The Post has an interesting article today on growing interest in the United States in carbon taxes as a way to limit greenhouse gas emissions. Taxes are considered an alternative to emissions permits which have been used in the European Union and are part of the Schwarzenegger plan for limiting emissions in California. The main distinction between the two mechanisms is that the tax effectively fixes a price on emissions, which may or may not be the right price to meet an emissions target (the tax rate can of course be adjusted through time). The permit system fixes a level of emissions and then lets the market determine the price through trading of permits. Both systems have plusses and minuses but the article misconstrues one aspect of the permit system. It implies that permits must be issues to current polluters -- in effect a grandfather system. This hands tens of billions of dollars to polluters based on the fact that they have been polluting. While this is exactly what happened in the EU, there is reason that the permits have to be grandfathered. They could be auctioned to the highest bidder, or there could be some mix between the two. In short, the permit system can be structured to have the same distributional effect as a carbon tax. The real questions should be the ease of administration and the political acceptability of the two mechanisms.
--Dean Baker
