Friday, April 6, 2007

Global Warming - cap and trade or tax?

The US Supreme Court ruled on April 2nd that the Environmental Protection Agency (EPA) must limit greenhouse gas emissions such as carbon dioxide.

Four Bills are now under discussion in the Senate that would instruct the EPA to set caps on greenhouse gas emissions and allow for trading of permits, so that those who do better than their allocated target can sell their "surplus" to those who fail to do so.

The problem with permits is that, if they are given away for free to existing polluters, that would be like rewarding them for the pollution they make. Alternatively, permits could be auctioned off, or there could be a mix. e.g. with a progressively larger proportion of permits to be auctioned off.

There remains a problem with trading in that it mainly seems to benefit polluters. Polluters who reduce their emissions will benefit, so there's a clear incentive for them to do so, but a wind farm that didn't generate greenhouse gases to start with will not get or need any permits, and it therefore wouldn't benefit from selling any "surplus" - it didn't get anything to sell, nor will it need to buy any permits. Trading in permits appears to leave the profits of such trade in the hands of a group of polluters and those feeding on them.

Instead, emissions could simply be taxed. Whether permits are auctioned or emissions are taxed, the key question is who will get the revenues. One thing that should be avoided is that such revenues will merely be used to assist the poor with paying their higher energy bills. If that would be the case, then no gain would be achieved at all. If the rich can afford to pay higher prices, and the poor get subsidies, then nothing will change in terms of pollution. Instead of taxing the rich and handing the money over to the poor, as in the old socialist motto, we should adopt a new motto, i.e. tax energy suppliers who pollute and give it to suppliers who don't. Indeed, it makes sense to reward suppliers of energy most who pollute least. A more blunt position would be that only suppliers of energy should get subsidized that do not add extra heat, i.e. those who don't add extra heat should get all the subsidies, while those who do should not be subsidized at all.

Such a combination of tax and subsidies would result in a shift away from supply of energy that contributes to global warming on the one hand, towards supply in energy that doesn't contribute to global warming on the other hand. Tax the first group and give the money to the second group! Because money is merely passed from one group to the other, there is no risk of a budget blow-out. The money is all accounted for, if the money that's raised is simply passed on in the form of subsidies.

Taxes could be set at rates to achieve certain aims. If taxes are too low and buying polluting energy is still relatively cheaper than non-polluting energy, then the tax rate will simply have to be raised to cause a quicker shift.

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