Thursday, April 10, 2008

ECON 260: Comment Thread for 4/11

This link contains several other links to the debate among economists over whether or not we should curb carbon emissions using a carbon tax or a cap-and-trade scheme.

What do you think is the best way to regulate carbon emissions? A carbon tax? Cap and trade (with which features)? Or should we stick with command and control regulations?

In "Phone Calls From the Congressional Budget Office," Nat Keohane essentially explains that cap and trade and pollution taxes are effective for different periods of ecological crises or environmental purposes. He uses the example of ecological tipping points to show that marginal effects of pollution are not stagnant, as projected for global warming. Scientist project that there are certain points in which environmental problems will "tip" and experience steep marginal damages (e.g., when Antarctica starts to melt and then melting speeds up rapidly because more ice is cracked and vulnerable to melting AND when the Amazon become so deforested that the rain stops, the land dries up, and the magnitude of environmental destruction multiplies exponentially!). Keohane explains that if we are trying to control emissions (with constant marginal damages), a tax regulation would be most effective, since this controls price (and annual emissions). But when you consider tipping points or total emissions, cap and trade would be most efficient. Therefore, I think we should make policy more sensitive to these environmental issues and maybe create a hybrid of cap and trade and tax regulations to control different kinds of pollutants/environmental problems (after all, different pollutants will have different marginal damages as well!).
Well, I don't think that command and control is currently doing the trick, and so we should probably look for an alternative method to regulate carbon emissions. Carbon taxes seem like a good idea for the developed north, but I don't believe that many industries in the developing south could afford any added costs-which could lead to some firms shutting down where they are very much needed. Even worse imposing a tax on industries in the south could hamper future development. A cap and trade scheme sounds better, to me at least, on the global scale, but then we still have the problem of how we should allocate permits across firms. I'm not in favor of simply giving the permits away-or at least not in the north. Maybe we could auction the permits in the north and then give them to industries in the developing south, but I get the feeling that a lot of big industries in the north would fight this idea tooth and nail. So, I'm not really sure about what would be the best way to regulate carbon emissions. I wish there was another, better option.
I pretty much agree with what both Amber and Rachael have to say. It seems that having some sort of hybrid between carbon taxes and cap & trade would be optimal in this situation. However, if I only had to pick one, I think that a cap & trade would be a much better alternative than the carbon tax. If we give everyone the same cap to begin with, then the companies can trade with one another until each one company reaches their desirable output. Although not perfect, I think this is the best strategy to satisfy most companies.
Amber and Rachael both want more options, i guess someone's got to get very creative and get a Nobel prize! As for the hybrid between tax and trade- do you think the flexible cap system fits that?

I'm not sure which side i'd take, but for efficiency i'd go with the tax (im just believing the conclusion of the studies presented). For safety i'd go with the cap- screw buisiness, the climate can only take so much!
Something I found interesting in CBO piece is the importance of flexibilty in order to make reducing emissions more attractive and possible for firms. I do think that flexibility is key and I think that it would be most achievable via a cap and trade system. Cap and trade would have the benefit of making emission reduction a way for firms to make profits on the secondary permit market. Although taxes may be more efficient according to Keohane, I think that you would face much more opposition from industry when trying to implement them and during the political process of drafting the tax legislation, it seems likely that the tax and goals would be pushed down by industry to damage the actual effetiveness of protecting the environment. Cap and trade is the better option because it has the virtue of being attractive to firms and we need to have them on board if we want to get anything done.
I completely agree with Elizabeth about the the problem with taxes. Considering that industry is already opposed to pollution reduction, imposing an additional cost would impose an insurmountable hurtle to implement the tax system. The government is already so subservient to industry, it would be a huge challenge to implement the tax system to begin with. For this reason, the cap and trade (giveaway, not auction based) seems like it would be far more appealing for both those wanting pollution reduction and for industry.
Personally, I would like to see an inflexible cap-and-trade system implemented to curb carbon emissions because its emphasis is on protecting the environment but I realize that it is not the most cost efficient. Therefore, I think that a flexible cap-and-trade system would be the best because it works at balancing environmental concerns and economic concerns. A system that took into account the cost of cutting emissions would be more appealing to developing countries whose primary focus is poverty and meeting the basic needs of its citizens. Since a cap-and-trade system would need to be collective global effort in order to make it effective, it is important that the developing countries are on board. In a sense an inflexible cap-and-trade system would play to interests of developed and developing countries. Developing countries that do not emit as much carbon into the atmosphere would be able to sell their share of emissions to developed countries. These countries with an abundance of extra emission permits could use the money to help alleviate poverty and advance development. Compared to implementing a carbon tax, cap-and-trade provides more certainty as to the annual amount of emitted carbon. Finding the “right” amount to tax is difficult but essential to the effectiveness of the tax. If the tax is not “right,” firms and industry do not have incentive to follow it.
Like Amber pointed out, it seems that the appropriate method for controlling carbon emissions is almost always going to be specific to the situation which needs regulation.

