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Cap'n Trade sails on, if only in the Sea of Theory

By Owen Paine on Saturday July 31, 2010 03:18 PM

Here's a paper on climate change policy:


I'm a big 'cap and trade' guy -- as a mechanism design, that is. Though the very thought of this 'market solution' sets many a well-intended left-munks a-chittering. The fevered people-person mind fills with a dire vision: an immense speculative mushroom cloud erupting over this 'umble mechanism. bring it but forth, and ye loose the hogs of hi-fi hell!

But I love C and T primarily because I hope someday that type of mechanism will be used as a price level control system, at least for certain select sectors (like health and higher ed) and ultimately, by some pinko contagion, infect our venerable corporate market system in its entrety -- yup, full macro price-level control.

The first really big-time use on the congressional agenda for this marketoidal mechanism is, of course, capping and trading carbon emissions.

This paper linked above looks at various pending bills in the C and T mode, but only their distributional aspects, i.e. aspects that I hasten to add would be similar even if the system used to curb carbon emissions some day is a Pigou tax on carbon -- the prefered hot pink method.

The paper concludes -- quite obviously -- that the ultimate distribution among households of the proceeeds of the public auctions of warrants -- or alternatively revenues from a Pigou tax -- "plays a decisive role in the welfare evaluation of program alternatives."

In arriving at that obvious conclusion, however, it travels through several necessary but usually skimmed-over dimensions and pulls out several important discriminations.

Exhibit A:

"We trace our result to the dominance of the sources side over the uses side impacts of the policy."
(They mean your source of income, not how you spend it: wages or profits or transfers.)
"..Our finding stands in sharp contrast to previous work that has focused only on the uses side, and has hence found energy taxation to be regressive."
I.e., the fairly consistent use-side-only finding is that the lower your income, the higher the burden, because the share of income going to energy costs is higher the lower the household's income.

But notably for boo-hoo "poor folk" fanciers:

"... Lower income households derive a large fraction of income from government transfers and, reflecting the reality that these are generally indexed to inflation... this source of income is unaffected by carbon pricing, while wage and capital income is affected."
Much to scrutinize here before fractious "rouge knees" begin to do the church lady jerk here. Take note, ye soulful salt-of-the-earth-lovin' pointy-hat types.

Comments (24)


"Rouge knees?" Are you... talkin'... to ME?!

Probably. I'm one of those pinkos who's highly suspicious of ole Cap'n Trade, and all his motley crew. The carbon tax idea seems infinitely better to me (with the proviso that the entire proceeds must be rebated to the public on a strict per-capita basis -- otherwise it's just another regressive tax).

Has anyone ever argued that the Cap'n is in any way a better mechanism than the rebated carbon tax? If so, I haven't seen it. The Cap'n's defenders seem to rely mainly on the idea that he's more "realistic"

Of course, when I hear the word "realism", I go for my revolver.

Why not just get rid of prices altogether?


the basic difference is which do you want to control exactly
the cost of carbon pollution or the amount
now i'm sure the argument can swing either way
but i'd like a big widely observed example of cap and trade to educate everyone

b4 intriduction of the cap and trade method to price setting

here is the key cap and trade is completely superior to an inflation tax
precisely because it makes the price level certain and lets the cost of mark up vary

the possible uses of such a control mechanism are enormous

just remember cap and trade
every time you read some jerk
clinching his/her argument
for why uncle can't do
x or can't do y
"it will lead to greater inflation
and we all know inflation
once out of the bag can't be controled "

btw we now fear unstoppable deflation
well it can be controled
with cap and trade too
just like inflation
whereas with inflation the price increasing party pays the price reducing party
with deflation the price reducing party pays the price increasing party

its an off set market

i must admit
i write about this all the time
but few respond
seems even its inventor mr colander has lost interest
because he couldn't build interest

the latest is to roll it out to stop japan's deflation

any takers ???


and its offered free of charge
by an off duty maoist

who can figure

alas it was like that about forex
in 05

and in 02 lot values

unfortunately even though i've scaled back
to just an off set market
for the health sector
equally few respond

but hey i'll keep trying
i have a nothing to lose
now there's no party
and round here anyways
no world to win
----err for now ---


