Bloomberg Pushes a Carbon Tax

Mike Bloomberg today has a very important speech advocating a carbon tax; he explicitly prefers it to a cap-and-trade approach. I'm very glad that Bloomberg and other civic leaders are pushing hard on this, even as I disagree with him on the subject of cap-and-trade.

The NYT's Sewell Chan tries to get to the nub of the argument, but fails:

Most economists consider a carbon tax a more effective instrument for reducing greenhouse gas emissions than the other major policy alternative, a cap-and-trade system that would require plant-by-plant emission measurements and could prompt companies to cheat.

This is just silly. You can't tax something without measuring it; both a carbon tax and a cap-and-trade system can be implemented as far upstream or downstream as you like. So the measurement and incentive-to-cheat problems are the same in both cases.

Now the vast majority of Bloomberg's speech makes a great deal of sense. He comes out strongly against subsidizing corn-based ethanol, for instance – something he has the luxury of being able to do because he's not worried about Iowa primaries. And his arguments against a cap-and-trade system are certainly eloquent:

If all industries are going to be affected, and the worst polluters are going to pay more, why not simplify matters for companies by charging a direct pollution fee? It’s like making one right turn instead of three left turns. You end up going in the same direction, but without going around in a circle first...
The costs will be the same under either plan — and if anything, they will be higher under cap-and-trade, because middlemen will be making money off the trades. (I happen to love middlemen. They use Bloomberg terminals and support my daughters. But what’s right is right!)

I do understand this argument: a carbon tax is simple, whereas a cap-and-trade system has a lot more moving parts and therefore has a greater chance of underperforming its potential. But Bloomberg does set up a bit of a straw man when he attacks cap-and-trade: he seems to believe that a cap-and-trade system would generate no revenue for the government, while any good cap-and-trade system would in fact auction off emissions permits for many billions of dollars.

And when Bloomberg says that a carbon tax would result in "greater carbon reductions for the environment," I'm not convinced. It seems to me that if you want to guarantee carbon reductions, you should cap them, rather than simply taxing them. But I'm still open to persuasion. Can someone show me the argument which compellingly demonstrates that a carbon tax would reduce carbon emissions more than a cap-and-trade system?

(Via Komanoff)