Cap and Trade: Be Afraid
because of the long-term nature of climate change, the key issue from an environmental perspective involves the long-term emissions and concentration paths of greenhouse gases, not the year-to-year fluctuations in emissions. The most cost-effective cap-and-trade design would thus encourage firms to make greater reductions when the cost of doing so was low and would allow them leeway to lessen their efforts when the cost was high. Providing firms with such flexibility could also prevent large fluctuations in the price of allowances that could be disruptive to the economy.
From a political economy perspective one important disadvantage of cap-and-trade relative to a carbon tax is that cap-and-trade will develop a long-term constituency. People talk about the irreversibility of the alleged climate change due to CO2 emissions. If you want to see irreversibility, watch what you happens once companies have a stake in pollution permits. Five years from now, if all the scientific evidence turns out to be that global warming is not an issue, any cap-and-trade program will be all but impossible to unwind.
We can’t even unwind our counterproductive ethanol subsidies.