Carbon Tax or Cap-and-Trade? Don’t Forget “Neither”

Carbon Tax or Cap-and-Trade? Don’t Forget “Neither”. By Robert Bradley
Master Resource, January 18, 2009

An article in today’s Houston Chronicle, "Debate Flares over How to Cut Greenhouse Gas Emissions," compares the relative merits of a carbon tax and cap-and-trade. We will be hearing a lot about these two approaches in the weeks and months ahead.

But the Chronicle article did not consider the other major alternative: neither a tax nor a cap-and-trade program. Yet that free-market alternative is alive and well. Some top Houston-based energy economists favor just this approach, which would amount to continuing the status quo as far as the federal government is concerned.

Several good arguments support the option of unpriced carbon dioxide (CO2).

First, it keeps the government from further politicizing the energy industry. If you believe that government is the problem and not the solution to energy problems, more government via a new energy tax is not the way to go.

Second, such an energy tax is regressive, hurting lower- and middle-income users the most. Thus a complicated rebate or credit program might have to be imposed in order to neutralize the problems of the "simple" tax approach.

Third, any tax will disadvantage the imposing country relative to countries without CO2 taxation. Such a discrepancy invites new restrictions on international trade in the name of "equality" and "climate stabilization." A trade war might arise between developed countries with carbon restrictions and developing counties with lighter or no carbon restrictions. Such protectionism is a high cost of such a tax. (Cap-and-trade has the same flaw).

Fourth, any new addition to the tax code, even if it is revenue neutral at inception, will take on a life of its own. The tax might change in unpredictable and unjustified ways, and it might not be revenue neutral for long. So the qualitative decision–do not impose a new tax, period–guards against the quantitative unpredictability of a new tax regime.

Are there other worthy arguments to add to these four?