More Climate Confusion: Trading Permitaxes

Poor Robert Samuelson received a lot of abuse from bloggers for arguing that a greenhouse-gas cap-and-trade system, such as the one under consideration by the Senate, would be inferior to a carbon tax. Samuelson argues  that cap-and-trade advocates pretend that cap and trade would not impose (short-term) economic costs on people, when in fact it would—just as a carbon tax would—by raising the cost of greenhouse-gas-emitting energy sources. Samuelson also argues that a tax system would be less vulnerable to lobbying and congressional misspending than a cap-and-trade system would:

Unless we find cost-effective ways of reducing the role of fossil fuels, a cap-and-trade system will ultimately break down. It wouldn’t permit satisfactory economic growth. But if we’re going to try to stimulate new technologies through price, let’s do it honestly. A straightforward tax on carbon would favor alternative fuels and conservation just as much as cap-and-trade but without the rigid emission limits. A tax is more visible and understandable. If environmentalists still prefer an allowance system, let’s call it by its proper name: cap-and-tax.

The critics pounce on Samuelson for the second point. As Ryan Avent  puts it (to an approving blogospheric chorus):

Yowza. As any economist worth his or her salt will tell you, a cap and trade plan with auctioned permits is essentially identical to a carbon tax. That also happens to be exactly what Barack Obama is proposing. So, another way for Samuelson to have written this column would have been to title it, “Barack Obama has a good plan to reduce carbon emissions.”

Samuelson is definitely confused: He argues that a cap-and-trade system is inferior to a carbon tax and that the two systems are the same. But his main point—that people don’t want to call a tax a tax—is right. Don’t believe me? Remember this exchange ?

GIBSON: I’m sort of sorry Chris Dodd isn’t here because he’s talked a lot about a carbon tax in this election. Al Gore favors a carbon tax.

None of you have favored a carbon tax. Is it a bad idea, or is it just so politically unpalatable that you guys don’t want to propose it?

RICHARDSON: Can I answer?

You know, I was energy secretary. It’s a bad idea. Because, when you have a carbon tax, first of all, it’s not a mandate. What you want is a mandate on polluters, on coal companies, on those that pollute, to reduce greenhouse gas emissions by a certain target. …

Furthermore, a carbon tax, that’s passed on to consumers, that’s passed on to the average person, that’s money you take out of the economy.

So it’s a bad idea.

GIBSON: Senator Obama?

OBAMA: Well, I agree with Bill that I think a cap-and-trade system makes more sense . That’s why I proposed it: because you can be very specific in terms of how we’re going to reduce the greenhouse gases by a particular level.

Now, what you have to do is you have to combine it with a 100 percent auction. In other words, every little bit of pollution that is sent up into the atmosphere, that polluter is getting charged for it.

Not only does that ensure that they don’t game the system, but you’re also generating billions of dollars that can be invested in solar and wind and biodiesel.

I do disagree with one thing, though, that Bill said, and that is that on a carbon tax, the cost will be passed on to consumers, and that won’t happen with a cap-and-trade.

Under a cap-and-trade, there will be a cost. Plants are going to have to retrofit their equipment. And that’s going to cost money, and they will pass it onto consumers.

So here’s Bill Richardson—the former secretary of energy!—implying that a cap-and-trade system, unlike carbon tax, doesn’t pass on any costs to a consumer. Obama, to his credit, corrects this error. But Obama surely knows, like Ryan Avent, that his cap-and-trade system is equivalent to a carbon tax.  So why does Obama say otherwise?

Whatever else one might say about Samuelson’s column (which I mostly disagree with), his main point is that politicians are trying to hide the short-term costs of a climate law by avoiding the “tax” word. (Whether or not “environmentalists” are, or not, I’m not so sure.) Perhaps, the best that can be said is that the public will be confused whether politicians use the term “tax” or “emissions permit.” The public understands neither of these terms—at least, not in the context of climate regulation—and won’t receive much help from their leaders anytime soon.