Correct me if I am wrong, but Obama has co-sponsored the same bill as McCain and Lieberman.  There is a picture of the three together at the top of this MSNBC article on the bill.

Matt, you're wrong about this in a number of ways. I'll get to you with the reasons why when I take my lunch break.

This is completely false: "The 'cap and trade' system is the other model, and the main sponsors are Joe Lieberman and John McCain."

The main sponsors of a 'cap and trade' system are Al Gore, Jim Jeffords, Barbara Boxer, Bernie Sanders, Environmental Defense, NRDC, Bingaman, Kerry, Snowe,  etc. etc.

In other words, pretty much everyone favors cap and trade.

It's not a scam. It's certainly not perfect, and there are economic inefficiencies, but as Gore said, it's incorrect to believe that a carbon tax must be exclusive of a cap-and-trade system.

You're barking up the wrong tree here.

Again, your post above falsely implies that Al Gore supports a carbon tax instead of a cap-and-trade system.

Gore's #1 suggestion is a carbon cap-and-trade system.

From his testimony before Congress:

"I think the first step should be a cap-and-trade system that starts with a freeze. I also support the Sanders-Boxer bill."

Polluting isn't a right.

This statement: "If you use energy in any concentrated form, you basically can't substitute away from carbon output" isn't true.

I definitely agree about the need for the carbon tax, but I'm not willing to dismiss the Cap and Trade approach quite yet.

A few of your concerns:  companies will monopolize the right to pollute.  I guess that means a large utility, for example, purchases all the carbon rights in a state, meaning individuals don't have the ability to create pollution because they don't have any of the carbon stocks needed to do so.  But does c&t apply directly to everyday consumers?  Not from what I understand.  Consumers would only pay higher costs when purchasing from companies that were inefficient in producing high carbon output products.  Which would be the same effect as a tax.

You state:  "A cap and trade system allows governments to allocate this resource."  Isn't the market really allocating the resource? As with the tax, competitive advantage would be the determining factor.

Also, how would a company cheat at c&t and not be able to do the same by cheating carbon taxes?  Wouldn't the c&t approach use the same matrix to measure carbon output as a tax?

In all honesty, I agree that a carbon tax would be far more effective, just because it IS much simpler to administer, but I don't think the two have to be mutually exclusive...and politically, one can be the stepping stone to ther other.

Even the Economist has published excellent articles in the past that have criticized the pitfalls in cap-and-trade systems.  On the surface, they seem kindly enough, but the potential for price volatility seems to make this system easy to play with.

In terms of electoral politics, this is the best thing going for Chris Dodd.  And frankly, if he's got the guts to push a progressive solution with some teeth to it, I'll vote for him too.  I like Obama, and I like Edwards, but we need to scare these guys away from neoliberal tendencies, cap-and-trade systems, and anything else that the Rubin crowd likes, while we have a choice.  I'm not going to sit through 2 terms of GWB just to get a more responsible Bill Clinton.

I was in grad school as the 1990 Clean Air Act was being implemented (I am starting to feel old) and my econ professors loved the trading rights around pollution limits.  One example that always stood out was a clean company could trade its credits to a dirty company as long as everyone was under the limits.  It fit really nicely into the graphs but I frankly never got it.  I always thought we should be forcing the dirty company to become cleaner rather than allowing them to buy credits but then again I am not an economist and don't want to be one.  

Last I had heard which was 5-6 years ago, the trading of pollution rights under the Clean Air Act wasn't working so well b/c not many companies were buying the credits.  Any word recently?

The main reason cap-and-trade would be a failure when it comes to carbon emissions is that when it comes to carbon, there are millions (!) of emission points -- including every vehicle on the road.  How would cap-and-trade cover them?  It can't.  A cap-and-trade system would only cover fixed emission points like electric generating plants and perhaps factories:

Carbon taxes address emissions of carbon from every sector, whereas cap-and-trade systems discussed to date have only targeted the electricity industry, which accounts for less than 40% of emissions.

http://www.carbontax.org/issues/carbon-t axes-vs-cap-and-trade/

If your goal is to reduce carbon emissions, a gradually implemented, progressive carbon tax is the fairest and most effective way to do it.  This is one case where market forces can be highly effective, once the cost of fuel includes the "negative externality" of its carbon output.

