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03/24/2016

Comments

Murray Manley

I thought this article was particularly interesting in that, unlike many other articles we have read, the author suggests that both cap-and-trade and carbon taxes in their purest forms have advantages and disadvantages; however, policy makers are not bound to implementing either of these systems in their purest forms, but rather can "modify either instrument's design, at least to some extent, to exploit apparent advantages of the other instrument" (3). In this way, the policy makers can please more constituents, as well as by reducing taxes in other areas such as income taxes, to compensate for the loss in revenue or distributional inequalities. Unfortunately, anytime an added tax is brought up in terms of policy, conservatives and liberals disagree as to what the best solution to the problem would be. Perhaps some sort of compromise in terms of the types of policy or combination of policy could alleviate that.

Additionally, the article talks about possibly implementing a banking of carbon allowances if the government chose to implement a modified cap and trade policy. This might appeal more to conservative policy makers since it allows an almost entirely market based approach similar tot eh European ETS. Both suggested policy paths raise the question, how are we going to get conservatives and liberals to agree? How are we going to make people recognize the urgency of the situation and agree to a tax that seemingly offers no tangible monetary benefits on the front end. The first step would be convincing the republican party to use the term “climate change,” or choose a moderate candidate for presidency that can raise awareness and get both sides on board. All eyes are on the US and China to make the first move, and before we can make the first move, we have to have a plan that most people agree to, such as banking allowances or a modified tax with income tax cuts for low-income households.

Bennett Henson

I thought this paper did a good job of representing the pros and cons of both Pigouvian tax policies and cap n trade permit systems. As a developed country with a well off economy the United States has the relative luxury of being able to forego possible economic expansion in order to create a healthier, ore sustainable infrastructure. Developing nations such as India and Brazil are not as fortunate as developed countries and are therefore not as able to forego rapid economic expansion in the pursuit of sustainability. When looking at policies to help developing countries develop sustainably there are two policies that economists prefer: taxes and cap n trade systems. Both of these systems have their pros and cons which the article explains in depth, but what I found really interesting is how either type of policy would be implemented.

Through implementing a sustainability policy such as increased taxes, a country disincentivizes businesses from locating their. It is easier to think about this issue on the state level in the US: if you're a logger on the NC VA border and North Carolina raises its tax on logging, you might consider moving to Virginia. In an increasingly global economy this issue of cost management becomes important on a global scale (just look at the inversion of companies in the medical industry).

A good way to think of this problem is through a game theory framework. As a planet we would all be better off if countries increased taxes or cap n trade systems, but countries are incentivized to do the exact opposite because higher taxes or regulations result in businesses going to other countries. It is even more unlikely that a developing country will raise taxes because they are aggressively looking for outsider investment. The paper we read for Tuesday points out that Clean Development Mechanisms (CDMs) are a possible way to correct for this global market inefficiency.

Katherine Pranka

I found this article interesting. While it was helpful having the cap and trade and tax systems spelled out like this, what I found most fascinating was the introduction about how the world needs to reduce carbon emissions, not just one country. I thought this went very well with what we discussed in class on Tuesday, and I appreciated the bluntness. I found it interesting that the key critieria were "keeping down overall policy costs, satisfying distributional objectives, addressing economic variability and disruptions, providing incentives for clean technology development, and facilitating policy coordination and verification among countries." This is not a simple list, and therefore difficult to achieve while keeping everyone happy. In my health economics in developing countries, we recently had a discussion on carbon emissions on health in developing countries, because the development is needed, but it has harmful effects on everyone in the world. I did find it interesting that overall, a tax would be most beneficial, which I understand, but it would be very difficult to enforce. Which is not to say that the cap-and-trade system would be enforced any better. Altogether, this is a very confusing system which needs the entire world to work together to fix.

Emily Rollo

I think this paper does a really good job at explaining the way carbon tax would be created and implemented. It also provides good evidence and explanation on why a tax is better than a cap-and-trade system on emissions. The criticism made about the implementation of a carbon tax makes this paper especially interesting. Today, we are emitting at a rapid rate and do not seem to be doing much about it. We are worried that a solution, such as a tax, would not be very cost effective. However, we have not experienced any method before now that internalizes the cost, so I think we might as well try the carbon tax. If the carbon tax was a flexible policy, then we should eventually see its benefits. A carbon tax plan that would allow adjustment in the future would help long-term goals of reducing emissions. I disagree with the analysts in the paper who believe in curing immediate damages and speeding up the stabilization of atmospheric conditions. This does not help future generations. Additionally, the options presented for minimizing cost by equating marginal abatement costs for all emission sources do not seem that practical. New energy conserving sources are not as easy to implement as it sounds. The longer we wait as a society to adopt and adapt to new technologies, the more expensive it will become. It will no longer be cost effective or minimizing and we are back at the root of the global emission problem.

