# The Costs of Cap-and-Trade **URL:** \ **Category:** Great Debates\ **Created:** [June 27, 2009, 10:25pm UTC](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203 "2009-06-27T22:25:01Z")\ **Posts on this page:** 20\ **Page:** 3
**Author:** ![Grumman](https://avatars.discourse-cdn.com/v4/letter/g/43a26b/32.png) [@Grumman](https://boards.straightdope.com/u/Grumman)\ **Post date:** [July 2, 2009, 11:59pm UTC](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203/41 "2009-07-02T23:59:03Z")
> [@flickster](#): > > I assume you live in a location where air conditioning is a luxury instead of a requirement. > > As for optional /non-essential power usage, I suppose we could all go back to reading by oil lamps, wait…that would kind of defeat the purpose. So what you’re saying is that if you make the assumption the customer considers themselves to be getting more than 12 cents of value out of every kWh, they will continue buying electricity offered at 12 cents per kWh? Do you somehow believe that this proves a point? ---
**Author:** ![flickster](https://avatars.discourse-cdn.com/v4/letter/f/7bcc69/32.png) [@flickster](https://boards.straightdope.com/u/flickster)\ **Post date:** [July 3, 2009, 12:03am UTC](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203/42 "2009-07-03T00:03:03Z")
> [@Rhythmdvl](#): > > So because it would be too expensive for someone to keep the temperature at 68 _and_ play their PS2 on a 60" plasma screen, we shouldn’t do anything at all about emissions reduction. Oh wait, I see what you did there. You went back to the marketing campaign of it’s too expensive therefore we shouldn’t do anything. You forgot to shout FREEDOM!!! We are already plenty energy conscious. programmable thermostats to adjust temps for when we are not home, energy saving light bulbs, cook on outdoor grills as much as possible, don’t have a mega screen tv, no video game decks…I guess I could replace the A/C units with more efficient models - sorry $10,000 is not in the budget, even before paying higher rates because of this money grab plan ---
**Author:** ![gonzomax](https://avatars.discourse-cdn.com/v4/letter/g/e8c25b/32.png) [@gonzomax](https://boards.straightdope.com/u/gonzomax)\ **Post date:** [July 3, 2009, 12:56am UTC](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203/43 "2009-07-03T00:56:42Z")
> [@Frylock](#): > > How bad would that be, though? > > As an extreme example, wouldn’t it be better if all the polution in the world were contained within a five square mile area? That one area would be hellish. But the rest of the world would be nice… > > Of course you can’t really contain pollution in that way, but I’m just asking whether it’s so bad if most of the effects of pollution are concentrated in smaller areas. What if it is mercury? That is a permanent stain and a toxin that will kill or poison the local environment. ---
**Author:** ![Rhythmdvl](https://avatars.discourse-cdn.com/v4/letter/r/85f322/32.png) [@Rhythmdvl](https://boards.straightdope.com/u/Rhythmdvl)\ **Post date:** [July 3, 2009, 1:11am UTC](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203/44 "2009-07-03T01:11:08Z")
“Money grab plan”? Sorry, is that from Mark Levin, Rush, or Hannity? It gets so confusing sometimes. It’s an interesting shift. First, argue against the need for emission reduction. Holdouts against the science starting to get thin? Great – shift to focusing on the expense of reduction. Why bother to argue that there is no _need_ to reduce? Make reducing too impractical! Why consider anything of the actual plan and discuss its weaknesses and strengths or propose an alternative that is better – no, it’s much better to consider _any_ cost too high, to suggest that only a no-cost plan would be acceptable. (Oh, and while we’re at it, let’s find some irrelevancies to focus on, like celebrity hypocrisy or something!) It’s foolish to argue that there will be no costs to emissions reduction. I can’t think of anyone who suggests that we need to reduce, and can do so costlessly. Similarly, pretending that it’s a fault of a schema because there are costs is absurd. If you want to go that route, the place for that is the myriad “Is climate change real” threads – you may be in the minority, but at least you won’t sound as silly. ---
**Author:** ![flickster](https://avatars.discourse-cdn.com/v4/letter/f/7bcc69/32.png) [@flickster](https://boards.straightdope.com/u/flickster)\ **Post date:** [July 3, 2009, 2:32am UTC](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203/45 "2009-07-03T02:32:30Z")
> [@Rhythmdvl](#): > > “Money grab plan”? Sorry, is that from Mark Levin, Rush, or Hannity? It gets so confusing sometimes. None of the above. Just someone not buying in to the politician driven media hype. ---