This isn't 2001 any more.  Global warming's a reality that most voters accept as real and are willing to pay to reduce.  At this point, cap-and-trade would be more of a sham, to give the feel good appearance of doing something without affecting most of the emissions and emission sources actually out there.

Any system can, of course, be a scam, if you don't do it right.

1. Global cap and trade.
There is a lot of literature on this, because this was a main focus of Kyoto and there was a lot of proxy-warring for and against Kyoto via the literature.

However, the cap and trade proposed by Edwards and from what I understand the Lieberman/McCain cap and trade that Obama co-sponsors are national caps. So the issue of whether a corrupt national government implements it in a corrupt manner than favors entrenched interests, boils down to whether our government will do it in a corrupt way.

2. Cheating.
People will cheat on a tax as well ... people cheat on taxes all the time. No matter what the instrument for pushing emission costs up, once it starts to bite, there will be time and effort devoted to coming up with ways to cheat the system.

However the biggest cheat on a tax is setting the tax rate at a level that "does not harm the economy" ... and in the process does not mitigate carbon emissions by nearly enough.

Bear in mind that the elasticity of demand for carbon emission is quite often very, very low, so a very, very high tax may be required to get things moving. Given that, there will be constant pressure to be over-optimistic in the estimated impact in order to justify a low tax rate.

The biggest gaming by industry-captured regulators on air pollution cap and trade is to set the original cap above the current level of emissions, and then when the cap begins to start biting, to expand the number pollutants covered by the cap and trade, with the new pollutants again brought it at over the current level of emissions to push the permit cost down again.

If you have a national cap on all carbon emissions, assessed as far up the production stream as possible, set the cap at current levels of emissions and progressively reduce the cap, then that prevents the most serious forms of abuse that we have experienced in the US of cap and trade systems. That seems to be the Edwards proposal.

It will be interesting for those who like burrowing into legislation to hear how the Obama-backed McCain Lieberman bill stacks up on that score.

3. Price Volatility
The price volatility argument is important, of course. If you are an existing carbon emitter, like a coal plant, it certainly is advantageous to you to have the reliable cost factor of a carbon tax compared to the risk that the carbon permits you require to operate may cost more than you expected. And a company looking to build a new coal-burning power plant can include the carbon tax into their planning, without including it as part of the risk assessment for their financiers, while a company looking to build a new coal-burning power plant under a cap-and-trade must include a risk-management system and their financiers may demand that it is included as part of their risk assessment.

I'm not seeing where that Price Volatility is a bad thing. It further increases the market appeal of sustainable sources of electricity like wind power.

4. Giving away rights that are presently being stolen.

The argument about giving away rights is that there is no existing right to use the atmosphere as a dump to the harm of someone else. That industrial habit was simply a matter of doing the harm, sometimes unknowingly, and nobody knocking on the door to say, "you are dumping stuff that is spilling out across to other people's airspace, you have to stop".

I am not surprised if the Obama-backed McCain-Lieberman version works by giving away the right to dump CO2 at current levels, and then slowly reduces that right. The Edwards bill auctions permits, and that is the revenue source for $10b of the $13b fund for New Energy Economy R&D.

Matt... I'm glad some of these comments have challenged your original view.  It needs that.

Both systems, a cap and trade and a carbon tax would serve to find the "right prices" for goods in the market.  So consumers will have incentives to buy fewer pollution intensive products and will shift consumption, thus reducing overall emissions.

