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Carbon Tax or Cap and Trade?

May 12, 2010

For those of you who have been following the debate over what is the best economic scheme to implement to substantially reduce the amount of carbon that is being released into the atmosphere, the ins and outs of it all can be more than a bit confusing.  The two main proposals that have the best chance of working are the Cap and Trade regime or a Carbon Tax.  Proponents of the latter feel it would be the fairest and easiest to implement across the board.  But, as in a lot of considerations in the field of economics, the theory is somewhat divorced from the social-political reality.  Actually implementing a Carbon Tax would be near impossible if the goal is to limit the amount of CO2 in the atmosphere to 350 ppm, which is the recognized scientific consensus to prevent a global temperature increase of 2 degrees celsius, and hence avoid the nastier effects of global warming.

Relying on a cap-and-trade system has many advantages over the Carbon Tax.  Robin Hahnel delineates one reason quite clearly as follows:

The scientific community has positioned us to win global caps that are a decent deal. Discussion is now centered on caps that would keep the average global temperature from rising by more than 2 degrees Celsius, or stabilize greenhouse gas concentrations in the atmosphere at 350 ppm.  Caps that accomplish this would be a tremendous step forward to prevent climate change before it is too late. On the other hand, there is no way in hell we have any chance of winning political support for an international carbon tax high enough to reduce emissions by nearly this much. In other words, strictly from an emission reduction perspective we are poised to get a much better deal than we could ever hope to get with an international carbon tax.

There is a good reason this has proven to be the case. When tax levels are debated it is economists who are the experts. How high should a tax be? Ask an economist. On the other hand when we ask how low does a cap need to be to keep us safe people sensibly ask climate scientists. We want the political debate to play out the second way – with climate scientists telling us what is safe — not the first way – with economists telling us how high to set a carbon tax based on their estimates of how costly the tax will be to the economy. Economists are the main enemy in this regard and we should not witlessly re-empower them now that climate scientists have seized the microphone.

Hahnel has been a leading voice on the left in that has come out in favor of the Cap and Trade regime, often at odds with others on the left.  For a very informative debate about the merits and drawbacks of the strategies and tactics of combating climate change see the debate between Hahnel and Patrick Bond that has taken place on Znet.

Anyone who has an interest in the topic of climate change and what we as humanity should do about it, which should be everyone, should watch the five-part series of interviews with James Boyce from the Real News Network about the Cap and Trade and a Carbon (posted below).  Having an understanding of these crucial issues is essential if we are to successfully confront the massive and omnipresent implications of a drastic change in our global climate and all the necessary ramifications it entails.

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