**Author:** ![Rhythmdvl](https://avatars.discourse-cdn.com/v4/letter/r/85f322/32.png) [@Rhythmdvl](https://boards.straightdope.com/u/Rhythmdvl)\ **Post date:** [July 3, 2009, 4:05am UTC](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203/46 "2009-07-03T04:05:00Z")
Oh, sorry – my bad. If your understanding of emissions trading comes from politician-driven media hype, it’s easy to miss the underlying mechanism. Rather than start from the beginning (or maybe we should?) what do you see as the inefficiencies and problems with emissions trading? Who is grabbing what money from whom? Given that under any reduction program there will have to be a degree of infrastructure (bureaucratic and otherwise) for verification and monitoring, is there anything specific to carbon trading that is more problematic than under other proposals? Or would you build some sort of anti-capitalist fundamental fairness argument in order to favor direct reduction mandates? Of course, you could base everything on “we don’t need to do anything,” but that’s really fodder for the “is global warming real?” threads, not a thread asking about the economics of reduction. (Though you could reasonably suggest that doing nothing will be cheaper than reducing, but that pretty much entails a consideration of the cost/extent of inaction with a tacit acceptance of climate change effects.) Anyway, if you’re not sure what emissions trading is, check out the Wiki link or ask away. ---
**Author:** ![flickster](https://avatars.discourse-cdn.com/v4/letter/f/7bcc69/32.png) [@flickster](https://boards.straightdope.com/u/flickster)\ **Post date:** [July 3, 2009, 4:21am UTC](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203/47 "2009-07-03T04:21:32Z")
> [@Rhythmdvl](#): > > Of course, you could base everything on "we don’t need to do anything I’m perfectly happy with that > [@](#): > > Anyway, if you’re not sure what emissions trading is, check out the Wiki link or ask away. I think I understand what it is all too well - Yet another commodities market to enable further milking of funds ---
**Author:** ![Rhythmdvl](https://avatars.discourse-cdn.com/v4/letter/r/85f322/32.png) [@Rhythmdvl](https://boards.straightdope.com/u/Rhythmdvl)\ **Post date:** [July 3, 2009, 4:29am UTC](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203/48 "2009-07-03T04:29:31Z")
> [@flickster](#): > > I’m perfectly happy with that Oh. OK then. We should stop the hijack from **The Costs of Cap-and-Trade**. There are plenty of threads to chose from if you want to learn about/debate the basics of climate change theory. ---
**Author:** ![Sam\_Stone](https://avatars.discourse-cdn.com/v4/letter/s/ecccb3/32.png) [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)\ **Post date:** [July 3, 2009, 4:38am UTC](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203/49 "2009-07-03T04:38:28Z")
> [@Rhythmdvl](#): > > Is there anything specific to carbon trading that is more problematic than under other proposals? Yes there is. Most economists agree that the most efficient way to recover carbon externalities is with a direct carbon tax. It’s transparent, and it’s not subject to being gamed or captured by special interests. Cap and Trade has many problems specific to its mechanism. For one thing, it’s distortionary. It hides the tax on carbon inside the price system, which makes it less efficient. It’s subject to gaming, as the carbon allocation process is inherently political. You can see that in spades in this bill - it’s riddled with exemptions and giveaways. What cap and trade does is make Washington more powerful. Every year or whatever the interval is, the government will decide how much to lower carbon emissions, which means a lobbyist parade to Washington to attempt to influence the legislation. It also means that it will be harder to price the value of future carbon and prices will constantly fluctuate based on political whim. This particular bill is so egregious even Greenpeace is opposed to it. All the pain is deferred for ten years. Is there anyone here who hasn’t seen government pull this trick a million times before? The painful cuts will never happen. AGW proponents are being sold a charade. The U.S. has passed balanced budget bills before, too. How’s that working out? Numerous signatories to Kyoto bailed when the going got tough. France and Germany blew threw the EU debt limits. It’s very rare that a government will take an action that is temporarily economically damaging to save money in the future. If deferring actual cuts indefinitely was all this bill did, I wouldn’t particularly care. But this trade tariff threat nonsense is dangerous to the world economy and boneheaded. What it really does is illustrate the truism that without world cooperation, local cap-and-trade legislation does nothing to prevent global warming and primarily results in economic damage to the country trying it. ---
**Author:** ![IdahoMauleMan](https://avatars.discourse-cdn.com/v4/letter/i/71c47a/32.png) [@IdahoMauleMan](https://boards.straightdope.com/u/IdahoMauleMan)\ **Post date:** [July 3, 2009, 1:58pm UTC](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203/50 "2009-07-03T13:58:14Z")
> [@Sam\_Stone](#): > > Yes there is. Most economists agree that the most efficient way to recover carbon externalities is with a direct carbon tax. It’s transparent, and it’s not subject to being gamed or captured by special interests. > > Cap and Trade has many problems specific to its mechanism. For one thing, it’s distortionary. It hides the tax on carbon inside the price system, which makes it less efficient. It’s subject to gaming, as the carbon allocation process is inherently political. You can see that in spades in this bill - it’s riddled with exemptions and giveaways. > > What cap and trade does is make Washington more powerful. Every year or whatever the interval is, the government will decide how much to lower carbon emissions, which means a lobbyist parade to Washington to attempt to influence the legislation. It also means that it will be harder to price the value of future carbon and prices will constantly fluctuate based on political whim. What’s more frustrating is that this is actually the second lap through this type of nonsense. The 3rd if you count the European example. All of the examples of ‘what happens’ when Congress decides to get busy in this arena were already evident in the ethanol subsidy fiasco. 