Auctioning Off Carbon Permits: Better than Carbon Tax?

Over at the promising new blog Econospeak, Peter Dorman argues that auctioning off permits for rationing carbon is a better strategy than either a carbon tax or the much-maligned 'cap and trade' system. I'm not yet convinced, still leaning toward a tax. But at least Dorman has it out there for discussion. Here is Dorman:

Tax Carbon?: The New York Times has a story today about John Dingell's change of heart on climate policy. … [A] carbon tax "is the climate solution that economists and environmentalists have long dreamed of" [says NY Times David Leonhardt] and that the only alternative is cap-and-trade, giving away emission permits to longstanding polluters. The third approach, and by far the best, is setting up a permit system and auctioning off each one of them.

There are two reasons why permits rule. (1) There is great uncertainty about the future relationship between carbon prices and pollution levels (long run elasticity of demand for fossil fuels). Taxes place the burden of this uncertainty on the environment (the amount of pollution); saleable permits place it on costs faced by energy users (fossil fuel prices). (2) Politically, if we go the tax route, we end up in a discussion about taxes. … If we center the policy on permits the debate is over how much greenhouse gas emissions we are willing to tolerate. That's the discourse we need.

Folks, this is a very important issue at a very important time. In the next year the contours of the national debate over climate change policy will be set. Huge ecological consequences — and gobs of cash — are on the line. It is essential to start off in the right direction. I'd like to see enough clarity and truculence in the activist community that journalists are forced to take notice

Background, from Leonhardt's article:

… Devised correctly, a cap-and-trade system could certainly work. But there are enormous complexities. As Gregory Mankiw, the Republican economist, has pointed out, companies that use the most energy today are likely to be given the largest number of permits, essentially rewarding them for their prior pollution. Some companies may even deliberately use more energy in the next few years, to assure themselves additional permits. Given all the issues, a cap-and-trade system could end up being "ineffective or even counterproductive," Lawrence Summers, who was a Treasury secretary under Bill Clinton, has warned.

A solution that relies at least partly on a carbon tax would be simpler, and the revenue it generates would go to the government, rather than to companies. The government could then turn around and cut, say, payroll taxes to cushion the blow of more expensive gasoline and home heating. …

Comments

[Francisco]

Another reason for the US to lobby for a cap-and-trade system: the US would be a net receiver of transfers from the developing world.
According to some studies, the marginal cost of pollution abatement is lower in rich countries than in developing ones. In a world with a global market in CO2 allowances, rich countries would reduce their emissions (because it costs less to do so than in poor countries) and sell their allowances to poor countries (which would increase their emissions).
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