Minding our P's and Q's (reprise)

By Dave Anderson:

Carbon taxes and cap and trade are both attempts to create price incentives to reduce carbon emissions.  The goal is to raise the dispersed and mostly externalized cost of pollution into a concentrated and internalized cost for the polluter.  From here, most polluters will seek to reduce emissions because emissions are now expensive and non-value adding to their bottom line.  The question is mechanism and certainty. 

I'm reprising and re-arranging a post of mine from last April when there was a round of carbon tax advocacy that neglects the sausage factory of the US Congress:

the first order public policy problem with carbon dioxide is not a revenue problem but a quantity of emissions is producing undesirable negative externalities problem...

Cap and Trade attempts to impose a hard Q of how many tons of carbon dioxide can be dumped into the atmospheric sink in a given year. Prices are at most a tertiary concern for a cap and trade system. Carbon taxes attempt to set a fixed price for carbon emissions. Quantity of emissions is irrelevant on the first order. The price will be fixed at a decent technocratic guesstimate of where the desired Q is in a technocratic world, or it will be fixed at the nexus of industrial/political capture points...

market mechanism [cap and trade] that has a demonstrated near peer already in operation in the United States in the form of the sulfur dioxide emission permitting system. The SO2 market reduced emissions at a faster rate than anticipated and at a much lower cost. The regulation and monitoring functions are fairly inexpensive for the government. The counterpoint is the claim that the European Union CO2 cap and trade market is inefficient but once you look at market design (that matters a lot) you see significant differences...

conservatives, you won the ideological argument twenty years ago. Liberals are using market based solutions to achieve policy goals with minimal interference in the economy. Direct taxation as a means to get to a related goal via a quasi-command and control system of rate changes is not the preferred liberal method any more.

Greg Mankiw is pushing for a carbon tax on the assumption of non-sausage making in the House or the Senate as he is pushing a piece of testimony by Ted Gayer that argues a perfect carbon tax where fixed prices are known are better than any bastardized cap and trade system that could actually emerge.  And he is probably right that a perfectly designed system without political interference would be more efficient and effective that whatever deal emerges from the Senate.  However if the carbon tax proposal was the proposal being debated upon in the Senate, it would not emerge perfectly designed as the Agricultural Committee and the Coal Caucus Democrats would get their pound of flesh to get to 60. 

The biggest problem with CO2 is not a revenue problem. The primary problem are the negative externalities which we are generating and will continue to generate for a generation even if emissions went to 1850s levels tomorrow.  The perfect is the enemy of the satisficing sausage that the Senate may or may not produce.