Has a flaw. There shouldn’t be a floor on the carbon price.
Yet another disturbing instance of this was the announcement tucked away in George Osborne’s Budget that he will impose a “£16 a ton floor price for carbon”, a measure seemingly so arcane that no one has really bothered to spell out its implications. What it means is that for every ton of CO2 emitted by British industry, and by our electricity companies in particular, we shall all indirectly have to pay what is in effect a hidden tax of £16, rising over the next nine years to £30.
Start from where the Government is: yes, climate change is a problem, something we should do something about.
Either a carbon tax or a cap and trade system. Each has benefits.
A carbon tax replaces other taxation for example: taxing bads rather than taxing goods is, umm, a good idea. The price can/should be set at the damage done by the emissions thus ensuring that we get the “correct” amount of emissions and thus climate change. Where emissions, and thus climate change, are cheaper than not emissions then we get change. Where reducing emissions is cheaper than the damage done, we get reduced emissions. Hurrah! we’re maximising human utility over time.
Cap and trade doesn’t target the price, rather it targets the volume of emissions. If squiddley tonnes is all we can emit without disastrous climate change then the cap is at squiddley tonnes. It’sthe price that then varies as people strugle to change methods of doing things to get below that number and buy and sell permits. Things where it’s easy and cheap to reduce emissions do so and things where it’s expensive/impossible buy thoe permits being sold by those who have reduced.
Either will, in theory, work.
However, the role of price in each of these options is entirely different.
In a tax it’s the price itself that does the work. So this should indeed be set centrally, at what the damage is.
In cap and trade the price is information coming from the market in hte permits: we don’t want to set that, we want to be able to see the information. And the information the market will tell us is not what is the cost of emitting a tonne: but what is the cost of changing the way we work so as to not emit a tonne.
For if your cap is correct, then we’ve already dealt with the climate change bit, now we’re just trying to find out how much it’s going to cost us to meet it. At which point, of course, the lower the price the better. We’d actually rather like the carbon price, brought to us by the market, to be 0.01 £ for that will be telling us that dealing with this climate change thing is rather cheaper than we had at first thought.
Note also where the money goes. A tax goes to government of course: and whatever we might think about levels of taxation, we all agree there’s got to be some for there are indeed things that have to be done and which only government can do. But permit money goes to those who innovate and reduce their emissions. Great, for that increases the incentives to innovate and reduce emissions.
Except when we put a floor on the price. That just provides a subsidy from the public to certain favoured insiders who get allocations of permits.
A floor on the carbon price is therefore entirely a cock-up. It destroys the very information we’re looking for (how much is all this shit going to cost us?) and is a massive transfer of resources from the hoi polloi to the insiders. It’s actually the worst mistake you could make within the confines of either the cap and trade system we have or of the carbon tax which would be an alternative.
And what are the politicians doing? Yup, that worst.
Which brings us to a common theme around here. The politicians who run the State just aren’t very bright which is why we’d always like to have the State, guided by such dunderheads, doing less rather than more.
The argument in favour of minarchism is not what the State could do, it’s what the State already does.