1. Congress decides to ‘do something’ about the whole global warming, environmental, create new green jobs thing. 2. Congress ‘does something’, but it’s so riddled with exemptions, subsidies, arbitrarily set targets, loopholes created by lobbyists, etc. that its unclear what (if anything) was accomplished. 3. Congress just handed itself more power to turn knobs and push buttons with special interests in the future, now that the bill has become law. 4. Congress distorts markets and starts the boom/bust cycle (or reverse) in targeted industries. Ethanol plant production was booming for 2 years in the Midwest. Now, a lot of people have gone bankrupt and there is empty plant and equipment sitting idle throughout Minnesota, Iowa, Illinois and other Plains States. That capital was largely wasted. 5. Unintended consequences start kicking in… like food prices feeling additional pressure, and an increasing number of scientists figuring out that US-based ethanol production actually ADDS to the supposed global warming effect. Not to mention lots of other little annoyances, like the fuel damaging vehicles and the additional cost imposed on drivers. Result? Nothing much happened to satisfy the original intent, a few well-connected firms and lobbyists distorted the bill to their advantage, and we’re worse off than what we were before. Nothing to suggest this won’t be any different. Barack Obama. Change we can believe in. ---
**Author:** ![elfkin477](https://avatars.discourse-cdn.com/v4/letter/e/a9a28c/32.png) [@elfkin477](https://boards.straightdope.com/u/elfkin477)\ **Post date:** [July 5, 2009, 5:21am UTC](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203/51 "2009-07-05T05:21:35Z")
Though I’ve heard a lot about why this is a bad idea, especially during a recession, I’m still left with this question: where will this money go? There’s some talk of R&D for alternatives, but surely the bulk of the money generated by this new tax won’t end up being earmarked for that purpose. Will it end up in the general fund or somewhere else? ---
**Author:** ![ralph124c](https://avatars.discourse-cdn.com/v4/letter/r/8797f3/32.png) [@ralph124c](https://boards.straightdope.com/u/ralph124c)\ **Post date:** [July 5, 2009, 2:23pm UTC](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203/52 "2009-07-05T14:23:08Z")
Al who favor this ridiculous “Cap and Trade” Bill ought to learn from our Federal ethanol program: the US Government is subsidizing the production of ethyl alcohol from corn. Gasoline in the USA is now a blend of 10% ethyl alcohol and 90% gasoline. This program is costing billions, and results in higher carbon emissions, higher oil imports, and lower gas mileage. The cost to consumers also includes: engine damage from the corrosve ethanol, and increased vehicle emissions…the exact opposite of what was intended! Of course, the farm belt lobby doesn’t care one iota! The important thing is that ederal money is flowing to farmers! Just goes to show you…don’t ever think that congress uses facts and reaon…its all about money! Oh, and to add to this disaster: farm state lobbyists have gotten legislation to block imports of lower cost ethanol from Brazil (where alcohol as a fuel actually makes sense!:smack: ---
**Author:** ![IdahoMauleMan](https://avatars.discourse-cdn.com/v4/letter/i/71c47a/32.png) [@IdahoMauleMan](https://boards.straightdope.com/u/IdahoMauleMan)\ **Post date:** [July 5, 2009, 2:28pm UTC](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203/53 "2009-07-05T14:28:39Z")
> [@elfkin477](#): > > Though I’ve heard a lot about why this is a bad idea, especially during a recession, I’m still left with this question: where will this money go? There’s some talk of R&D for alternatives, but surely the bulk of the money generated by this new tax won’t end up being earmarked for that purpose. Will it end up in the general fund or somewhere else? The last I heard, this was the ‘down payment’ on the ensuing health care fiasco. Yes? No? Wonderful. Then we’ve now officially reached the point where the resources extracted from the citizenry by one huge, punitive, wealth-and-jobs-destroying club being wielded by our government is being used to fuel the next one. Now that IS change we can believe in. ---
