Cap & Trade Front & Center

© 2009 Joshua Stark

A number of prominent folks have come out with positions on cap & trade, or carbon pricing ideas now being worked out by the federal government.

Right now, a lot of attention is being given to the allowances (ability for a company to emit carbon), & specifically whether or not they should be auctioned by the government, given away, or some combination of the two. Recently, the Pew Research Center gave testimony in favor of giving away some of the allowances, and phasing in an auctioning system. It must be noted here that the Pew folks are in the US-CAP, along with the Natural Resources Defense Council, Environmental Defense Fund, the Nature Conservancy, and a number of major corporations, including the Big Three, Shell, BP, Conoco Philips, DuPont, and Rio Tinto. US-CAP's testimony, as given by the head of Pew, can be found here.

Last Monday, the Center on Budget and Policy Priorities gave testimony that was much closer to the former Congressional Budget Office head Peter Orzsag's comments: A cap and trade system should start with a 100% auction, and it must include ways to alleviate the economic burden it will put on poor people. I mention Mr. Orzsag's comments here because he now head's the Obama Administration's Office of Management and Budget, and probably has some clout.

The questions for you all, then, are: Should a cap & trade system include a 100% auction, or should some of the allowances be given away at first? Or, should we just scrap a trading system, and institute a carbon tax, taxing every ton of CO2 regardless of its source, or an EPA-mandated cap?

Well, I have sat on the fence for too long. Here is my opinion (skip this and go to the comment section if you want to give me your opinion and don't want to be bothered by mine):

For two main reasons I have been more leery of a cap & trade system:
1), a contrived market is easier to game; and
2), companies that pollute more would, in general, continue to pollute, harming local communities.

However, a commenter with the moniker CG explained the comparative effectiveness of a cap & trade system very clearly at an Environmental Economics post. He basically said that we have a good idea of the amount to cap, and the problem with a tax is that we'd have to play around with the price until we got it to cap the right amount. So, although I'm still uncomfortable with a cap & trade mechanism, I am done with a carbon tax (having done a 2-second review of the history of politics and tax rates in my head). It'll have to be either a regulatory cap or cap & trade.

Any action curbing carbon emissions will lead to higher energy prices, and a disproportionate burden will be placed upon the poor. So, the focus of folks should be on how to mitigate the problems we know will occur under a carbon cap of some sort, and in this realm, I support some form of financial mitigation for the costs to poor people. Also, should a cap & trade system be created, all allowances need to be auctioned off by the government. Last, I would prefer no offsets be allowed, but if they are, they need to offset co-pollutants, as well as carbon (I'll cover this soon).

All allowances to emit carbon should be auctioned off by the government, who should use the revenues to offset the financial burdens of carbon emissions on poor folks & on the environment, and then to pay down government debt and pay for government services in general.

When carbon gets capped, the prices of goods and services using carbon-emitting energy sources will rise. In fact, the only really effective caps on carbon are more than likely going to result in uncomfortably high prices for a number of products and services (that, or the cap probably won't be sufficient to effectively cut carbon). Further, these price increases will occur whether or not the allowances to emit carbon are auctioned off or given away. That is because the nature of both forcing companies to emit less carbon and allowing carbon to be bought and sold in a market effectively adds the price of carbon to the cost of production.

Now, some folks in political circles are referring to a cap & trade market as an "energy tax", and although I understand that this is to heap scorn upon it, I really don't mind the analogy. The real question is this, though: Should this tax be collected by the government, through an auction system, or by major individual corporations, through the trading mechanism? I, for one, don't like to be taxed by anybody, nor do I like to pay for anything, but I'd prefer taxes be collected by our government, where I may have a say, and where some form of accountability can be maintained. What I would not understand is how we could allow a company to tax us for its pollution by giving away allowances.

Please, now, let me know how you feel about this vital and potentially expensive and game-changing idea.