency enforcement, will be necessary, but that is equally true of a carbon tax. 

[Sheilbh]

This should be okay.  The policy isn't totally unknown so the American government will be able to learn good and bad stuff from other examples such as the Canadian and European systems.

Personally I think it's not nearly enough and there should be a carbon tax but that's just not possible.

[lustindarkness]

I see.

[crazy canuck]

The mechanism is the same as that for currency.  The reason people care about being able to distinguish between good currency/credits and bad currency/credits is because you cannot spend bad currency or bad credits.  Every year, you have to file a sort of "carbon tax return" showing that you have purchased the credits necessary to offset your tons of pollution.

Credit enforcement, like currency enforcement, will be necessary, but that is equally true of a carbon tax.

I dont think that is a good comparison.  The reason why a buyer of currency credits worries about whether it is not fraudulent is because the buyer will in turn want to trade them along in some form.  In the case of carbon credits the buyer doesnt care.  He is not going to try to convince another buyer to take them.  He is going to use them against his own pollution.  All he cares about is whether the government regulator will accept them which brings me back to the huge problems encountered with the research tax credits.

Whether we are talking about taxation or cap and trade it all comes down the a government regulator ensuring that the process is not abused.  In the case of Cap and Trade there is a lot of room for abuse and indeed if a buyer can get cut rate credits some a fraudulent source the potential for abuse is significant.

[crazy canuck]

the American government will be able to learn good and bad stuff from other examples such as the Canadian and European systems.

You are not going to learn anything from us.  We are not going to implement this until the US does.

[Iormlund]

Polluting generates a lot of costs that people have to pay for in health-care and the like. If this tax helps decrease this distortion, it'll have been a good idea. I'd rather go for a flat tax, though. And not just CO2, sulfur, dioxins, heavy metals an such as well.

[alfred russel]

Terrible idea.

The sad reality is that there may be no practical way to meaningfully reduce CO2 emissions on a global scale. Increasing the cost of CO2 in the US, which is what this is theoretically doing, is only going to push carbon intensive industries offshore or lower the cost of carbon based fuels so that parties previously priced out of the market can use them. I can't imagine a future in 20-30 years where major oil fields are left untouched because the price of oil is too low, which is the only way to mark success.

The border adjustment idea is needed to keep blatant offshoring from happening, but I have doubts it can really be effective. For example, if electricity costs here begin to get too expensive, that is just one more incentive to offshore IT functions to India, and imagine a tariff regime stopping that.