"highly suspicious "

the fuss and fury over at europe
in left and green circles
has an old to obvious basis in solid facts

warrents and off sets and such have quite complex policing and auditing aspects in addition to the monitoring aspects common to any control system for emissions
but i think the biggest suspicion is simply a market itself for warrents and off sets

the rubes fear of the slickster

but frankly i welcome the contest

nothing strikes me as a better way to mobilize greens then a cheating ring
that's profiting by poisoning the planet

okay i just described the energy corporations right now

fucking with a single market is a simple focus easily made unlawful

the recent run up in commdity prices
i notice the econ con community fell on its face trying to track that scandal down
well here might be a battle ground worth the fight for broad pwog forces

hey just a conjecture

and yes if i had no deeper motive i'd say
a pigou tax on carbon
is the obvious way to go
only i'd pay plain folks
to cut their use
....get me ??
like donating blood

take all the money collected from the tax
and feed it back as rewards
for reduced consumption
of carbon pollution producing products

now that would really appeal to your parlor greens

how well every citizen gets a quota spend less get money

its like rationing in reverse

covered activity

gas for autos
fuel and electricity for house or apartment

must be other easily monitored polluting systems
too eh ??
of course we'd need a vastly improved integration of our payments system

big brother green nose so to speak

hayek is rattling his crypt


beauty here
with a pigou tax fully transfered into
a paine conservation ration/rewards system

this way
we little mugs
get to cheat
not the big energy corporations


Does anybody care about cost, except insofar as it affects amount?

My buddy Charlie Komanoff writes:

Fee-and-dividend is superior to cap-and-trade on grounds of both political appeal and economic efficiency. Here's how James Hansen, the nation's pre-eminent climate scientist, contrasted the two approaches in an op-ed in the New York Times last December:
Consider the perverse effect cap and trade has on altruistic actions. Say you decide to buy a small, high-efficiency car. That reduces your emissions, but not your country's.

Instead it allows somebody else to buy a bigger SUV—because the total emissions are set by the cap. In a fee-and-dividend system, every action to reduce emissions—and to keep reducing emissions—would be rewarded. Indeed, knowing that you were saving money by buying a small car might inspire your neighbor to follow suit. Popular demand for efficient vehicles could drive gas-guzzlers off the market. Such snowballing effects could speed us toward a pollution-free world.

Hansen's example applies equally to renewable energy. Under a cap system, a wind farm, no less than his efficient auto, will lower the price for carbon emission permits, thus undermining the price incentive for other actions that would reduce emissions. In contrast, a carbon fee is immune to this effect, since individual actions have no effect on the legislated carbon price.
Is there something wrong with this line of reasoning?


"Why not just get rid of prices altogether"

jack my lad
that is only where one starts
but it is where one starts
all markets are guilty till proven innocent
but i don;t suggest we arrest em all first
lets convict em one by one

i may be an unrehabilitated maoist
but so
i've learned a few things
from examining
the Great Leap
and pol pot's magic prole kingdom


By the way, Charlie's term "fee and dividend" refers to the scheme (which I favor) of rebating the tax revenues per-capita to the public.

Owen's idea of using the revenue to "feed it back as rewards for reduced consumption of carbon pollution producing products" isn't clear to me -- I don't understand how that would work. Sounds like it would be more complicated than just cutting everybody a check -- and unnecessarily so, as far as I can see.


"That reduces your emissions, but not your country's. "

he has here taken the uncontroled amount of actual pollution abatement as the basis for
we all matter goo goo activism
yes the cap sets the pace of reduction
what's wrong with that
we could have too low a tax as easily as too high a cap

as to savings the act itself is unchanged
the suv driver still pays a higher price in fact for every cap ther is a shadow pigou tax that is exactly the same as the cap's
increase of market price over the uncapped price

"legislated carbon price" ie carbon tax
has a duel permit price ..get it

if we have a spate of reductions then the cap an be moved down faster
in fact one could tie the caps decline to the market price of the permits ..a priori

no this idiotic phobia about cap and trade
ultimately betrays the excessive caution
of the reactionary reformer
could we get skunked by cap and trade
more easily then a pigou tax

and yes its not the cap that is the problem
its the trade that upsets these goo goos
in their minds some corporate some where is making a killing
a nice reversal of the welfare queen phobia
commonly held by the other wing
of the middle class hate club

there is no fearful symmetry here of course
obviously little guys gettin to ride the bounce is oceans apart from some tower troll getting the loaded dice to roll


