Previous post:

Next post:

The uncover economist and carbon trading

by mel starrs on April 14, 2007

in Uncategorized

I have a lot of time for Tim Harford – his book is out in paperback 3 May and he presented a quirky little program on economics on BBC2 early last year.  He also writes in the FT and has an article on the issue of taxes vs. quotas for carbon here:

A carbon tax gives us certainty about the price of carbon but not the quantity of emissions. A tradable permit scheme gives us certainty about the quantity of emissions, but not the price.

The question, then, is where the uncertainty is most damaging. Say we impose a tax, hoping for a 15 per cent reduction in emissions but getting only a 5 per cent fall. Is that less serious than a tradable permit scheme where we expected a carbon price of ₤25 a tonne but got a price of ₤75 a tonne?

It is indeed. The uncertainty about next year’s emissions is not very worrying, because climate change is caused not by what happens next year, but by the accumulation of emissions since the industrial revolution. If we get the tax wrong and emit too much one year, it will be easy to fix. The economy, on the other hand, is more vulnerable to short-term shocks: get the permit quota wrong, even for one year, and you could cause lasting damage.

Is what he says true? I had been a fan of quotas up until now.  Can anyone point me in the direction of an opposite argument which defends quotas against taxes in terms of economic benefits?