A Free-Market Energy Blog

Carbon Tax or Cap-and-Trade? Don’t Forget “Neither”

By Robert Bradley Jr. -- January 18, 2009

An article in today’s Houston Chronicle, “Debate Flares over How to Cut Greenhouse Gas Emissions,” compares the relative merits of a carbon tax and cap-and-trade. We will be hearing a lot about these two approaches in the weeks and months ahead.

But the Chronicle article did not consider the other major alternative: neither a tax nor a cap-and-trade program. Yet that free-market alternative is alive and well. Some top Houston-based energy economists favor just this approach, which would amount to continuing the status quo as far as the federal government is concerned.

Several good arguments support the option of unpriced carbon dioxide (CO2).

First, it keeps the government from further politicizing the energy industry. If you believe that government is the problem and not the solution to energy problems, more government via a new energy tax is not the way to go.

Second, such an energy tax is regressive, hurting lower- and middle-income users the most. Thus a complicated rebate or credit program might have to be imposed in order to neutralize the problems of the “simple” tax approach.

Third, any tax will disadvantage the imposing country relative to countries without CO2 taxation. Such a discrepancy invites new restrictions on international trade in the name of “equality” and “climate stabilization.” A trade war might arise between developed countries with carbon restrictions and developing counties with lighter or no carbon restrictions. Such protectionism is a high cost of such a tax. (Cap-and-trade has the same flaw).

Fourth, any new addition to the tax code, even if it is revenue neutral at inception, will take on a life of its own. The tax might change in unpredictable and unjustified ways, and it might not be revenue neutral for long. So the qualitative decision–do not impose a new tax, period–guards against the quantitative unpredictability of a new tax regime.

Are there other worthy arguments to add to these four?


  1. Paul Roberts  

    We must be well aware of the competitive impacts of both cap-and-trade and direct taxation on CO2 emissions. Although the incoming president has spoken of tax cuts, the draconian effects of both cap-and-trade and taxation would offset and potentially overwhelm the benefit of any reduction in income tax rates.
    Furthermore, either approach would adversely impact the competitive status of U.S. industries. Industry mix differs dramatically from nation to nation and increasing production costs for U.S. industries would simply improve the position of other nations.
    We can take a deliberate, measured approach to reducing CO2 emissions but both cap-and-trade and taxation pose the risk of sudden and dramatic changes in costs. We must be very cautious of the actions we take.


  2. Falling carbon permit prices in Europe: Threat or menace? « Knowledge Problem  

    […] Rob Bradley reminds us that the policy choice isn’t just between cap-and-trade and carbon taxes. […]


  3. TheSkyIsFalling  

    Point one I guess covers it but I would state clearly that liberty depends upon not feeding government with more taxes. The more you feed it the stronger it becomes and the more money it has to play with to regulate more aspects of individuals’ lives and economic activity.

    One further point that does not appear to be covered – what about the cost of having such a tax removed? Backing out of such a complicated octopus like tax with tentacles everywhere would be extremely complex and disruptive when it is found that CO2 emissions are either not the significant player we are told they are or even if they are that it is too costly in terms of standard of living to tax (costs exceed benefits). I assume nearly everyone would prefer a higher standard of living and easier life (if not contact me and I will give a bank account for funds to be deposited) to the problem of turning up an air conditioner a notch – and that is assuming CO2 has a positive forcing effect greater than 1 on temperature – this has not been proved as yet and I doubt it will be. What if we survive as a species into the next ice age – and we are due for one now. Will a carbon tax make sense then? Unfortunately like a junky on heroin it will come to depend on its carbon tax fix and won’t be able to just do without the revenue when the time comes. Another tax will need to replace it and the overall economy contracts with compounding effects over time as worthwhile activity is channelled into mandated useless activity. With our present economy we may be say 50 years away from a completely new technology that makes current energy sources look like kids stuff but slowing the economy may push that discovery out a century or more depending upon the effects. Would taxing horse “emissions” in the 1700’s have sped up the development of a reliable internal combustion engine!? I somewhat doubt it.



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