When choosing a system, it is necessary to understand the imperfect information you have about the market.  Thus, an economic theorem, the Weitzman Theorem, has emerged.  It states that if you're more concerned about steep environmental costs (as many environmentalists are - especially in global warming), you should favor a quantity instrument (a cap and trade policy that absolutely controls total emissions).  However, if you are more worried about abatement costs (as many economists are), you should favor a price instrument (a tax that absolutely controls per unit costs).  Thus, it would seem that if we are concerned about the immense environmental damages from global warming - including its catastrophic and irreversible effects - we should favor a cap and trade system.  Either way, a system putting value on the right to pollute is preferrable to what we have now.

If we are to give away the emissions permits for free we are giving up the opportunity to offset deadweight loss producing taxes elsewhere in the economy or to use those deadweight loss saving revenues to fund important projects.  Thus, we should demand that any cap and trade system auction off the rights to pollute.

One last thought - the EU ETS is working fairly well for such a large and groudnbreaking system.  It's just now finishing its first phase and about to enter its first 5 year term.  Companies in Europe are internalizing the costs of pollution and factoring these costs into their decisions to research and develop new cleaner technologies.  Give it some time and I think the system will turn out to be just as successful as our own cap and trade model (the sulfur dioxide system from the 90s).

{note: I am not Congressman Kennedy. I blog on climate change at BlueClimate}

Matt said:

This system sets an overall cap on carbon emissions, creates a fixed set of carbon credits which add up to this cap level, and then allows companies to trade credits with each other. There really is no upside to this system, though proponents will argue that it does have a firm cap on carbon emissions.

No upside? The upside is the overall cap that puts some certainty in the emission reductions.

A cap and trade approach to putting a price on carbon is a legitimate approach. So is a carbon tax.

But isn't it funny how the proponents of the carbon tax always envision some simple tax with no exemptions or loopholes? How realistic is that? Once the lobbyists get done with a carbon tax it won't be so simple anymore.

The fact of the matter is that both approaches to putting a price on carbon, tax or cap and trade, depend on one fundamental factor to make either of them work as they are intended. That factor is political will. The political will to face up to the large reductions in greenhouse gas emissions we need to make over the next 50 or so years, starting now. The reason the European cap and trade had problems in their first commitment period (2005-2007) was because the individual countries in the European Union gave their industries too many emission allowances. The countries lacked political will.

The European Commission is now going through the painful process of forcing the countries to reduce their industry emission allocations for the second commitment period (2008-2012). By the way, for purposes of compliance with the Kyoto Protocol, it is this second commitment period that counts. The first period was established to work the kinks out of the system.

A cap and trade approach can work but it needs the political will to put good policy in place. If you want to read up on what constitutes good policy, check out some of the comments that are now up on the website of the House Committee on Energy and Commerce. Chairman Dingell asked for comments from industry and NGOs on how congress should design climate change legislation. Some of the NGOs in particular (e.g. Pew Center, Environmental Defense)provided good comments.

As a final thought I would say that those of us who support taking strong action on climate change should not underestimate the power of the "no new taxes" argument to throw a difficult road block in our way. Lets not make it easier for the climate change deniers.

Matt,

Like many people here, I have to disagree with you about the benefits of cap-and-trade. The main benefit of a cap is the very important benefit that it allows the enforcement of a schedule for CO2 emissions. Carbon taxation is a blunt instrument; by itself, it would require regular tinkering to keep the country on an emissions schedule.

The challenge with cap and trade is determining how credits get issues for each year. A cap and trade system where carbon credits are auctioned for each year is effectively a carbon tax where the tax level is automatically set at the appropriate level for reaching an emissions goal. In order to limit the initial economic impact, you might phase in an auction system, with some of the credits for the first couple years allocated based on a baseline; but the auction system is key to establish the proper price signal.

Yet another subject about which Stoller knows nothing about, yet deems himself capable of pontificating upon and, more importantly to him, using to smear his political opponents.

In over your head here, Matt.

The internets are full of good policy blogs and especially full of arguments about cap and trade versus carbon taxes.

Stepping back from the details,

1) Political feasibility does not count for nothing. Even if a carbon tax could get passed, could you pass one at a tax rate high enough to actually freeze or reduce emissions? A tax by itself establishes neither a target nor a timetable.