"Sounds like it would be more complicated than just cutting everybody a check"


so is paying folks for work performed
versus sending em a social dividend

no doubt many here including me prefer getting a chreck for being me
not for doing something

"unnecessarily so "
focus on the ration father
each gets an equal ration
who spends more polluting now
who would have a harder time
ending up with rations to cash in ???

as for complications
organization etc
for fuck sake
what do u imagine gosplan II to look like

its crack pot home spun simplicity that is the enemy of progress here

of course you rebate the full amount that's polly ana 101

but make folks earn it
and tilt it so poor folks
have an easier time of it winning rewards

street people could just go cash em in
first of every month


Isn't being paid for reducing consumption rather self defeating? Money is to spend and reducing consumption is not to spend. What does one do with this reward, make a hat out of it?


as to a sea of theory
of course big time cap and trade as a mechanism
floats thru fantastic seas

alone and unafraid i might add...

we all know
there exist cap and trade systems
here already
but only for minor pollutants
right ??

if its the trade bit that so offends
good folks

what we got here
basically is damn quota system

but with a wrinkle :
a secondary exchange market
that allows
the entire ensemble of players
to make the adjustments ie reductions
first ... where they are maximally
low cost to make

simple enough proposition that ..eh ?

yes i quickly admit
i'd prefer rigid iron hard
largely unreachable
corporation by corporation
facility by facility quotas
and death sentence penalty clauses

and yes compared
to this fiddlers free for all convention
a lovely simple reduction quota
where each player must hit the mark
or face the consequences
looks shifty and sleeked

but i doubt anyone... in theory
objects to flexibility no ???
so long as the quota
ie the cap is set low enough and moves down
fast enough

yes a pigou tax works exactly
the same way on the producer cost side
though with a cost uncertainty in the cap case
till markets determine tat cost

recall our object is to reduce carbon emmissions
a cap has certainty about precisely that eh ??


its will be really
quite a nasty bit of silliness
if any carbon cap and trade gig
can't be approached with some degree
of inner calm

i recall with a creepy mirth
the single payer yelpers here
over any discussion of
what was clearly a step back
ie pub op

it seemed to me at the time odd
some true heart stalwarts here
grasped a simple truth
--that i guess they believed some how
escaped others ... unless of course these others were in fact corporate cutouts--
and yet were unprepared to calmly examin the ..options

i'll confess a certain haughty impatience
with such untutored raised noses
sniffing for swindle there and possibly here too

of course there will be swindle
europe already has had swindle
plenty of swindle

but if its simply the complexity
that raises hackles ..
and gets old occam's razor out of the bottom drawer

well i submit that lively blade
has better uses i think
then to slash up
a partly examined alternative
without additional meditation

besides there's something saintly about
considering a con man's proposition isn't there??

..as if this time it just might
not be
a con man's proposition
even though
the odds are 50 to 3
he is a con man
or as i might prefer
a con gal


bonkers tax money is already here on the table
in this instance

we're just trying to distribute it


i'm often reminding myself
about some of the left outs 'round here

they'd prolly like to become
st francis with a pecker

if the high water mark
of your rejection of corporate capitalism turns out to be
anti kulack consumer vulgarity and hogishness


peace be with you
you dignified whistle head


Seems to me the straighforward rebate amounts to a social wage, in fact if not in name. And the incentive to avoid some carbonaceous expenditures in favor of non-carbonaceous ones is simply that the carbonaceous ones now cost relatively more than they used to.

Point taken, though: the tax being too low is functionally equivalent, modulo the complexity and non-transparency, to the cap being too high.

