Undercover Economist

Emission impossible?

A lot of people think it a good idea to reduce the amount of carbon dioxide we pump into the atmosphere. But not many have sensible ideas about the correct way to do that.

One contributor to the FT recently asserted that, ”An individual carbon trading scheme is more equitable and effective than carbon taxation as it reduces consumption quickly and dramatically.” All that carbon dioxide has clearly addled his thinking. It isn’t possible to work out whether rationing would reduce emissions more than a tax until you know what the tax might be, or how generous the ration.

When it comes to reducing carbon emissions, the question ”How much?” is separate from the equally important question ”How?” The sensible choice is between a carbon tax and some kind of scheme to trade pollution permits. (Politicians prefer to bung cash at favoured initiatives; it’s in their nature, but makes environmental gains harder to come by.) And for any level of environmental tax you can get the same carbon price and emissions reduction by using a permit quota instead.

That doesn’t mean the two systems are equivalent. One difference is the cost of administering the system. Matt Prescott, the director of a Royal Society for the encouragement of Arts (RSA) research project into personal carbon allowances, paints an exciting picture of cheaply loading your carbon permits on to a credit card. I think it would be simpler just to administer a tax. A second difference is where the revenue goes. A tax directs cash to the government levying it. A lot then depends on how the revenue is used: if it’s distributed more heavily towards the poor, taxes are more progressive than a personal carbon allowance.

Permits enrich whoever starts with the permit: the government again…

Continued at ft.com, subscription free.