2) Trading regimes have some efficiencies (incentives) that a tax does not: the inventor of affordable sequestration technology, for instance,  is rewarded in the former but disincentivized in the latter. Pricing the actual emmission that you want to reduced optimizes incentives.

3) A mix is optimal. As many have pointed out, large point sources are relatively easy to put into a cap and trade system. You and your car? No.  A gasoline tax is clearly the best that can be done there.

MyDD surely does have a role to play if we develop better information to answer the crucial political feasibility questions.

Rent seeking behavior is another one of the policy/politics interfaces that needs more work. Yes, some cap and trade schemes unfairly grandfather emissions permits while others auction them. But taxes, too, are likely to be a mess. The trucking industry will lobby hard (with teamsters on board) to pay less than their share. The wider public, motorists, will likely pay more since we are not so good at lobbying. Fuel taxes are regressive. Is it really likely that the poor and lower middle class will win the day and get payroll tax relief? Or is it more likely that the chemical or steel industry will?

We could do a carbon tax, but the problem is that Gore is asking to substitute it for the payroll tax.  That wouldn't punish companies who pollute, for switching one tax for the other would just be an offset.  You have to make a carbon tax mean something and you have to fit companies that pollute where it hurts: In the pocketbook.

That's why I advocate for a cap and trade system.  I think if you set a hard cap and make companies meet it, by natural selection the top polluters will die.  I think you have to let the market settle this, a) because they are dying to settle it if you read how many companies want a cap-and-trade and b) political feasibility in a world of divided government.

A couple links to other articles on cap-and-trade
vs. carbon taxes, both from the venerable Grist:

"Cap and trade: More effective than a
carbon tax" from the chief scientist at
Environmental Defense
"Don't Trade Carbon, Tax It"

I should also point out that the National
Wildlife Federation, Sierra Club, NRDC, WWF,
Environmental Defense, EarthJustice, USCAP... so on
and so forth all support cap-and-trade as a major
part of the equation and more so as a necessary
first step.  Most, if not all, have scientists on
staff.	All have experts on climate policies.

Also, the heavily referenced Stern Review, headed by
Sir Nicholas Stern, Britain's Chief Economist,
says carbon trading is one of the most important
tools.

Matt et al. - I think a carbon tax is the best idea in theory, but it is difficult to imagine it passing when raising the gas tax, which would have a similar effect on carbon-intensive activity, has been anathema.

I wrote some papers on cap and trade programs while in college. I can't comment on cheating, but a major problem with the SO2 cap and trade problem is that certain of the richer, more polluting companies can hoard credits for their worst plants. So while overall pollution decreases, intense pockets of pollution remain unchanged. This shouldn't be a problem with CO2, because it is the overall effect rather than the local that causes global warming.

Overall however, cap and trade programs are successful because the government should, over time, buy up (or retire on schedule) the credits it sold away in the first place, causing pollution to decrease.

This is what has occurred with the SO2 cap and trade program. SO2 levels have decreased by about 50% since 1980. You don't hear about this very often, but then acid rain doesn't get the coverage that it did in the 80s and 90s because it simply isn't so much of a problem anymore.

Thank you, Matt, for another stimulating post.

How about we just ignore this non-issue?

http://video.google.com/url?docid=449956 2022478442170&esrc=sr1&ev=v& q=global+warming+swindle&vidurl=http ://video.google.com/videoplay%3Fdocid%3D 4499562022478442170%26q%3Dglobal%2Bwarmi ng%2Bswindle%26hl%3Den&usg=AL29H23Hf H1ot-g2hya61KR2eGZlEDgBPQ

I'm sorry, I know it's a troll, but I just couldn't leave that as the last post... The 'great global warming swindle' is propaganda produced by known deniers with an underlying agenda, a background in p.r. and almost no genuine scientific credentials. Anyone who doubts me, feel free to check Desmogblog which gives the facts on these 'experts'.
It was produced by Channel 4 in my own illustrious home, the UK, in an attempt to appear controversial, because everyone over here accepts what 99% of scientists say is so. This documentary has also revealed to me the truly seductive force of denial, as the only people I know who watched it and cling to its spurious and desperate claims are all oil-workers and geologists.
This is the only issue I can think of, where I fervently wish that those opposing me were right. Unfortunately, I find myself burdened with a need to listen to reason....

