Yesterday’s report that cap and trade helped reduce emissions in Europe was much needed good news for carbon trading advocates.
The European model for cap and trade has largely been a disaster, but this should not be taken as an indictment of all cap and trade systems. The EU initially gave away too many credits. Companies sold them at large profits, without changing their business practices, and the market for credits collapsed. As it stands now, the system still looks shaky, carbon credits are trading at lows.
As a result of these pains, many question the intelligence of the United States implementing a similar system. Today’s Washington Post lays out an argument in favour of a tax scheme as opposed to a cap and trade.
A carbon tax, by contrast, is simple and sure in its effects. Last summer, when gas prices shot up past $4 a gallon, average miles driven dropped significantly, as did energy consumption. Demand for fuel-efficient cars and overall energy efficiency skyrocketed. If high prices were the result of a gas tax, that money would have stayed in the United States rather than lining the pockets of oil-rich regimes all too happy to feed the U.S. addiction to fossil fuels. As with a cap-and-trade system, the money generated by a carbon tax could be given back to the American people.
It’s a simple argument, but it doesn’t hold up.
Europe’s cap and trade was mismanaged from the start,. The U.S. can learn from European mistakes, it can base its policy decisions on data collected from the EU system.
Taxing emissions might be simpler, but it’s a bad idea to tax companies in the middle of a prolonged recession. The cap and trade system syncs nicely with the economic downturn. If a company is manufacturing less, it has carbon credits it can sell, which provides another source of revenue. When business improves, the companies can scrub up their operations or buy more offsets.
Fix Europe’s cap and trade mistakes, but don’t abandon the system altogether. It’s a better system than a carbon tax.