**Author:** ![Rhythmdvl](https://avatars.discourse-cdn.com/v4/letter/r/85f322/32.png) [@Rhythmdvl](https://boards.straightdope.com/u/Rhythmdvl)\ **Post date:** [July 5, 2009, 4:13pm UTC](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203/54 "2009-07-05T16:13:01Z")
There seems to be a profound lack of understanding of rudimentary economic principles. Of course, it could come down to something similar to **flickster’s** I-don’t-want-to-reduce-emissions-so-it-doesn’t-matter-what’s-being-talked-about-I’m-going-to-call-it-names-anyway irrelevancies to the topic, so there very well could be _some_ basic understanding in other contexts. But very little here. > [@ralph124c](#): > > Al who favor this ridiculous “Cap and Trade” Bill ought to learn from our Federal ethanol program **Ralph** , was this supposed to be ironic? You’re pointing at a program that’s pretty much the **antithesis** of emissions trading to say that emissions trading won’t work? Or is this a “see, the government can’t do anything right so don’t support anything!” post? If you wanted to draw a parallel to emissions trading, what about using, well, [emissions trading](http://en.wikipedia.org/wiki/Acid_Rain_Program)? A successful program (though open to critique and improvement) that reduced acid rain effects at a significantly lower cost than direct reduction mandates. > [@](#): > > > [@elfkin477](#): > > > > Though I’ve heard a lot about why this is a bad idea, especially during a recession, I’m still left with this question: where will this money go? > > > [@IdahoMauleMan](#): > > > > The last I heard, this was the ‘down payment’ on the ensuing health care fiasco. Yes? No? **IdahoMuleMan** , could you be confusing a direct carbon tax (favored by some) with the emissions trading program at the heart of the OP? Do you have a cite for where you heard that this is a ‘down payment’? That might shed some light on the misunderstanding. Do you realize that in a cap and trade program, most of the monies are being exchanged between _voluntarily contracting private parties_? Of course there will be an expense — on the government side as well as in general implementation. For the government, it’s one thing to take the simplistic “any money sent to the government _for a program I don’t like_ is a waste of money and teh evil,” but then what kind of exchange is possible if all you’re going to do is stick your fingers in your ears and chant “too much too much too much” over an over? And again, you could be doing the same dance specifically for emissions reduction, but the effect is the same. This is a shame, because there are some very difficult problems associated with emissions monitoring and enforcement. What to do about “hot air,” how to implement monitoring for the least cost, how to resolve disputes between parties, what to count as a reduction, etc. But all that seems to be getting lost in the drumbeat of “all government spending is bad; end of discussion!”. > [@Sam\_Stone](#): > > Yes there is. Most economists agree that the most efficient way to recover carbon externalities is with a direct carbon tax. Cite? Who are these economists and what bizarre/non-standard definition of efficiency are they using? The basic premise of emissions trading rests on comparative advantage. That is, if you can reduce your emissions cheaper than I can, it is **cheaper** and **more efficient** to allow me to pay you to reduce more so I can reduce less. As an example, say Doperland wanted to reduce its emissions by 200 units. You and I are the only emitters, both producing 1,000 units, both run factories of similar size, and both need to reduce by 100 units. At my Cog factory, the cost for reducing is $10 per unit; my total cost is $1,000. At your chocolate factory, you face a cost of $5 per unit to reduce, so your total cost is only $500. \*\*With no trading allowed, the total cost to the economy is $1,500. \*\* However, if trading were allowed, then it’s possible that you and I could come to an agreement. If you reduce by 1_50_ units, I’ll pay you 6 dollars per unit for the extra fifty (that’s $5 for your costs and $1 for you). You reduce by 150 units, I’ll reduce by 50. The net result is _still_ a 200 unit reduction. As noted upthread, the nature of CO2 is such that its actual, physical origin is irrelevant (though, as you noted, there are major problems in other areas). Here’s where the efficiency comes in: Your cost to reduce is **$50 _lower_ than it would have been without trading.** [sup]_[/sup] My cost to reduce is **$200 lower than it would have been without trading.** [sup]_[/sup] The total cost to the economy is **$250 _lower_ than it would have been without trading.** [sup]\*[/sup] How is a direct carbon tax more efficient? What do you mean by “For one thing, it’s distortionary. It hides the tax on carbon inside the price system, which makes it less efficient.”? How does a direct tax not get subsumed within the price system? How is that better than allowing emitters to use the market to reduce their costs? What is so special about a direct tax that a similar bill wouldn’t also be “riddled with exemptions and giveaways” ? > [@](#): > > What cap and trade does is make Washington more powerful. Every year or whatever the interval is, the government will decide how much to lower carbon emissions, which means a lobbyist parade to Washington to attempt to influence the legislation. It also means that it will be harder to price the value of future carbon and prices will constantly fluctuate based on political whim. How is this unique to cap and trade? A direct tax or other reduction program wouldn’t be subject to annual review/revision? If carbon futures are only predictable for the next cycle, wouldn’t contracts —contracts freely engaged in by willing participants — reflect that? Though less efficient than if there was a stable ten-year period, isn’t it still more efficient than a blanket tax? It’s not that there aren’t problems with