Oh, and our only genuine option is Concentrated Solar thermal, but that is for another post another day.

Good luck out there.

Thanks for the excellent discussion of carbon taxes vs. cap-and-trade. A few points have not been fleshed out adequately.
First, the "certainty" provided by cap-and-trade is illusory.  Don't forget that most cap-and-trade proposals provide a safety-valve, so if the price of a carbon allowance exceeds a predetermined level additional allowances are allocated. Guess what?  No more certainty.
Second, the importance of volatility cannot be overstated.  A properly designed carbon tax should initially be set at a relatively low level, the Carbon Tax Center recommends $37/ton of carbon, and then increased with a steady and inevitable trajectory so that energy users can make rational investments to choose less carbon-intensive and less expensive alternatives. A cap-and-trade system, by contrast, inevitably produces volatile prices since quantity is limited and changes in weather or the strength of the economy will result in dramatic price swings.  Look at what has happened in the European carbon trading market.  If prices are volatile, consumers (large and small) will not see the price signals necessary to encourage long-term investment in more efficient appliances, equipment, vehicles and renewable energy such as wind and solar.  
Third, a carbon tax will help rather than hurt the economy.  The carbon tax should be revenue neutral, with the revenues used to offset the payroll tax or provided as a rebate to all Americans.  Instead of dollars going out of the country, the dollars will stay at home where they will strengthen our economy.  
For more details, please take a look at the Carbon Tax Center web site.

Matt,
with all due respect, you are waaaaayyyyy off base here.  Cap and trade is absolutely essential, even more so than a straight tax.

1. Your first argument against cap and trade: "it's mccain and lieberman's position, so it must be bad."  This is misleading -- it's al gore's position, first and foremost.  LOTS AND LOTS of progressives feel the same way.

And this isn't even a real argument, just an ad hominem attack linking a policy to certain personalities.

2. Your second argument: "it tempts corruption."  This is more interesting, but i don't think it ultimately holds water.  With the proper implementation, corruption can be held to a minimum.  And after all, corporations cheat on their taxes too, you know!!!

3. As you admit, without a cap and trade system, (tax only) there is no limit on carbon emissions.  They could continue to climb.  Cap and trade makes this impossible.

4. You don't give the strongest argument in favor of cap-and-trade:  incentives for innovation.  If there's just a limit on emissions, companies will have to get below that limit, but that's it.  There's no incentive for them to reduce emissions further.  With cap-and-trade, anyone who figures out ways to significantly lower emissions stands to make serious, serious money.  It makes game-changing innovations in energy technology much more likely!

5. The additional costs for doing business in a dirty way, plus the additional benefits for doing business in a clean way, will mean dirty plants go out of business.

If we just have a carbon tax, the status quo will be maintained, just a little more expensively.  Cap-and-trade could change everything.

The debate shouldn't be "cap-and-trade, or carbon tax?"

The debate should be "merely cap-and-trade?  or cap-and-trade PLUS carbon tax?"

Also:  I'm a fan of your writing, but frankly i feel that your framing of the issue here is very dishonest.  It makes me angry!

As many others have said, the question is not whether cap-and-trade itself is a problem, it's how you implement it, who is covered, and where they are covered.

Every system to reduce emissions has its problems and advantages, but the best one based on the research I've done (and no, I can't produce cites right now because my computer was stolen.  I'll try and recover the documents and post a diary later) is the upstream permit system mentioned above.  The end-goal should be for all permits to be auctioned, though a hybrid system which "grandfathers" some in could be better in order to minimize the transition costs.

