Glenn Hubbard: Not Far From a Carbon Tax

Mark Thoma, tongue only slightly in cheek, wants Glenn Hubbard and Greg Mankiw to duke it out on carbon taxes versus cap-and-trade:

Looks like it's time for two former chairmen of the Council of Economic Advisers for the Bush administration, Glenn Hubbard and Greg Mankiw, to settle this tradable permit versus carbon taxes issue once and for all. I propose an Econoduel. Mankiw versus Hubbard, whiteboards only, any theory goes, and you cannot be saved by the end of period bell. We'll need a referee, so I'll suggest John Whitehead at Environmental Economics as he seems relatively unbiased - he doesn't think there's much difference between the tradable permits and carbon taxes and doesn't really care which one we put into place, as long as we do something.

What neither Thoma nor Mankiw picks up on, however, is that Hubbard's version of a cap-and-trade system is actually very far from optimal. He does allow the auction of some unspecified portion of the carbon permits in his (actually the NCEP's) system, which allows Mankiw to consider it tantamount to a carbon tax. But he also has a disastrous "safety valve" mechanism:

It is important that the NCEP proposal includes a "safety valve" mechanism -- an upper boundary on the price of tradable permits that limits the cost of the program to the businesses and individuals. In particular, the proposed program would not raise the cost of gasoline more than 7%, electricity 10%, and natural gas 8% beyond the amount that would otherwise arise over the next 20 years.

This defeats the purpose of a cap-and-trade system, which is to cap carbon emissions. It also guarantees that no one will ever invest in more expensive forms of reducing carbon emissions, since the government will commit to printing more permits instead -- and those permits would cost much less.

In this sense, Mankiw and Whitehead are right: a cap-and-trade system a la Hubbard is indeed more or less the same thing as a carbon tax. Rather than an Econoduel, what we need is a serious examination of whether, in reality, a carbon tax will achieve the main thing being asked of it: a substantial decrease in carbon emissions. Unless and until we're reasonablly sure that it will, it's a much better idea to go with a cap-and-trade approach.