the current bill, questions, problems, and critiques related to carbon emissions trading, costs involved in implementation, and efficiency trade-offs to be considered. > [@](#): > > What it really does is illustrate the truism that without world cooperation, local cap-and-trade legislation does nothing to prevent global warming and primarily results in economic damage to the country trying it. Yes, we do need collective action. Is it possible that the global and national costs of inaction are greater than the national costs of going first? Which would be more efficient? [sup]\* To check my math: Your base cost is 150 x $5 per unit; $750. You receive a payment from me of 50 x $6; $300. $750 – $300 = $450. This is $50 less than your original $500 cost to reduce. My base cost is 50 x $10 per unit; $500. I have to pay you $300, so my total cost, $800 is $200 cheaper than my original $1,000. [/sup] ---
**Author:** ![Public\_Animal\_No.9](https://avatars.discourse-cdn.com/v4/letter/p/b9e5f3/32.png) [@Public\_Animal\_No.9](https://boards.straightdope.com/u/Public_Animal_No.9)\ **Post date:** [July 5, 2009, 6:31pm UTC](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203/55 "2009-07-05T18:31:17Z")
> [@elfkin477](#): > > Though I’ve heard a lot about why this is a bad idea, especially during a recession, I’m still left with this question: where will this money go? There’s some talk of R&D for alternatives, but surely the bulk of the money generated by this new tax won’t end up being earmarked for that purpose. Will it end up in the general fund or somewhere else? Despite the claims of those who are fighting CO2 reductions in general, this is not a tax. By far, most of the money that is spent on allowances will be paid from one private company to another private company, and will not go to, or even through, the government. The original approach favored by Obama was to sell all the allowances and use the funds as part of the federal government income, but that idea pretty much died during the usual horse-trading that was done to get the bill to pass. If that approach had been adopted, then it would have been a tax, with the funds going to Uncle Sam. As it currently stands, the allowances will be allocated (at no cost) to various industries, with the power industry getting most of them. There may be some of the allowances that are sold, with the projected revenues going into support of research, development, and deployment of carbon capture and storage technologies, renewable energy, and I think for rebates to low-income utility customers. As proponents continue to demonstrate that this is not a tax, the opponents are starting to paint this as a give-away to Wall Street traders and bankers, as though they (Wall Street) are the ones who are getting the allowances rather than the emitting industries, who are the ones getting them for free. On the issue of tax vs. cap-and-trade, there are some good reasons for choosing one over another. With a C&T system, you can set a defined amount of emission reduction by setting a specific cap. What you don’t know is how much it will cost, at least until the allowance market settles down. With a carbon tax, you can pretty much figure out what it will cost, but you don’t know how much reduction you might get, at least not until the market figures out what is worth changing at the price set by the tax. If I remember the discussion correctly, if you have a good sense of how much you need to reduce emissions to reduce the adverse impacts you are trying to avoid, then you would use a C&T system, and adjust the cap so that your total cost is close to what your estimate is for the benefits you are achieving through the emission reduction. If, on the other hand, you can’t really determine what the benefit of an incremental reduction in emissions will be, then you use the tax, which allows you to set the initial cost, and then adjust that as needed in the future to achieve the reductions you anticipate you need. I have heard proposals to set a carbon tax that was revenue-neutral, by reducing income taxes by the same dollar amount as any carbon tax. I don’t know if that idea is still alive in the Senate or not, but I thought it was an interesting one. ---
**Author:** ![Sam\_Stone](https://avatars.discourse-cdn.com/v4/letter/s/ecccb3/32.png) [@Sam\_Stone](https://boards.straightdope.com/u/Sam_Stone)\ **Post date:** [July 5, 2009, 7:14pm UTC](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203/56 "2009-07-05T19:14:14Z")
> [@Rhythmdvl](#): > > There seems to be a profound lack of understanding of rudimentary economic principles. Yeah, but not on the side you’re thinking of… > [@](#): > > If you wanted to draw a parallel to emissions trading, what about using, well, [emissions trading](http://en.wikipedia.org/wiki/Acid_Rain_Program)? A successful program (though open to critique and improvement) that reduced acid rain effects at a significantly lower cost than direct reduction mandates. There is a _huge_ difference between CO2 and most pollutants. Other pollutants are emitted in small quantities, and with proper scrubbers, can be removed from emissions entirely. CO2 is the fundamental byproduct of fossil fuel burning. It can’t be ‘scrubbed’. Short of sequestration, which we can’t really do, the only way to reduce carbon is to reduce the consumption