Cap-and-Trade is Relatively Easy to Establish
Under cap-and-trade, the government establishes the cap using sound science. Cap-and-trade does not require the government to make arbitrary decisions to set prices, ration allowances, or determine which technologies are winners and losers.
Cap-and-trade does not require the government to decide how many emissions each person, company, or industry can emit; nor does it require the government to fix carbon prices, such as in a carbon tax; nor does it require the government to determine to what extent we should rely on different technologies, through command-and-control approaches. The government simply sets the total cap, based on the best available science, and then sells or allocates the number of allowances equal to the cap. If the Government set a cap but did not allow trading, it would be up to the government to determine exactly how much each covered business could emit -- a virtually impossible task.
With a carbon tax, the government sets the cost of the solution, but leaves it up to the marketplace to determine to what extent emissions will be reduced. For example, the government might decide to impose a $50 per ton carbon tax, but it will ultimately be up to consumers and businesses to decide to what extent they are willing to pay that price and to what extent they will instead reduce emissions. And even if a company or business were to aggressively reduce their emissions -- say by 20% by 2020 -- they would still have to pay the tax on the remaining 80% of their emissions.
A traditional command-and-control approach assumes that the government is best able to determine the technologies that will help reduce emissions, as well as the amount of emissions that each technology will reduce. But how can the government know the best way of reducing emissions -- especially since many of the most important emission reductions are likely to come from technologies that have not even been invented yet, or new ways of doing things that no one has yet thought of?
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Carbon trading is good, but a carbon tax is better. The argument that a suitable cap is easier to determine scientifically than a tax is wrong.
Some argue that it will be very difficult, even for PhD researchers, to estimate the environmental cost of emitting a ton of a greenhouse gas, so the government shouldn’t try to set the tax rate, whereas anyone, even politicians, can choose a volume level of emissions to allow. Well, sure they can, but it will be as arbitrary as picking a tax rate out of a hat. The only reason it seems easier is because no one would expect any rational basis for an emissions limit, so we’ll just let the politicians fight it out as they always do.
The truth is, if you think about it, that in order to determine the appropriate level of emissions to allow, you have to know, or estimate, the amount of damage caused by each ton. The more the damage, the more you want to limit emissions. No damage—no limit. And that estimate must be compared to an estimate of the cost per ton of reducing emissions in the most economical way. So you have to estimate both the damage per ton and the cost per ton of reducing emissions most economically to arrive at the best tradeoff. With the carbon tax approach, on the other hand, the government needs only an estimate of the damage per ton. You can let the industries consider the costs of reducing emissions for their own businesses, and make their own tradeoff decisions. So the individual businesses do what they are best equipped to do, while academicians estimate the future social costs of environmental damage, which they are best equipped to do.
The above is excerpted from my blog on the subject: http://fearlesstheorist.wordpress.com