I know that carbon tax is unlikely, but what are the relative advantages and disadvantages of each? Does cap and trade run the risk of penalizing those who have been proactive and promote stalling on quick cheap interventions by those who expect a cap/trade in the next administration?
It depends how the permits are allocated. There is no such problem if the permits are auctioned (and are expected to be). For the same base, a tradeable permit system and a tax have the same effect on prices and the revenue received by government is the same as for a tax in discounted terms.
But if permits are allocated on the basis of present emissions firms have an incentive to delay abatement. And the permits are a large handout to owners of polluting industries for no particular reward - except perhaps political feasibility.
For actual schemes, the devil is in the detail.
If the permits are auctioned, a cap-and-trade system has some subtle but useful advantages over a carbon tax. In particular, one can limit the credits one auctions off so that the CO2 target is met, and let the revenue do what it will. With the carbon tax, one sets the amount of the tax, but that still doesn’t mean you’re going to meet the target, which is the key thing.
But in terms of revenues and economic incentives, you’re right, they should have pretty much the same effect.
All too true. Which was why I was relieved to see that Hillary’s plan to deal with global warming has the permits being auctioned. Of the three major Dem candidates, she was the most likely to go the pro-corporate route on this, but she didn’t.
Between this and her universal health insurance proposal, I’m starting to think she might not be a bad President.
Sorry that I am so dense on this, but I’ll never learn if I don’t admit my confusion.
Let’s take an example: a utility company that is investing now in carbon reduction measures - be it sequestration or co-firing biomass or algae bioreactors or increasing their portion that is renewables like solar or wind farms, or even more so, doing some easy low hanging fruit of carbon reductions; and a utility that has delayed doing any of those things. Two years go by and carbon cap/trade is implemented.
Does the first company get credit for what it has already done or is it capped at that point and can it only earn credits by engaging in further, and perhaps more costly interventions, while he foot-dragging company can get credits for low fruit that they left hanging?
I suspect that I am not quite understanding the process, but I thought that the idea was to cap at some point below the extant level for each facility and then individual companies could buy credits to exempt themselves from it either at aution or from each other. I may need some basic coverage on this. Still I suspect a debate is more likely than a GQ once I understand it! 
And yeah, I hate to admit that my dislike of HRC is decreasing as the campaign goes on.
Yes, theoretically one can get a carbon tax that will have the same effect as any cap-and-trade idea you want. Actually performing that analysis may be difficult, but the benefit of a tax is that you can adjust it as you go. Carbon credits would be harder to take out of circulation.
With cap-and-trade, the problem is with the initial allocation. If you auction them off, then it ends up as being the same as a tax. However, if you base it on current carbon usage, you benefit the biggest current polluters; if you leave it to Congress, you can bet that big campaign contributers will be first in line for the credits. Cap-and-trade is never more efficient than carbon taxes, but it can easily become less efficient.
But of course, and this is what bugs the hell out of me - politicians, every mindful of the soundbite, are basically forced to propose cap-and-trade, even if it is less economically efficient. After all, limiting pollution is goood, and taxes are baaad! :rolleyes:
It depends on the method of permit allocation. If the permits are auctioned, the first company just doesn’t have to buy so many. If the allocation is done on the basis of existing emissions, yes. If it’s done in some more cunning way - say what emissions would have been in the absence of various industries’ abatement measures - the first company might get credit. But that sort of thing is administratively challenging and vulnerable to various kinds of political influence.
Ah, but is it? It’s the stock of gases that matters and that needs to be stabilised. What the change in that stock (the flow) in any particular year is doesn’t really matter. Sticking to a particular target could be jolly costly in a single year (think a cold northern hemisphere winter).
Now, there are arguments on the other side too. And schemes to get around the problem, like Mckibben/ Wilcoxen. But my point is to suggest that meeting the target in a single year is not obviously an advantage.
There are a couple of key differences between cap and trade and carbon tax approaches. As has been noted by several posters, in the cap and trade approach, there can be some real issues surrounding the initial allocation of allowances. But once the allowances have been distributed, cap and trade lets everyone interact and find the lowest price allowances available. Theoretically, this would mean that a source with too few allowances (and therefore a need to make carbon emission reductions) could buy allowances for less than it would cost to control the emissions at that particular source. The seller presumably would be able to reduce emissions for less than they sold them (if they couldn’t, it would not make much sense to sell at that price). So everyone comes out ahead, at least financially. Over time, the number of allowances would decrease, so that there would need to be more and more actual reductions rather than simply trading.
In a carbon tax approach, any emission is taxed (at least in theory), so the economic driver would only be the difference between the tax and the cost of control. This approach requires that the government would need to estimate ahead of time the cost that would result in the desired level of control, and historically those estimates have been way off the mark.
For carbon, the cap and trade approach would also help facilitate international exchanges in ways that would be more difficult for carbon taxes. Presumably, this would help to maintain some level of parity across different countries and economies. The huge challenge internationally is that initial allocation.
From the CBO: this report. (warning:PDF)