It seems that command and control and pollution taxes are somewhat identical in their methods: they give direct penalties to those who violate a certain emissions standard. These methods will probably work best in more dire environmental situations that require immediate action, such as a superfund location.

Cap & trade is ideal as a long term solution, once we have already cut down carbon emissions to a sustainable level. From this point, we then grant industries permits to pollute a certain amount, and they are free to trade and sell them as they please. If this system fails and aggregates pollution to one central industry, we simply fall back to a pollution tax or command and control.

The necessary method depends entirely on the severity of the situation.
I am open to either system and there are people much smarter than me who are on both sides of the fence. However I would like to see one of them work first. Carbon trading in Europe has been a total failure so far. "Carbon trading" has become the go to phrase for what to do whenever someone asked a politician what to do about global warming. But how would it go about including automobile emissions? It would be the big companies which would stand to gain from carbon trading, they have the market power to help set the price as well as the capital to redesign their infrastructure to make it more carbon neutral.
It seems to me that the problem isn't so much about whether we should use cap and trade, taxes, or CAC. What is more important if we actually want to reduce pollution is better enforcement. It doesn't matter which method we implement if we don't have the ability to enforce it. We all know industry is "evil", so why would we trust them to do what's "right"?

As everyone has been saying, there are perks and problems with all of these methods of pollution reduction. Of course, a hybrid may do the trick considering all the problems that these methods have, but without proper enforcement, even these won't create ample change.
I think that cap and trade is the best way to do this, because we cannot know exactly the amount of money it will take to tax down to the right level of pollution, but if we start by making the allowed amount of pollution how much we think the right level is, nothing easier. I feel that this system may also help bring about a system where everyone gets their share, because people who need more pollution have to buy it from those who use less, and we end up rewarding those who can make less pollution. The draw back is that we loose that public money, but I feel that this is alright, if we never had it in the first place.
It seems that a hybrid may be the optimum choice for dealing with pollution levels however, it has to be done in such a way that the most able are doing the most changes in their practices. Carbon taxes etc, may harm the lower classes more for they typically live in the suburbs, or exurbs and have to commute to jobs.

Perhaps employers could subsidize lower income employees for their travels to work. Also perhaps subsidices could be used for smaller companies for Economies of Scale allow larger companies to adjust to industry changes.
I am a strong beliver in the tipping point or apocolpyse theory towards global warming. Policymakers are unwilling to accept that the tipping point is a possibility and so Command and control has failed to control because the end seems quite far off. Taxes seem to be bad idea because they can’t enforce change quickly. If the taxes are steep, companies will shut down. If they are small, they will not promote development of cleaner technologies. With cap and trade, we can let corporations force themselves into reducing pollution in a market-friendly manner. Despite the corporate-world’s distaste for pollution reduction, this model seems like an exciting way for businesses to get clean. There is competion and higher incentives for developing new technologies. There is also the potential for single firms to dominate the market. It may not be fair but once many of the kinks are worked out, all of the wonderful behaviors of competivive capitalism can be quickly applied. Both environmentalists and corporations could be well satisfied with fast clean progress and money to be made.
Most systems will likely adopt some type of hybrid approach. I feel that abandoning command and control would be a bad idea. In places like Baltimore, Eban says it seems to be working on its own. In terms of cap-and-trade vs. carbon tax, I lean towards supporting taxing carbon emissions because it avoids hot spots and helps avoid environmental injustice.
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