Alternate Seat of TYR

I thought it was Felix Salmon who made a very good argument for a carbon dioxide tax rather than a cap-and-trade system, referring to British Columbia’s decision to introduce a progressively increasing levy on fossil fuels and make a matching cut in general taxation. But it wasn’t; anyway here goes.

If you read this blog you’re probably aware that I think cap-and-trade is too much of a fancy, thinktank hipster/wonk solution; there are a lot of interesting failure modes. Instead, I support the tax that gets to the cause of your problem; higher VAT on fossil fuels is hard to evade (and harder the more fuel you’re trying to evade it on), simple to apply, cheap to collect through the existing and very efficient administration, and directly matched to the problem. It’s regressive, but that can be fixed by paying out the cash, perhaps under a negative income tax or citizens’ income system. (As Daniel Davies would say, many schemes to aid the poor have been proposed but the only one to show consistent success is money.) And we could do it tomorrow; if it only took two days to nationalise the Northern Rock, this is quite a lot simpler.

Anyway, Salmon - in fact, it was Gar Lipow whose argument this is; read the whole thing - made the point that cap-and-trade implies the creation of a market in CO2 permits. That is, after all, the point of the exercise. Then you start to reduce the cap, squeezing the total permits in circulation. But here’s the rub; if the policy is a success and people are busily trading the permits, there will be a substantial new lobby against any reduction in the cap - the traders. There is no way they can win from reduced volume, so they will be a powerful opponent of reductions in the cap and a powerful supporter of any move to loosen the definitions of what contributes to the cap.

A carbon dioxide tax, of course, doesn’t need a carbon dioxide market and therefore isn’t subject to this problem. It doesn’t need to decide what counts as an offset; it certainly doesn’t require some fiendish extension of the surveillance state like road-pricing or personal cap-and-trade. It just requires a higher rate of VAT on stuff that burns and came out of the ground.