US Congressional Budget Office Favors Carbon Tax

At a Nov. 16 Congressional Budget Office "Director's Conference on Climate Change", CBO Director Peter Orszag argued in favor of a carbon tax relative to an at-least-for-now inferior alternative of a cap-and-trade policy [Issues in Climate Change, Statement of CBO Director - PDF]. Here is a snip:

… Any effort to limit CO2 emissions would have two principal effects: It would produce long-term economic benefits by avoiding some future climate-related damage, and it would impose immediate economic costs by reducing the use of fossil fuels. Employing incentive-based policies to reduce emissions would help minimize the cost of reducing emissions by any given amount because they would use the power of markets to identify the least expensive sources of emission reductions. Thus, they can better accommodate technological advances, differences between industries or companies in their ability to make low-cost emission reductions, and changes in market conditions.

Two alternative incentive-based approaches for reducing CO2 emissions are to tax them or to establish a cap-and-trade system for them. Either a tax or a cap would be most efficient (that is, would best balance expected benefits and costs) if it was designed to gradually become more stringent over time—meaning the tax would gradually rise or the cap would become tighter. Such an approach would best reflect the present value of avoided future damage (the benefit of reducing a ton of emissions), which would take on greater weight as larger potential damage became closer in time. Further, such an approach would allow a smooth transition to a less carbon-intensive economy, allowing firms and households time to gradually replace capital equipment with alternatives that are more efficient, use less carbon intensive fossil fuels (such as natural gas rather than coal) or use renewable energy sources (such as wind or solar).

Efficiency Advantages of a Tax on CO2 Emissions
Although both types of incentive-based approaches are significantly more efficient than command-and-control policies, studies typically find that over the next several decades, a well-designed and appropriately set tax would yield higher net benefits than a corresponding cap-and-trade approach. A tax creates relative certainty about the cost of emission reductions each year, because firms will undertake such reductions until the cost of decreasing emissions by another ton just equals the tax on an additional ton of emissions. A cap-and-trade program, by contrast, creates relative certainty about the total quantity of emission reductions each year, because the cap limits total annual emissions. In terms of the impact on the climate, however, it does not matter greatly whether a given cut in emissions occurs in one year or the next.

From that perspective, a tax has an important advantage: It allows more emission reductions to take place in years when they are relatively cheap. Various factors can affect the cost of emission reductions from year to year, including the weather, the level of economic activity, and the availability of new low-carbon technologies (such as improvements in wind-power technology). By shifting emission reduction efforts into years when they are relatively less expensive, a tax can yield a given quantity of emission reductions at a lower cost than can a cap-and-trade program with specified annual emission levels. In addition, by avoiding the potential volatility of allowance prices that might result from a rigid annual cap, a tax could be less disruptive for affected companies. Provided that the tax was set at a level that reflected the expected benefit of reducing an additional ton of CO2 emissions, the tax would provide a motivation for firms and households to reduce emissions up to the point at which the cost of doing so was equal to the resulting expected benefits.

The relative advantages of a tax and a cap-and-trade program could change over time as new information became available. For example, because a cap creates relative certainty about the level of emissions, it could become more efficient than a tax if scientists determined that additional emissions were likely to trigger a sharp increase in damage, or if new technologies offered the opportunity to make extremely large cuts in emissions at a low and fairly constant cost. Analysts who have tried to define more precisely the conditions under which a cap would be more efficient than a tax have found those conditions to be quite narrow and not likely to be relevant in the near term. Specifically, scientists would need to have fairly precise knowledge about the level of an emissions threshold—beyond which additional emissions would trigger a sharp increase in total global damage—and such a threshold would have to be sufficiently close that policymakers would want to make very large cuts in emissions each year to avoid crossing it. In the absence of those conditions, a tax offers a more efficient approach for reaching a multiyear emission-reduction target.

Although a tax is generally a more efficient policy, the efficiency of a cap-and-trade approach can be enhanced by various design features. In addition, some participants in the policy discussion believe that analytical comparisons of a tax and a cap-and-trade system ignore the idea that policymakers may be more inclined to set a tight cap than a correspondingly high tax. … [footnotes omitted]

HT: Greg Mankiw

Comments

[Trinifar]

"By shifting emission reduction efforts into years when they are relatively less expensive, a tax can yield a given quantity of emission reductions at a lower cost than can a cap-and-trade program with specified annual emission levels. In addition, by avoiding the potential volatility of allowance prices that might result from a rigid annual cap, a tax could be less disruptive for affected companies."

I'm just amazed that a government agency, even the CBO, was able to produce such a statement. Really, political concerns aside, is there any better idea than a carbon tax?

[Syd Golston]

One of the easy things we all can do is to call catalog senders and tell them not to send them anymore.
1) The websites I found that do this effectively for you are EXPENSIVE.
2) I could not find a place to post a "Shame on You!" for a company which made it almost impossible to cancel their catalog: Sephora.
Shame on them.

[Syd Golston]

Hard to believe, but despite my persistence, I just got another Sephora catalog in the mail yesterday! And it's three months since I thought I had cancelled.

Something has got to be done to save the energy and the paper and the gasoline that goes into this cascade of junk mail. How about the water involved? We see so many warnings about turning the water off while we brush our teeth. I would imagine that the amount of water it takes to make the paper for catalogs we don't want dwarfs those savings...

We will all have to brace for the Christmas season crush of this wasted stuff. Can someone find a free website that allows you to look at hundreds of catalogs and cancel the ones you don't want?

[Steven Earl Salmony]

The greedy people in dark, pin striped suits who have pillaged the capitalist system and ruined humanity's political economy by turning it into a gambling casino and stealing its wealth for themselves and their minions are the same people who are now warning honorable people not to dismantle the global economy. What is wrong with this picture?

Steven Earl Salmony
AWAREness Campaign on The Human Population,
established 2001
http://sustainabilityscience.org/content.html?contentid=1176