EconoSpeak has a post with some basic S/D diagrams that lay out the economic arguments for tax versus cap-and-trade, which in large part hinge on uncertainty. The basic takeaway is that given the uncertainty about the ‘demand’ for emitting carbon dioxide, we’re better off with cap-and-trade, as it eliminates quantity uncertainty. The argument for a tax, then, is that the economic cost, not the environmental cost, is what should be limited with certainty.
it matters not only how much emissions are cut but also how they are cut…cap and trade is designed to treat emissions-reduction measures as equal, regardless of whether they are likely to contribute to unquantifiable but important positive global synergisms…
the fact that there can be no firm basis for offset accounting opens the way for unresolvable conflicts over estimates of carbon credits.
So, in fact, cap-and-trade does open the door for significant quantity uncertainty. In Lohmann’s view, carbon accounting creates a false sense of security about the true amount of emissions deferred by an offset. A good analogy is the false sense of certainty about risk that VAR gave many investment bankers in the buildup to the economic crisis.
The alternative, it seems, is a more flexible tax. As it turns out, one doesn’t have to believe that ‘markets are poison’ a la Lohmann to advocate a tax. Brookings’ Ted Gayer (whom I unknowingly sat next to at the Saez seminar I posted about), has testified to Congress in favor of a tax. He argues that the tax would help lower deficits for the US, reduce reliance on offsets (about whose integrity, he argues, there are real concerns), and avoid some of the disruptions from price volatility.
Problematically, “tax” is a dirty word. Of course, when Sarah Palin is taking over the WaPo op-ed pages referring to cap-and-trade as “cap-and-tax”, perhaps this issue should be less of a concern.