of fossil fuels. That means a ‘cap’ on CO2 means a reduction in energy output using fossil fuels. Whether or not a reasonable scheme can be set up to sell carbon credits totally depends on how politicians decide to allocate those credits in the first place, and who they decide to exempt. For example, if you’re a coal-fired power plant, just how are you going to ‘improve efficiency’ in terms of CO2 output? If we were talking about S02, you could install scrubbers. But you can’t with CO2 - it is what it is. All you can do is pass the cost along to your consumers. What you may notice is that states which have large hydro resources or nuclear plants suddenly have a competitive advantage over other states, _and there’s nothing the other states can do about it_. Likewise, municipalities that have coal as their major energy source are now at a permanent disadvantage to those that don’t. All their goods will be more expensive. This could cause seismic shifts in the country, at great economic cost. Part of the key feature of a proper cap-and-trade program would be the initial auctioning of carbon credits, which would level the playing field among all businesses, old and new (i.e. a business that starts up a year from now would have to buy carbon credits for its operations, but so did the business that’s currently running). But this bill doesn’t do that. It hands out 85% of the credits for free to existing businesses, based on political favoritism. That means that after the initial handout, new businesses are going to be at a huge disadvantage, because they will have to buy their credits on the market, whereas other businesses did not. Here’s what the [Carbon Tax Center](http://www.carbontax.org/issues/carbon-taxes-vs-cap-and-trade/) has to say about it: > [@](#): > > CTC regards carbon taxes as superior to carbon cap-and-trade systems for six fundamental reasons: > > 1. Carbon taxes will lend predictability to energy prices, whereas cap-and-trade systems will aggravate the price volatility that historically has discouraged investments in less carbon-intensive electricity generation, carbon-reducing energy efficiency and carbon-replacing renewable energy. > 2. Carbon taxes can be implemented much sooner than complex cap-and-trade systems. Because of the urgency of the climate crisis, we do not have the luxury of waiting while the myriad details of a cap-and-trade system are resolved through lengthy negotiations. > 3. Carbon taxes are transparent and easily understandable, making them more likely to elicit the necessary public support than an opaque and difficult to understand cap-and-trade system. > 4. Carbon taxes can be implemented with far less opportunity for manipulation by special interests, while a cap-and-trade system’s complexity opens it to exploitation by special interests and perverse incentives that can undermine public confidence and undercut its effectiveness. > 5. Carbon taxes address emissions of carbon from every sector, whereas some cap-and-trade systems discussed to date have only targeted the electricity industry, which accounts for less than 40% of emissions. > 6. Carbon tax revenues would most likely be returned to the public through dividends or progressive tax-shifting, while the costs of cap-and-trade systems are likely to become a hidden tax as dollars flow to market participants, lawyers and consultants. > [@](#): > > Cite? Who are these economists and what bizarre/non-standard definition of efficiency are they using? Economists who oppose Cap and Trade and support a carbon tax: Paul Volcker Larry Summers Nobel Laureate Joseph Stiglitz Robert Reich Jeffrey Sachs Greg Mankiw Alan Greenspan Nobel Laureate Gary Becker William Nordhaus Richard Posner Anthony Lake Martin Feldstein Gregg Easterbrook Tyler Cowen And trust me, that’s a \*very incomplete list. A carbon tax is also favored by James E. Hansen, who is probably familiar to you, and Obama’s energy secretary, Steven Chu. The current cap-and-trade bill is also opposed by Greenpeace, which says that it has so many exemptions and puts off the hard choices for so long that it will do nothing. In fact, the widespread agreement that carbon taxes are superior to cap and trade, by economists across the political spectrum, makes this one of the more widely agreed-upon economic issues. Now maybe you could provide a list of economists who think that cap-and-trade is a better system than a carbon tax? > [@](#): > > The basic premise of emissions trading rests on comparative advantage. That is, if you can reduce your emissions cheaper than I can, it is **cheaper** and **more efficient** to allow me to pay you to reduce more so I can reduce less. In an ideal world, there is some merit to this. Carbon taxes have the same effect, only they are even more efficient. But in the murky world of politics, the differences become even more pronounced, because a carbon tax is much harder to manipulate and game and politicians have much less power to grant favors allowing extra emissions. > [@](#): > > As an example, say Doperland wanted to reduce its emissions by 200 units. You and I are the only emitters, both producing 1,000 units, both run factories of similar size, and both need to reduce by 100 units. At my Cog factory, the cost for reducing is $10 per unit; my total cost is $1,000. At your chocolate factory, you face