Cap-and-Trade and Carbon Taxes: Equal Opportunity Boondoggles for Governments

Economists have long argued over whether cap-and-trade, in which emissions permits are traded, or a carbon tax would be better. The answer, once politicians start working, may be neither.

The dominant cap-and-trade proposal in the United States have drawn ire for its lack of focus and attempts to please every affected group. Low-priced permits will result in ineffectiveness, while convoluted rulemaking could ultimately prove harmful, as a Louisiana State University study reported on by the WSJ states:

That, says Dr. Mason, is chum in the water to financial speculators who quickly learn how to game the system in their interests, something environmental groups have also warned about. And it pretty much defeats the purpose of environmental legislation in the first place: “With carbon permit prices fluctuating wildly, long-term signals regarding the carbon-reducing benefits of investing in clean-air technology are clouded at best and nonexistent at worst.”

The other possibility, a carbon tax, is more intimidating for business, but would stabilize prices. It would also simplify the entire process, at least according to common sense – surely, a tax is just a tax.

Not according to the plans of French president Nicolas Sarkozy for a “climate-energy contribution,” a proposed tax that was until recently a campaign issue with support from all parties. Now that the time has come to implement the tax, it is rapidly becoming as complicated as any carbon trading scheme. In the Independent:

After a tumultuous row within his own party, and public differences with his Prime Minister, François Fillon, Mr Sarkozy promised that tax-payers and businesses would be fully compensated for the new levies through cuts in their income and pay-roll taxes. Poor people who paid no income tax would receive a “green” cheque. People living in rural areas, who need to use their cars, would qualify for higher tax breaks than city-dwellers.

In a speech at a heat-pump factory near Lyons, televised to the nation, the President said: “Every centime taken from families will be returned to families… The aim of this ecological fiscal policy is not to fill the state’s coffers but to encourage the French people and companies to change their behaviour…

In other words, while families and businesses that change their energy consumption patterns for the better would pay less tax, those which fail to do so would face no fiscal penalty.

The issue, it seems, is not that one plan or another is better, but that any scheme is bound to lose its force upon encountering an electorate and business community that is opposed to losing any amount of money as a result.

In the meantime, the Copenhagen world climate summit is just three months away. Given the inability of most countries to make meaningful reforms within their own borders, it’s hard to feel any optimism that all of them together will make any headway.