Sunday, April 01, 2007

Carbon Tax Problem

An article in today's Washington Post suggests a good homework problem:

Tax on Carbon Emissions Gains Support
By Juliet Eilperin and Steven Mufson

As lawmakers on Capitol Hill push for a cap-and-trade system to rein in the nation's greenhouse gas emissions, an unlikely alternative has emerged from an ideologically diverse group of economists and industry leaders: a carbon tax.

Most legislators view advocating any tax increase as tantamount to political suicide. But a coalition of academics and polluters now argues that a simple tax on each ton of emissions would offer a more efficient and less bureaucratic way of curbing carbon dioxide buildup, which scientists have linked to climate change.

"We want to do the least damage to the growth of GDP," said Michael Canes, a private consultant and former chief economist for the American Petroleum Institute, who led a Capitol Hill briefing on the subject in late February sponsored by the conservative George C. Marshall Institute. Between a cap system and a carbon tax, "a carbon tax will be the much more cost-effective way to go," he said...

Few lawmakers, Democrat or Republican, have the stomach for a carbon tax, however. Some are still smarting from a vote in the early 1990s when President Bill Clinton persuaded the House to adopt a BTU tax -- a tax on the heat content of fuels -- only to abandon the effort in the Senate.

Democrats such as House Natural Resources Committee Chairman Nick J. Rahall II (W.Va.) say they have no desire to revisit the issue. "I'm not an advocate of a carbon tax," Rahall said. "That's going to be passed on; the consumer would end up paying for that."...

Only one House Democrat, Rep. Pete Stark (Calif.), has drafted a carbon tax proposal. Stark, who first proposed such a tax 16 years ago as a way to ease the nation's energy crunch, plans to introduce a bill in April that would levy a tax of $25 per ton of carbon released for five years.

"It's more efficient, more equitable, and it's less subject to gaming, I might add," Stark said, estimating that it would raise the cost of gasoline by 10 cents a gallon.

Here is the good homework problem for introductory microeconomics:

Compare the effects of a $25 carbon tax with a cap-and-trade system in which the cap is set so that the price of a carbon permit ends up at $25. Is the impact on carbon emissions different under the two systems? Is the impact on consumers different? Who wins and who loses with cap-and-trade compared to the tax?

Post your answers in the comments section.

Update: Patrick gives the best answer:
The two systems produce the same effect on carbon emissions [and also on consumers]. The difference is purely distributive. In the tax situation, the government keeps all the revenue. In the cap-and-trade system, the revenue from the sale of permits goes to current polluters (it ends up essentially being a transfer to them).