But make me Carbon Tax Czar, bro, and you can be damn sure the thing won't be too low.


are we once more caught in this waltz

as with single payer i prefer a pigou tax
stand alone here
apart from my not so secret agenda

yes of course the price increase is the source of the basic substitution away from
relatively higher carbon intensity
but why not make the "social wage"
redouble that reductive impact
by rewarding the reducer
the proposition is clear
make folks earn it in some fashion
and the calvinist demons will be stymied ..somewhat


obviously i have no problem
with the simple full rebate
and as a practical matter
i'd hold to that and not get into it
any deeper
the nanny state aspect darkens the margins of it some
like aunt sam
paying folks to cut body fat
or do belly crunches


"complexity and non-transparency"

the pigou tax does not insure a reduction
of adequate size up front eh ??

the out come is not transparent and the calculation behind the tax rate is quite complex

so each has its off setting
simplicity and complexity
lets face it the cap and trade is from the jump a con job
an attempt to create a fast shuffle
with maximum room for back room practices

but if it cuts carbon release
and that it does right on the marquee
its getting job one done

imagine trying torebate a pigou tax to the producers of the pollution
you can't

with a cap set up you can regulate production
rebate full cost to the adjusters
while not killing the incentive
to reduce emisssions

a bribe that works

the pigou tax rebate plan
bribes to ass hole innocent
rubber stamp public
not the movers and shakers


Ignoring the personal stuff which, frankly, I, at least, must ignore for lack of comprehension, if persons are rewarded differentially for their "CO2 reducing" behavior and if the reward is monetary and if everything that one does with money is "CO2-increasing" then this month's rewarded good behavior will be compensated for by next month's bad behavior funded by this month's reward. It's a wash. Everyone will eventually "win" and the net effect over some extended interval will be the same as dividing up the take evenly every month or period.


"if everything that one does with money is "CO2-increasing" "

the notion is to attack CO2 production head on
not lower the river raise the bridge
yes greater consumption means more CO2
again st francis time in browning greenland



The Pigou tax does not insure a reduction of adequate size up front eh? The outcome is not transparent and the calculation behind the tax rate is quite complex.
Sure it is, if you try to come up with it by some analytical means. But why bother, apart from the intellectual interest of the thing? Just start small and ramp the tax up from one year to the next until you start to see something like the reductions in consumption you need, allowing for some degree of hysteresis, of course.

There's really no need to prove any theorems -- apart from the undeniable fun of proving theorems -- when you can readily find the answer by simple experimentation.


Ruminating some more:

Just start small and ramp the tax up from one year to the next until you start to see something like the reductions in consumption you need, allowing for some degree of hysteresis, of course.
Same is true for the warrants, of course; make 'em more expensive year by year, or more scarce, which amounts to the same thing. That would be an equally effective empirical way of getting consumption down to the desired level.

What's not so clear, to me anyway, is how the money would get back into people's pockets, rather than going into a budgetary black hole and funding Races To The Top or Humane Interventions or, worse yet, some hedgie's Gulfstream.


i don't doubt that at all any more then using
feed back to guide the deficit process of full employment recovery
i some how might suggest the targets be explicit up front however
this reduction by this date a series of milestones with numbers on em

now cap gets you those numbers as built into the legislation
pigou has to come up with a tax that ties in
i can here the line
"its not working its going to cost too much see this isn't enough
do we still want to do it"
of course the trade part of a c and t set up will throw off some prices thsat can be yelled
at but no one can say
"and they don't even work ..."
that is so long as the system has monitoring
and auditing integrity
which is needless to say
problematic either way we go

are we tell each other anything here
we both
don't already know ??

i doubt it

the pigou tax and full rebate per capita
like single payer
strikes me as a fine atrful
circling of the pwog wagons
for another valient last stand massacre

as to the reportage on C and T
unlike health insurance deformation

we'll have to wait and see

frankly i'd like a clear run down on why corporate america outside the energy sector and their investors and creditors
prefers cap and trade
they obviously do
despite loyal corporate cut out
greg mankiw holding his ground
for pigou


"What's not so clear, to me anyway, is how the money would get back into people's pockets, rather than going into a budgetary black hole and funding Races To The Top or Humane Interventions or, worse yet, some hedgie's Gulfstream"
now we're getting some where
this is precisely the point
i think
why cap and trade trumps fee and dividend

the bribe to corporates trumps
the dividend to us weebles
in the halls of congress at least

if you wanted a parallel to fee and dividend
you auction the warrents for a certain period
and the proceeds get sent out as per capita dividends

now the existing thois period warrents
get traded of course
like short term treasury notes on the market
but the key is the say quaterly auction
as the number of warrents/permits fall
the price rises as does the per capita dividend

this is all very carefully understood because it fomally parallels trade trariffs versus import quotas
a venerable area of analytic study

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