Cap and Trade or Carbon Tax?

As we wind our way toward Copenhagen, debate about climate change policy has intensified. Particularly interesting is the US debate, where a seemingly trivial administrative ruling is having tremendous implications. Back in the Bush years, the EPA ruled that CO2 was not a pollutant and, hence, could not be regulated by the EPA. In April, 2009 (following a 2007 Supreme Court ruling) the EPA in the Obama administration ruled CO2 was a pollutant. The implications of this are huge. It means that CO2 emissions are covered under existing legislation and, hence, the EPA can create administrative rules limiting CO2 emissions WITHOUT having to pass legislation through Congress. While there are legal constraints on the types of rules they can come up with under existing law (which mean this probably isn't the best way to go), this gives the Obama administration a really big hammer to use on Congress: do something significant about climage change or the EPA will act unilaterally.

Two EPA lawyers with 20 years of experience dealing with cap and trade legislation, Laurie Williams and Allan Zabel, have recently inserted themselves into the debate. As the Obama administration moves toward cap and trade legislation in Congress, they are advancing an alternative -- a carbon tax (or, since tax is a bad word in the US, a carbon fee and rebate system). This is a scheme similar to that proposed by Stephen Dion (though that didn't go over very well, did it?) and, increasingly, by thoughtful economists like Nobel winner Joseph Steiglitz, who served as Chair of the President's Council of Economic Advisers in the Clinton administration. Their recently posted YouTube video is below. For more info, go to their website.



It is tempting to think of this as just a policy debate. But, at its root, it is an argument about creating social rules to facilitate cooperation. Their basic complaint is that cap and trade, as a big accounting scheme, is subject to all sorts of accounting tricks. This means both that it is ineffective and, equally as significant, that it will be seen as inequitable. Since cooperation depends on trust, this means that, over time, an inequitable cap and trade system may self-destruct. Since there really isn't time to limit emissions by trial and error -- that is to try one policy, see if it works and adjust it if it doesn't -- we need to get the policy right the first time. Stated another way, the policy needs to take account of social theory -- our understanding of processes related to social rules and trust -- as well as economic theory. More about rules and cooperation later.