Online Debate: Pizer on emissions trading
Here’s the latest posting from CFR.org’s Online Debate on greenhouse gas policy:
June 26, 2007
William A. Pizer
It is useful to first highlight where Mr. Green and I agree—bans and regulations are highly inefficient. We also agree on the desirable goals for a domestic policy: an economy-wide incentive, transparency, strong institutional frameworks, minimizing rent-seeking and transfers, government revenue to cut other taxes, avoiding unnecessary price volatility, and (possibly) harmonizing policy internationally.
However, in contrast to Mr. Green, I see tax and cap-and-trade equivalent on many of these goals, and cap-and-trade exceeding taxes on several. Both policies can be imposed upstream in the fossil-fuel supply chain, covering virtually all U.S. emissions. Both involve a transparent price signal. While Mr. Green suggests trading systems are unenforceable and the institutions untested, I would argue they are as enforceable and tested as taxes. Both systems require identical measuring and reporting of associated emissions at some point in the fossil-fuel supply chain. And emissions trading institutions have proven themselves in everything from the 1980s lead phasedown in gasoline to the 1990s acid rain program, with a minimum of administration (fifty EPA [Environmental Protection Agency] staff manage the current acid rain program covering thousands of sources).
It is ironic that he would suggest, after the American Job Creation Act of 2004, that taxes are less likely to incite rent seeking than tradable permits. Indeed, rent seeking in a carbon tax program creates distortions in behavior, as well as redistributing rents—making the problem worse. While we both favor raising government revenue to cut other taxes, it is ridiculous to imagine that raising $50 billion of revenue through a carbon tax or permit auction to finance such a cut is not a redistribution from people paying more of the old tax to people paying for the carbon emissions. Indeed, perhaps such a swap is—at least initially—a less fair redistribution than giving some free permits to those industries and regions bearing more of the burden under a carbon tax or tradable permit program.
Avoiding price volatility is important and easily done in a trading program with a safety valve—exactly the same mechanism applied to policies as diverse as trade (tariff rate quotas) to performance standards (alternative compliance payments). Given its wide application, it is hard to argue it is a particularly complicated or nontransparent approach.
All of this goes to highlight exactly why I prefer a tradable permit system. It can do everything a tax does—and more. Most importantly, it addresses rent seeking head on rather than pretending it does not exist under a tax and ending up with a debate over exemptions and special interest deals.