a cost of $5 per unit to reduce, so your total cost is only $500. \*\*With no trading allowed, the total cost to the economy is $1,500. \*\* And now for the real world picture: My cog factory lobbies congress for a special exemption, saying that it’s unfair to cog manufacturers to bear the brunt of the cost. So now, even though my factory is less efficient than yours, I have an economic advantage over you. Also, in order for Congress to buy off the cog manufacturers (and everyone else), they give out 85% of the carbon credits for free, and I only have to pay money for the extra 15% I need to make up my shortfall. But that may be good for me, because A) I’ can now raise my prices with impugnity, because B) any competitors that spring up to take advantage of my high profit margins suddenly find that they have to buy ALL their carbon credits, and the added financing costs makes them unable to compete. Congress has now created a huge barrier to entry into manufacturing, which current manufacturers are exempt from. The economy stagnates, jobs are lost in droves, and competition suffers. > [@](#): > > What is so special about a direct tax that a similar bill wouldn’t also be “riddled with exemptions and giveaways” ? Oh, there can be some gaming of the system, to be sure. Canada’s GST has exemptions for some foods and not others, for example. But by and large, a tax administered like a VAT is transparent, and fairly universally applied. It doesn’t stack the deck against new businesses, since everyone pays it all the time. If a single company gets an exemption, all other companies can see it and complain, as can the people. Also, the public can make smarter choices. If I’m facing the choice between two goods, one of which is more expensive than the other, how do I know what the price differential represents? Maybe the more expensive one is of higher quality. Maybe it performs better and is more reliable. Or maybe it’s more expensive because the factory making it is in a region that uses coal for energy, and the other one is in a region which uses hydro. From a global warming standpoint, you’d prefer that I buy the one that uses hydro power, but the price doesn’t tell me. But if i look at too products and see the basic price if the same, but one has a carbon tax of $20, and the other has a carbon tax of $50, I’m naturally going to buy the one with the lowest carbon tax, which is the decision you want me to make, right? The main difference is that cap and trade is byzantine and hidden, which is the environment government loves to work in. The current bill is over 1000 pages long, and that’s just for starters. A carbon tax is much simpler and open. > [@](#): > > How is this unique to cap and trade? A direct tax or other reduction program wouldn’t be subject to annual review/revision? If carbon futures are only predictable for the next cycle, wouldn’t contracts —contracts freely engaged in by willing participants — reflect that? Though less efficient than if there was a stable ten-year period, isn’t it still more efficient than a blanket tax? If a carbon tax is set at, say, $30/ton, everyone can work with that number. You can plan around it. You know what effect it will have on the price of carbon a year from now. If the price of carbon is set through auction, no one knows what it will be until the auction is over. Given a period of high demand, the price could skyrocket. During a period of low demand, the price could plummet. And by the way, what you’re doing here is creating yet another new derivatives market. Carbon futures will be bought and sold and speculated on. People who have no desire to use a single credit will be in the market, buying and selling credits for profit. There will be new risks. And it’s a totally untried type of commodity - if someone buys a billion dollars worth of 5-year carbon credits, imagine the storm if the government suddenly decides to change the cap. What you have is a derivatives market of high risk for an artificially created commodity whose price is directly controlled by government. The possibilities for fraud and corruption are staggering. > [@](#): > > Yes, we do need collective action. Is it possible that the global and national costs of inaction are greater than the national costs of going first? Which would be more efficient? ‘Going first’ makes it LESS likely to get global action. Because you’ve just given the Chinese an additional comparative advantage, as long as they continue to burn fossil fuels. It is entirely possible that this bill will: A) drive manufacturing out of the U.S. and into countries that are less energy-efficient, which will increase the carbon footprint of those products, B) Be so full of exemptions that it will do absolutely nothing for global warming, C) make it harder to get global cooperation, and D) increase the cynicism of the public toward other climate mitigation schemes, setting the whole movement back. This is why Greenpeace is opposed to it. A good parallel here is the ethanol subsidy program. Championed by global warming activists, the program was completely captured by big business and used in their favor. It actually made global warming worse, hurt the economy, and made people more skeptical of climate change efforts. And the thing is, some of us were saying it would have these effects right from the beginning, but the argument for ethanol was, “Yeah, it may not be perfect, but we’ve got to start _somewhere_.” Sound familiar? ---
