The $40 billion handout

This week’s survey in The Economist of business and climate change explains why the US is likely to get a cap-and-trade system (as in the EU), rather than a carbon tax.

If the American governments adopts a cap-and-trade system […], it will hand out permits to pollute. They are, in effect, cash. According to Paul Bledsoe of the National Commission on Energy Policy, those allowances are likely to be worth in the region of $40 billion. Companies therefore want to be involved in designing those regulations. As Mr Rogers explains: “There is a saying in Washington: if you’re not at the table, you’re on the menu.” […]

A tax would be a better option. Unlike a cap-and-trade system, which stipulated the amount of CO2 that may be emitted and allows the price to vary, a tax sets a price and lets it determine the quantity emitted. […] But the prospects for a tax are not good. Business – particularly in America – is allergic to the very word; and the allowances which companies tend to be handed in the early stages of a cap-and-trade system have an obvious appeal to companies concerned about rising costs.

There is an academic discussion (e.g. here and here) about which is better, a carbon tax or cap-and-trade. But the discussion will remain academic. The $40 billion cap-and-trade allowance giveaway offers so many opportunities for patronage, lobbying, and campaign contributions from firms that stand to benefit that it is hard to see how a carbon tax could stand a chance. And on top of that, it is called a “tax”.

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