Owen Brannigan

I enjoyed reading this article and getting examples of actual plans an actual carbon tax on both domestic and Global CO2 emissions. Beginning with domestic and then moving to the larger issue of taxes and global changes in energy usage was effective guiding me down a possible path to the decrease of carbon emissions worldwide. I liked the way the author structured the paper as well as his clear distinctions between a cap and trade system versus a tax. I agreed with the authors concern that reinvesting the tax into various different sectors could raise an issue in domestic environments. Different people want different things, but I believe that the best way to reinvest money would be to invest it in new clean energy technology. In terms of a global tax the paper proposes to make tax rates across countries relative depending on the countries level of CO2 production. The cap and trade system uses differences in marginal abatement costs across regions and creates a system that integrates efficient domestic allowance trading markets. Both need to be made with the long term in mind and will lose their effectiveness if the periods of commitment are too short. Overall I thought this article gave an informative comparison between cap and trade and tax policies and using both policies or either policy could definitely help reduce global carbon emissions.

Oliver Nettere

Upon reading the argument about what should be the point of regulation for a proposed GHG tax I recalled a discussion we had earlier in the term how it is best to internalize the externalities associated with agriculture at the production level. This would raise the private cost curve so it was set equal to the social cost of agricultural production. The producers would pass this cost along to the consumers through higher prices of goods, a concept I found unappetizing, until you informed us that this in reality reflects the true cost of production of the resource. If someone could not longer afford the goods well then that is indicative of an entirely unrelated social problem. The proposed GHG tax would be best implemented in the upstream, along the production side, as this would immediately internalize the externalities associated with downstream combustion of fossil fuels by the consumer. By raising private costs to the producer this carbon tax would do the same thing as the agriculture example and the downstream price at the pump would see a resulting increase - an increase that had already fully incorporated the externalities associated with fossil fuel production. If someone could no longer afford to fuel up their car or heat their home then this is also indicative of social problems & would also likely lead to increased abatement by consuming less fossil fuels at a level that would be more personally affordable.

Elizabeth Wolf

Though this was certainly a well-developed and comprehensive paper, I disagree with a claim that Aldy makes early in his paper, though it is one that remains unsubstantiated. In fact, Aldy argues against his own claim that that both the cap-and-trade policy and carbon tax are both market systems in the sense that their effectiveness relies in affecting market behavior through emissions pricing” (2).

Very simply, I think that Aldy miscategorizes cap-and-trade as a market system. He himself points out that cap and trade “fixes the quantity of emissions, leaving marginal abatement costs to fluctuate with economic conditions” (6). How then, is the market supposed to efficiently allocate resources intertemporally when prices are not the main market signal? In a cap and trade economy, the arbitrary level of emissions determines the cost of all other pollution-related behaviors in the market. This policy does not directly affect behavior through pricing, it affects behavior by manipulating the costs of certain activities. As Aldy himself shows in Figure 1, “under a fixed emissions cap of QE, abatement will be excessive if marginal costs are higher then expected, or too low if marginal costs are lower than expected, resulting in deadweight losses (DWL), relative to the emissions tax” (9). Cap and trade systems are based on the principle of assumptions and predictions and do not allow for volatility in the market without significant losses to economic efficiency. However, Aldy suggests an amendment to the cap and trade system that would make it more responsive, to “incorporate provisions to contain allowance price volatility and to transition to full revenue-neutral allowance auctions” (17). This is also addressed on an international level, “Under an international cap-and-trade system, marginal abatement costs are equated across different regions at a point in time if the international regime fully integrates efficient domestic allowance-trading markets” (26).
Essentially, the amendments to the traditional cap and trade system transform them into a carbon tax by another name. Cap and trade systems use a series of government-created incentives to cap pollution at a certain level and lets firms self-allocate pollution levels based on marginal costs. However, a carbon tax caps the level of carbon emissions with a price rather than a set value of pounds of CO2. So if Aldy’s solution to the rigidity of the cap and trade argument is allowing price volatility, why wouldn’t a carbon tax be more favorable? There is little argument that carbon taxes are less favorable if the economics suggest that prices are the best means of allocation – which they overwhelmingly are.
The paper contains more detail on the exact comparison of carbon taxes and cap and trade systems, but very narrowly Aldy arrives at the same conclusion from two different sides of the same coin – he charts the merits of the carbon tax, and yet also outlines the steps needed to adjust the classic cap and trade model to accommodate volatility in the market. What we’re left with is two different frameworks but one solution – the carbon tax. Ultimately, this paper (at risk of over-simplifying it) is yet another example of the supremacy of prices to determine efficient behavior. Attaining accurate pricing, however, is another matter.

Mamie Smith

Reading this article was helpful because it mentioned and explained much of what we talked about in class on Tuesday and all semester (about how carbon taxes would help). I appreciated the comparison of taxes and cap-and-trade because it reminded me of when we discussed the idea of either choosing the quantity of emission in the atmosphere (cap-and-trade) or choosing your price to stay at (tax). I didn't fully realize before, though, how there was also the option of joint policies that used both strategies and also that these types of policies do exist in the world. It makes me want to study those systems more in depth (British Columbia, EU, etc.) and how they link to culture and politics in order to understand more about why the US lacks progress in this area. It made me wonder, too, how these governments were using their revenues and ideas about whether their systems have been working. Also, I remember where the article mentioned that one way to minimize cost of mitigating emissions would be to lower demand for energy-intensive activities. I wonder if that is even a possibility in the US and how it could be done. It makes me think that the US needs some sort of artistic or philosophic movement to move toward simplicity and reminds me of some relatively modern art movements I have been studying in Art History.

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