**Author:** ![IdahoMauleMan](https://avatars.discourse-cdn.com/v4/letter/i/71c47a/32.png) [@IdahoMauleMan](https://boards.straightdope.com/u/IdahoMauleMan)\ **Post date:** [July 5, 2009, 7:31pm UTC](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203/57 "2009-07-05T19:31:45Z")
> [@Rhythmdvl](#): > > **IdahoMuleMan** , could you be confusing a direct carbon tax (favored by some) with the emissions trading program at the heart of the OP? Do you have a cite for where you heard that this is a ‘down payment’? That might shed some light on the misunderstanding. Do you realize that in a cap and trade program, most of the monies are being exchanged between _voluntarily contracting private parties_? Here was one cite I picked up after 20 seconds of Googling. But it’s not real authoritative. [http://healthcare.change.org/blog/view/cap\_and\_trade\_to\_fund\_health\_care\_uh\_do\_we\_have\_to](http://healthcare.change.org/blog/view/cap_and_trade_to_fund_health_care_uh_do_we_have_to) I would love a direct carbon tax. As a substitute for payroll and Medicare taxes, capital gains and dividends taxes. That way, you address an important externality, help the working poor, and spur investment and job creation in one fell swoop. But it won’t happen, for two reasons. 1. It puts Congressmen directly in the face of their voting constituents, by having them support a tax that is clear, visible and will piss off voters. Cap-and-Trade is a politically slick end-around that problem. It’s a tax alright, but it’s hidden. 2. Congress can’t horse-trade favors with lobbyists and special interests with a direct carbon tax nearly as easily. They can with Cap-and-Trade. And they did. That’s why the bill is a jillion pages long. ---
**Author:** ![Richard\_Parker](https://avatars.discourse-cdn.com/v4/letter/r/35a633/32.png) [@Richard\_Parker](https://boards.straightdope.com/u/Richard_Parker)\ **Post date:** [July 5, 2009, 9:11pm UTC](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203/58 "2009-07-05T21:11:01Z")
We’ve said that the cost of the bill basically depends on four relatively complicated factors: 1. The amount of increase in the prices for energy resulting from the bill 2. The consequent cost to GDP of lower consumer demand and industry flight 3. The costs avoided by reducing the amount of pollution the bill reduces 4. The benefits of an energy market with prices more accurately reflecting costs Opponents believe 1 & 2 will be large, 3 & 4 will be small. Proponents think that 3 & 4 will outweigh 1& 2. Is that about right? Are there other major factors affecting the cost of the bill? ---
**Author:** ![IdahoMauleMan](https://avatars.discourse-cdn.com/v4/letter/i/71c47a/32.png) [@IdahoMauleMan](https://boards.straightdope.com/u/IdahoMauleMan)\ **Post date:** [July 5, 2009, 9:17pm UTC](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203/59 "2009-07-05T21:17:41Z")
> [@Richard\_Parker](#): > > We’ve said that the cost of the bill basically depends on four relatively complicated factors: > > 1. The amount of increase in the prices for energy resulting from the bill > 2. The consequent cost to GDP of lower consumer demand and industry flight > 3. The costs avoided by reducing the amount of pollution the bill reduces > 4. The benefits of an energy market with prices more accurately reflecting costs > > Opponents believe 1 & 2 will be large, 3 & 4 will be small. Proponents think that 3 & 4 will outweigh 1& 2. > > Is that about right? Are there other major factors affecting the cost of the bill? Another one I would add is ‘strategic cost’, which is the cost of disproportionately punishing certain industries relative to foreign competition. That has the potential to hollow out certain sectors of the economy and place us in an uncomfortable position, strategically, with a foreign power. ---
**Author:** ![Richard\_Parker](https://avatars.discourse-cdn.com/v4/letter/r/35a633/32.png) [@Richard\_Parker](https://boards.straightdope.com/u/Richard_Parker)\ **Post date:** [July 5, 2009, 10:44pm UTC](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203/60 "2009-07-05T22:44:10Z")
> [@IdahoMauleMan](#): > > Another one I would add is ‘strategic cost’, which is the cost of disproportionately punishing certain industries relative to foreign competition. > > That has the potential to hollow out certain sectors of the economy and place us in an uncomfortable position, strategically, with a foreign power. I guess I meant to include that in “industry flight,” assuming there’s only a minor economic difference between an industry relocating to Mexico or a Mexican industry gaining a greater market share. Similarly, the flip side of that strategic question (e.g. benefits to ensuring that US renewable energy industry has an international advantage), falls under 4. I recall that critics of the 1990 amendments to the Clean Air Act made arguments similar to the generic ones being made about this bill. Are there any studies on the actual economic effects the Clean Air Act and how they compare to the critics claims? [Previous page](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203.md?page=2) [Next page](https://boards.straightdope.com/t/the-costs-of-cap-and-trade/501203.md?page=4)