The advantage of such a system is that it effectively is the hybrid permit+tax system.  By placing a cap on "emissions" at the source, the government controls precisely how much is ever able to enter the economy.  In practice for most consumers, this has almost exactly the same effect as a tax.  The producers absorb the cost of paying for the permits and then pass on that cost to energy-consumers, just as they would with a carbon tax.

However, as many people have noted, it has a distinct advantage in that taxes are notoriously poor at controlling demand in a predictable way.  Desire to use energy is relatively inelastic and while you can obviously overcome this simply by raising the tax until it reaches the desired target, the administrative costs and difficulty in  holding consumption at anything close to a stable level is enormous.  Placing a firm cap avoids this problem.

Of course, as others have noted, this runs into a problem of price volatility.  If you cap emissions, what happens when people need/want to use more?  Prices fluctuate rapidly and potentially you suffer a modest price-shock.

That's the main difference here.  You gain some benefits economically in exchange for losing some certainty in actually reducing consumption.  Neither one is "right" or "wrong" per se - it's just a question of priority.

And I do think it's important to note that the political viability of "cap and trade" is quite a bit higher than a "carbon tax."  Maybe that just means we should do the latter in order to force people to really face up to what is at stake, but I personally think that when facing the choice between two systems that do approximately the same thing, picking one that does so without tapping into politically costly terminology and strategy is probably better.

Of course, such an upstream system loses some of the economic viability of less strict downstream systems, precisely because it imposes its cost at the level of entry into the economy and thus forecloses a lot of the trading by utilities downstream which mainstream proponents of a cap and trade policy like.  So maybe the point there is moot.  And, of course, the fact that this has more cap and less trade is also why it resolves many (not all, but many) of the concerns about cheating.

Two other issues, which I don't think anyone else has mentioned.  First, a permit system is far easier to integrate into an eventual global trading system.  There are a lot of people who argue (once again, I don't have the cites but please trust me that they exist) that serious CO2 reductions on a global scale will only be possible if we can create a global regime which establishes a framework for a cap across all markets.  This, of course, does not prove a carbon tax would be bad, but does at least argue for the importance of building hard caps into whatever system we do deploy.

Second, there are many kinds of waivers, loopholes, etc. which fit extremely well into a cap and trade system in a positive way.  For example, companies can petition for waivers on meeting their required emission reductions if they can prove that they are in the process of developing technological methods (alternative energies or simply efficiency measures) which will enable them to provide substantial long-term emissions reductions.  This is extremely important because, ultimately, the point of any of these systems is to provide incentives for the development of an economy based on things other than carbon.  Taxing or forcing companies to trade for carbon emissions are really just the means to force R&D into new measures that transcend the problem.  Reducing emissions now really doesn't mean anything.  It's far more important to reduce them by 80% over 50-75 years than it is to reduce them by 5% now.  In fact, if holding emissions steady (or even letting them increase) now makes it easier to create a substantial reduction later, it is undoubtably worth it.

Innovation waivers recognize this.  And while something along these lines certainly could be incorporated into a tax regime, my fear would be that the loophole problem would be far harder to manage there.  I would love to hear anyone who knows more about this chime in.

Finally, on a rhetorical note, let me say that it's frustrating that you consistently call people out for saying what you consider to be inflammatory things, but post something encouraging a debate on this question which refers to cap and trade as a "scam" in the title.

Oh, and one other thing, as I hope was clear from what I just wrote (and from what grimm and others have said above), I think the essential debate here really has very little to do with who is calling for a tax or permits or whatever.  Both systems are designed to incentivize carbon reduction and impose economic costs on those who choose not to make reductions, or are unable.  Just because one makes the cap clear and one makes the tax clear doesn't really change that.

In fact, these systems are so similar that I think focusing about the choice between the two is far less useful than focusing on whether the system we do settle on (whether tax, cap and trade, cap+tax, or any permutation on those) is designed to cover all emissions, is designed to minimize loopholes, and is designed to encourage innovation.

A well-designed cap or tax can accomplish those goals.  Let's make the debate about how to accomplish it, not just about which general category our strategy falls into.