Cap and Trade versus Tax Debate focuses on wrong issues

Even though cap and trade seems to be the leading contender for any US climate change legislation, there is an active debate about the merits of cap and trade versus a carbon tax. Unfortunately, the debate draws false distinctions between the two approaches to regulating greenhouse gas emissions and, by doing so, by and large omits a discussion of the real issues separating the two approaches.

In particular, most c&t versus carbon tax discussions focus on the revenue aspect of one or the other. Advocates of a cap and trade approach claim that you can never pass a tax increase such as a carbon tax. The quick response to the $80 billion of revenues included in President Obama's budget proposal from auctioning carbon allowances under cap and trade has however shown that cap and trade also imposes a tax. In both cases, however, the emphasis on tax revenues as opposed to the price signal set by each approach creates a) a false dichotomy and b) diverts attention from the real issue. Either system will potentially raise large amounts of revenues with many competing potential uses. However, the decision of what to do with carbon tax revenues or allowance auction revenues, while important, has little to do with effective climate policy. For climate change, what really matters is what price signal is being set, and cap and trade and carbon tax are largely equivalent there. The political conumdrum is that the hundreds of billions of dollars that will be generated as tax or auction revenues are too tempting a pile of money to ignore, even though the attempts by politicians to hold on to that money will make it much harder to get climate legislation passed - since the result will indeed be a substantial carbon "tax" on consumers.

It would be much smarter to basically refund all the revenues, either through "cap and dividend" or through a carbon "untax" as proposed by Steven Stoft (www.stoft.com) and others. Refunding the revenues will significantly reduce the "cost" of lowering carbon emissions at any carbon price (whether a tax or an allowance price resulting under c&t).

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