Cap and Tax

| Sun Dec. 28, 2008 2:09 PM EST

CAP AND TAX....Matt Yglesias suggests that although a gasoline tax would have been a good idea 20 years ago, today it's obsolete:

Given what we've learned about the risks of catastrophic climate change, it [] seems like a concept that's been somewhat overtaken by events. A carbon tax, or a cap on greenhouse gas emissions with auctioned permits, would constitute a tax on gasoline among other things. And there's no particular reason that burning fuel in a car should be disfavored versus other carbon-intensive activities.

This is true, but it's worth noting that for technical reasons there's an argument to be made that cap-and-trade is a good solution for stationary carbon souces (primarily coal and gas fired power generating stations) while a tax is a better solution for mobile sources. A lot of this revolves around whether your favored cap-and-trade plan applies directly to fuel sources ("upstream" cap-and-trade) or to the actual emission of carbon ("downstream" cap-and-trade). Downstream is essentially impossible with cars and trucks since it's impractical to monitor hundreds of millions of carbon sources, so if that's the version of cap-and-trade you prefer, then you need to apply a different solution to the transportation sector.

In addition, it's also possible that driving should, in fact, be disfavored even compared to other sources. The elasticity of gasoline demand is very low (it's higher in the long term than in the short term, but still low in either case), which means you have to price gasoline at a very, very high level if you want to get meaningful reductions in use. In Europe, for example, gasoline is taxed at around $2-3 per gallon, which is equivalent to a carbon tax of about $1000/ton, and even the most aggressive cap-and-trade plan won't produce carbon charges remotely near this level anytime in the foreseeable future. It's arguable (though, admittedly, far from obvious) that a gasoline tax might be able to get to that range faster than a cap-and-trade plan.

I don't have any special dog in this fight. My tentative preference right now is for gasoline taxes combined with cap-and-trade for stationary sources or, possibly, for gasoline taxes in addition to a broader-based cap-and-trade plan. If we really want to reduce driving, encourage use of urban/suburban transit alternatives, and produce a revenue stream big enough to fund it, that might be what we need.

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